Small profits rate triggers more alerts from contractors’ advisers
More advisers to contractors continue to grow lukewarm about the Small Profits Rate, which despite not applying to 1.4million companies will still sting those hit by it by a sharp £50million.
And upwards, according to Patrick Gribben, head of client services at Intouch Accounting, who disputes this one-off implementation cost estimated by the taxman at Budget 2021.
'HMRC is lowballing'
“The cost to implement the SPR seems, as ever, to be a lowballing by HMRC,” he told ContractorUK.
“If you think there are around 4,000,000 limited companies registered in the UK, then that's not very much per company.
“That cost probably doesn't work out to very much more than one hour’s time for someone on little over the national living wage.”
Among the firm’s PSC clients alone, the senior accountant predicts that a “significant” chunk will miss out on the 19% rate – due to be confined to annual profits of less than £50,000.
'Majority of contractors will be hit'
DNS Accountants also calculates that many of its customers will be victims of the SPR, which will start at the 19% but top out at 25% on profits of £250,000 from April 2023.
“We reckon more than half of our contractors will be hit by this legislation,” said the accountancy firm’s tax director Sid Agarwal.
“The majority of PSCs who are IT contractors do end up making more than £50,000 in profits, and where a husband and wife uses the same company, they will be hit even harder.
“In that sense, with this incoming change to corporation tax, it’s hard not to see chancellor Rishi Sunak as doing anything other than pushing the PSC market into oblivion.”
'Better than many were expecting'
However, a corporation tax rise was widely anticipated before the Budget and not only is the new 25% rate tapered, but it is also some two years off, points out accountant Graham Jenner.
“While it’s necessary to enable companies to get back on their feet, post-pandemic, the delay until 2023 is still better than many were expecting,” the Jenner & Co boss argues.
“Contractor company owners were even bracing themselves that they would have to pay extra tax to help pay the costs of furlough and other covid measures via an outright CT hike.”
'Contractors should not be too tax-influenced'
Nonetheless, the design of the corporation tax change could deter contractors, start-ups and entrepreneurs from generating a higher turnover than they otherwise would.
Mr Jenner explained: “We can expect the marginal relief provisions to be similar to the old marginal relief prior to April 2015.
“Such measures can provide a disincentive where the profits are close to the cut-off point. Notably, the element of profit just over £50,000 can be taxed at an effective tax rate, which people see as unacceptable.”
He urged: “That said, with a starting point of 19% and a relatively large gap of £250,000 before the main rate is hit, contractors should not allow themselves to be too influenced by the additional tax.”