Inflation, red tape and more admin: the impact of freezing tax thresholds

One impact of the freezing of tax thresholds is the increased red tape it creates for businesses. While it is estimated that individuals will pay an additional £40 billion in tax by 2028, few commentators have remarked on how a failure to index certain thresholds for inflation is increasing administration for business.

In Crowe UK’s open letter to HM Treasury, before the Autumn Statement, we highlighted how there is a disincentive for businesses to grow, arising from the fact that the tax regime tends to become more onerous the greater the turnover/income level of the person or organisation. With administrative thresholds having been frozen, more organisations become subject to rules designed for larger businesses, when actually the real terms of size of the business activities have not significantly changed.

For example, there is a threshold for UK companies having to comply with the full transfer pricing requirements. These are currently €50 million turnover and a balance sheet total of €43 million. They haven’t been adjusted for a number of years. With inflation running at record levels , the real terms value of these thresholds have declined significantly. Companies that have been able to take a light-touch approach to their transfer pricing will be required to produce more detailed and complicated documentation – while the real size of their business remains unchanged.

Another more, perhaps, worrying example is around tax efficient fund raising for companies. The maximum amount of qualifying tax efficient capital that can be raised is no more than £12 million (£20 million if a knowledge intensive company) in total per group from a combination of the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts. High inflation has eroded the spending power of the amounts raised, meaning the funds have significantly less impact on business growth than a few years ago. Equally the companies that can qualify are smaller in real terms due to the lack of increase in the size thresholds. For a government that claims it is committed to encouraging innovative companies this is an astonishing oversight.

It seems likely that Jeremy Hunt will have one more chance to prove whether his growth agenda has real substance to it when he presents his Spring Budget in a few months.