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Medium sized businesses get a raw deal from UK tax system

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.