Any tax increases the Government might be planning in order to recoup some of the money spent dealing with the pandemic must be carefully measured to avoid further shocks for businesses as they continue to grapple with challenging trading conditions.
Some reports have suggested that Chancellor Rishi Sunak might be planning to increase the rate of Capital Gains Tax (CGT), possibly as high as 45%. According to the corporate tax team at Menzies LLP, this could stifle entrepreneurial business plans and make it harder for SMEs to invest in job creation and productivity improvements.
Richard Godmon, tax partner at accountancy firm, Menzies LLP, said, “While some tax increases are expected, any decision to increase CGT above 38%, the current rate of tax that applies to share dividends, could have a devastating effect on business activity. Entrepreneurs would no longer have any tax incentive to invest in building up the value of a business in order to realise gains at the point of sale. The flow of investment into entrepreneurial businesses could start to dry up as a result, undermining the fragile economic recovery.”
To avoid further shocks for business, Godmon recommends a measured approach. He said, “Businesses are facing some major challenges at the moment, due to rising costs and ongoing material and skills shortages, and the pandemic is continuing to cause disruption in some parts of the world too. Further shocks for businesses must be avoided and any tax increases should be phased to minimise any collateral damage for the economy.”
With the 1.25% increase in Employer NICs due to take effect in April 2022 and Corporation Tax set to rise from the current rate of 19%, to 25% in April 2023, it is clear that the tax landscape for businesses is getting much tougher for all.
Godmon said, “For SMEs in particular, as headline rates of Corporation Tax and Employer NICs start to increase, it becomes even more important to manage inflationary pressures on the cost base carefully, to remain viable.”
The Chancellor should also consider doing more to encourage business investment in innovation by exploring ways to enhance R&D tax relief. With a review currently underway, it is possible that the Chancellor might consider removing the separate schemes that apply to SMEs and larger companies, in favour of a single one, for all businesses.
He added, “At a time when investment in innovation is a key focus for the Government as the economy rebounds, R&D tax relief has a major role to play in encouraging businesses of all sizes to invest in technologies, which could give them a competitive edge. Merging the scheme could really help, potentially making it easier to access for businesses of all sizes.”