Call for consolidated turnover tax for sub £1m companies

Companies with revenue under £1m should be given the option to replace corporation tax, business rates, VAT and employer's national insurance (NI) with a simple levy on turnover, charged on a cash basis, says the Centre for Policy Studies

The proposal for a simple consolidated tax (SCT), which businesses could opt in to, would simplify administrative costs and encourage growth, argues the Centre for Policy Studies (CPS), a right wing think tank.

The small business tax charge would replace corporation tax, currently charged at 19% on profits, and related business taxes, including business rates and NI, as part of a radical overhaul of tax for small and family businesses. It says the tax should work on a voluntary, opt-in basis so that no business would lose out – those companies which would be worse off under the new system would be able to maintain the status quo within the current system.

The proposed simple consolidated tax would only have to be paid on an annual basis, although company owners could choose to make payments throughout the year, and the thinktank says that the payments could be fully automated and taken at a time when invoices are paid by customers. However, the key change is that it should be paid on a cash basis – that is to say, only on income already actually received by the company.

Modelling by Capital Economics suggests that the simple consolidated tax would be revenue-neutral for the Treasury at a rate of between 11.5% and 13.5%, depending on the underlying assumptions used.

At a rate of 12.5%, a company with a £300,000 turnover would pay an simple consolidated tax of £37,500. If set at 11.5%, roughly 42% of companies with an annual turnover of under £1m would face a reduced tax bill under the simple consolidated tax.

The CPS says that if just 250,000 companies choose to opt in, and each of them saves three quarters of the average £2,379 spent on accountancy by micro-businesses for corporation tax and VAT alone, then the total administrative saving would be roughly £450m.

YouGov polling of some 2,000 owners and senior managers of small businesses found that 72% of those who expressed a preference said that they would sign up for such a scheme if it meant paying the same amount of tax, compared to 28% who would prefer to stick to the old system.

If there were a chance of lowering the tax burden at the same time, then 79% would make the change compared to 21%.  More than a quarter of the respondents said that they would move to the new system even if it meant paying more tax.

The polling also showed that only 22% of those running small businesses think the tax system is sympathetic to their needs. Just 1% think it is too simple rather than too complex.

Most (71%) think that the tax system should aim to help small businesses grow, compared to 10% who do not, while 80% want the tax system to be simple for small businesses to understand. By a margin of three to one (64% to 19%) they think that tax and reporting systems for small businesses should be simpler than for large companies.

Other suggestions in the report to reduce administration include letting the smallest companies submit accounts every two years. The CPS also wants better access to finance by doubling the Seed Enterprise Investment Scheme (SEIS limit), as well as a bring in a PAYE and employer’s National Insurance holiday for all new hires made by companies with eight or fewer employees.  

CPS report, Think Small – A blueprint for supporting UK small businesses

Pat Sweet

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