The June 2010 budget sought to cheer up small businesses by announcing that a reduced corporation tax rate of 20% will be applicable from 1 April 2011. This was particularly welcome given that the Labour budget announced in March 2010 had proposed to raise it to 22%. Whilst a 1% reduction from the current level to 20% appears soothing what the small businesses must realise is how this is proposed to be funded. Currently, under Annual Investment Allowance, businesses are allowed to write off up to £100,000 cost of qualifying assets acquired during the tax year against taxable profits. By reducing this to £25,000 from 01 April 2012 the June 2010 budget hasn’t actually done small businesses any favour. The table below provides a snapshot of the effect of recent changes:
* Tax effect for a small business with a taxable profit of £100,000 investing £100,000 in eligible plant and machinery (not considering normal writing down allowance)
| Tax Year | 2009–10 | 2010–11 | 2011–12 | 2012–13 |
|---|---|---|---|---|
| Corporation tax rates – small businesses (%) | 21 | 21 | 20 | 20 |
| Corporation tax (£) | 21,000 | 21,000 | 20,000 | 20,000 |
| Annual Investment Allowance (AIA) (£) | 50,000 | 100,000 | 100,000 | 25,000 |
| First Year Allowance* (40% of bal £50,000) | 20,000 | Nil | Nil | Nil |
| Tax savings from AIA + FYA (£) | 14,700 | 21,000 | 20,000 | 5,000 |
| Tax payable (£) | 6,300 | 0 | 0 | 15,000 |
*since withdrawn
Unfortunately the reduction in the Annual Investment Allowance is not the only bad news: the rate of writing down allowance for General Pool plant and machinery will see a 2% reduction from 20% to 18% followed by a similar reduction for the Special Pool from 10% to 8% effective 01 April 2012. Adding to it the fact that VAT will move up to 20% from 01 April 2011 small businesses really need to plan their investments in assets well in advance should they need to be tax smart!
