An imbalance exists between the effective rate of corporation tax paid by large companies and SMEs. Businesses with less than 500 employees and a maximum turnover of £25m, SMEs, are feeling the effects of this disparity.

What has caused this discrepancy in Corporation Tax payments?

Over time, SMEs and large companies have ended up on the same rate of corporation tax and now SMEs are, in real terms, paying a higher rate.

Only eight years ago, SMEs paid 21% corporation tax rate and large companies paid 28%. This discounted rate helped to make things slightly more economically equitable between the two. But since then, the corporation tax rate for large companies has been reduced by nearly one third. The rate for corporation tax on company profits is currently 19%.

At the beginning of this year, Moore Stephens analysed more than 10,400 companies to compare the effective rate of corporation tax paid by SMEs and large businesses in 2016. They found that the rate for large businesses with a turnover of £1billion was 20%. This increased to 21.7% for SMEs.

What can be done to improve this Corporation Tax situation?

A partner at Moore Stephens, Mike Cooper, said: “Recent tax rate reductions have clearly focused far more on encouraging larger businesses than SMEs. Re-introducing a corporation tax discount for the SME sector would be timely to further encourage the dynamic enterprise culture the UK aspires to and support the much needed drive for growth. The above statistics suggest that larger corporates may be somewhat better at identifying and claiming the available reliefs than their SME counterparts. Furthermore, there are several tax reliefs targeted at SMEs like Research and Development tax credits and 100% capital allowances reliefs, but despite this they remain stubbornly under-claimed, mainly through lack of awareness.”

So, the government could implement corporation tax discounts for SMEs, which would certainly support their growth somewhat. But this is not a definite part of government strategy and any timescale on this happening can only be conjecture.

How you can reduce your Corporation Tax imbalance with R&D Tax Credits

Right now, SMEs need to take some time to really look into any and all allowances that they are entitled to claim. These are policies that are already in place as regulation, with claiming processes already set up. Some of them are specifically designed for SMEs, like R&D Tax Credits and 100% capital allowances reliefs. It is not a question of assuming they are not for you because you only run a small business, there is no minimum company size rule. This is how large companies are effectively paying less corporation tax – they dedicate time and resources to finding out all the reliefs and allowances that apply to them.

You may not have a separate accountancy or R&D department, but you really don’t need one. For example, most business owners seek the niche expertise of R&D Tax Credit specialists when they are putting together their lucrative R&D Tax Credit claim. You don’t have to get rid of your accountant, we just work with them on your R&D claim.

Finding out which of your projects are eligible for R&D tax relief is something you have direct and immediate control over. You don’t have to wait for a reduction in corporation tax rates to become more tax efficient and provide your business with future investment through tax savings.


Jamie Smith