Hidden Cost of UK Business Taxes

July 16, 2010 Taxation in UK

Few PoundsUK businesses face a far greater tax burden than the headline tax rate would suggest, possibly leading to reduced levels of entrepreneurship and even subdued growth.

The UK Institute of Directors (IoD) has voiced its concern over the country’s tax treatment of businesses, claiming that almost five months of a company’s profits will be paid to the state every year.

UK businesses currently incur a 28 percent corporate tax rates, or a special 21 percent tax rate for small businesses. Additionally, companies also face employer National Insurance Contributions (NIC), business rates, road fuel duties, climate change levies, stamp duties. Additionally, individual businesses may face taxes particular to their specific business situation. Cumulatively, a representative micro-sized business will spend 121 business days to compensate their annual tax liabilities, or an approximate equivalent to 33.2 percent of annual earnings. A small business will work for 142 days before being able to pay off their tax burden, or approximately 38.8 percent. Medium-sized businesses in the UK are estimated to have operate for 161 days to satisfy their applicable levies and rates, an equivalent rate of 44 percent of profit.

According to the IoD, the UK Government needs to immediately consider drastic reductions to all of its tax rates, although dropping corporate tax rates and NIC will be benefits businesses the most. On a per-percent scale, a one percent fall in the NIC will have the greatest comparative positive impact on overall tax burdens. The UK Government should also investigate the effect of taxes that are not pegged to profit, as they could lead to disproportionate liabilities for small businesses. However, the IoD has conceded that the national fiscal position could make tax reforms unfeasible. Although for the Government to effectively encourage economic growth and job creation, it is advised to consider gradual reductions to primary business tax rates over the shortest feasible time period.

Photo by René Ehrhardt