Reeves’ vow to cap corporation tax at 25% gives rise to small profits rate fears

Talk from the new chancellor of a maximum rate for the duration of the parliament sounds anything but cheap.

Rachel Reeves has pledged to cap corporation tax at 25 per cent.

The contractor sector would usually welcome an attempt by the Treasury’s boss ahead of a Budget to provide tax certainty.

But the wording of the chancellor’s pledge, with October’s Autumn Budget 2024 looming, has unsettled advisers to limited companies.

Speaking on September 3rd 2024, Reeves said, “today I can confirm…our commitment to cap corporation tax at 25%”.

‘Potentially a warning sign’

Emily Coltman, chief accountant at accounting software giant FreeAgent, reflected on Friday in a statement to ITContracting.com.

“Is this potentially a warning sign that the chancellor will increase the rate for small companies from 19% to 25%?

“I very much hope not but…if I were running a small company, I would start putting more money aside to pay a possibly higher tax bill.”

‘Taxing all companies at 25%’

Most limited company contractors do not pay corporation tax at 25%, observes Brookson managing director Matt Fryer.

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He told ITContracting.com: “This is the maximum rate for companies with profits over £250,000.

“For smaller companies, the rate of corporation tax varies between 19% [profits under £50,000], and 25% depending on profit levels.

“I hope Autumn Budget doesn’t…[introduce] taxing all companies at 25%; that would be bad news for contractors and small businesses.”

Sir Keir Starmer has already warned of a “painful” Autumn Budget 2024, with “unpopular decisions” on October 30^th.

‘We need some positivity’

Made during Treasury Questions, Reeves’s announcement of a cap on corporation tax was probably intended to lift the gloom.

The head of compliance at Dolan Accountancy, Zeeshan Anwar, explained his assessment to ITContracting.com:

“I think the government appreciates that we need some positivity in the business sector after a period of slow growth.

[And] capping corporation tax at 25% should give business some confidence that investing in our economy can still bring fruits.”

‘Reeves’ corporation tax pledge provides stability’

Another accountant, Sid Agarwal, confirms that the pre-Budget pledge to cap corporation tax at 25% “provides some stability”.

DNS Associates’ senior tax manager, he continued: “It’s not all good news for contractors.

“While [Reeves’s pledge] stops the rate from going any higher, it would still represent a big increase from the 19% many PSCs pay.

“If a single [CT] rate of 25% does get announced on October 30^th, it would also upend the basis of a lot of contractors’ financial plans.”

‘For the duration of this parliament’

In her announcement, Reeves said the government intends to cap corporation tax at 25% “for the duration of this parliament”.

She made the pledge in quite an unprompted way, given she was only asked “what fiscal steps she is taking…to encourage inward investment.”

The chancellor also said Autumn Budget 2024 would unveil a “tax road map” to offer firms “the certainty that encourages investment.”

‘Will Reeves’ tax road map tackle IR35?’

“Contractors value certainty, and although this cap gives a limit, it’s not exactly a relief,” DNS’s Mr Agarwal told ITContracting.Com.

“[And as for this map], will it tackle other important issues like IR35?

“Or will it be used to bring in new rules that could affect contractors?”

‘Corporation tax shrinking due to off-payroll rules’

An IT contractor says it is because of the off-payroll working rules that corporation tax isn’t the earner for HMT that it once was.

“IR35 [reform] is pretty much shutting down the limited companies, so the corporation tax bucket is shrinking by the day,” said the contractor, Alex Philips.

Specialising in project and programme management, Philips added in an online post: “Forecast tax claims are a fantasy. To get tax [receipts], you need as many registered UK tax points as possible.

“Get creating those instead, Sir Keir; otherwise the feeling on the ground is going to change rapidly.”

‘New government got to show some favour to business’

To Dolan Accountancy’s Mr Anwar, the stage is now very well set for Autumn Budget to be “interesting”.

“We’re now just six weeks away from the first Labour Budget in nearly 15 years. Whether it’s through corporation tax or not, the new government has got to show some favour to business if it wants investment in the country; that includes leaving the small profits rate of corporation tax at 19 per cent.”