Medium-sized businesses get a raw deal from UK tax system - CBI / Grant Thornton UK / LLP
24 Jun 2014 11:51 AM
The medium-sized business (MSB) segment is
already thriving and a key contributor to the UK economy. It also has the
potential to further drive business growth and job creation but they are being
held back by the UK tax system, a new CBI / Grant Thornton report
reveals.
Stuck in the middle shows that the tax
system is acting as a brake on their growth. It is disrupting their cash flow,
absorbing management time and dampening export ambitions. MSBs do not have the
resources that large companies have to navigate tax rules, nor do they receive
the targeted support that the Government directs at small
businesses.
The
CBI and Grant Thornton are calling on the Government to make a number of
changes to the tax system, including to improve cash flow, widen access to
R&D tax relief and to make it easier for MSBs to export.
John Cridland, CBI Director-General,
said:
“Medium-sized businesses have the most potential
to drive business growth and job creation. But all too often their resources,
management time and ambitions are being sapped by a tax system which
disproportionately hits firms of this size.
“We need our growing businesses to invest,
innovate and break into new markets to secure the long-term health of our
economy. The UK’s tax system should support these entrepreneurs to do
this but in many cases it is actually working against them.
“Medium-sized firms are not able to benefit from
the incentives that small firms do and at the same time most cannot afford to
have an army of tax consultants on speed dial to help them wade through the
complexities of the system.
“The Government must urgently review rules around
R&D investment, international tax requirements and take steps to stop
medium-sized firms from being treated like large companies when it comes to
corporate tax payment.”
Jonathan Riley, Grant Thornton UK LLP, National
Head of Tax, said:
“As the UK’s economy continues to gather
pace as we emerge from the recession, it is vital that all businesses do not
face administrative burdens that impede their growth. This is especially true
for MSBs. These organisations face particular challenges in coping with tax
law. They are not so large that they can self-resource the skills needed to
resolve complex tax legislation, or to have the dedicated support that the HMRC
CRM affords; neither are they so small that many of the complexities
highlighted in this report are not relevant to them. The MSB community often
struggle to find a voice, yet when asked they have a lot to say, with tax
complexity regularly cited as a major barrier to their growth.
"We need this dynamic segment of business to fulfil
their potential in order to drive UK growth as a whole, and policy makers are
beginning to recognise this, and would do well to take heed of the issues
uncovered during our research and our simple proposals that would mitigate
these barriers."
The
CBI and Grant Thornton are calling on the Government to:
- Raise the threshold for the Quarterly Instalment
Payments system from £1.5m to £5m. Under the current tax system,
when a business’ annual taxable profits reach £1.5 million it has
to pay tax up front on a quarterly basis instead of annually. Many MSBs are
caught by these rules even though they don’t have the cash reserves to
manage them, diverting their finances away from investment.
- Change the SME R&D tax relief to allow all growing
businesses to benefit as long as they do not have a controlling investment
stake from a larger company. Equity finance is an important alternative finance
product for MSBs to be able to access, but growing firms are sometimes deterred
from using it. Under the current tax rules if a business is more than 25% owned
by another company, despite not being a controlling stake, they do not qualify
for the SME R&D relief so the Government should raise this level to
50%.
- Raise the threshold for exemption from transfer pricing
rules from firms with less than 250 employees to firms with up to 500
employees. We should be encouraging MSBs to break into new markets to export
their goods and services abroad but as businesses become more established in
overseas jurisdictions, the tax burden increases, particularly transfer pricing
requirements.
- Roll out HMRC proposals to provide a designated named
HMRC official to the largest MSBs, on a demand basis, as soon as possible and
in the meantime improve digital communications through emails and live chats.
According to Grant Thornton research, 45% of MSBs said tax was a factor in
slowing down their commercial decision making, while half of respondents (51%)
said they spend ten hours a month (120 hours per year) on tax management. In
particular, MSBs report difficulties in getting through to HMRC on the phone
and then finding the correct person to deal with their
request.
Looking more broadly at the tax system, the Government
has set out a sensible plan to reduce corporation tax, but this is not the only
tax which businesses pay, so the Government should replicate this strategy to
reduce the overall burden facing businesses. In particular, a roadmap on
National Insurance Contributions (NIC) would provide certainty and comfort to
MSBs that the cost and complexity is not going to
increase.