Appendix 7: Lower tax rates for small companies: Background Paper for Sessions 6 and 7 of the Tax Working Group

This paper considers whether a progressive company tax rate (with a lower rate for small companies) would improve the tax system and the business environment and concludes that it would not.  On the one hand, a split company tax rate would provide more funds for small businesses to grow, and might be seen as a way of compensating for the relatively higher costs of compliance faced by SMEs.  On the other hand, a split rate can distort business decision-making, is unfair on other businesses just over the threshold, and adds considerable complexity to the tax system.  It can also be a disincentive to business expansion as it only helps businesses that are making profits, and would exacerbate system integrity concerns.  Overall productivity is likely to be reduced.    The paper notes that there are already a number of ways that business profits can be taxed directly at investors’ personal tax rates, such as through a look-through company or limited partnership.  The paper recommends against a lower company tax rate for small businesses.