Insight Associates provide outsourced accounting and Finance Director services to ambitious and growing businesses. We work as your only resource or with existing staff to give you complete financial support including monthly management accounts, high level financial advice, robust controls and financial systems, funding and business planning, payroll & compliance, VAT returns and statutory compliance.

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Monday, June 25, 2012

Does the tax on businesses make any sense?

I recently read through the very interesting report from the Institute of Directors (IOD) entitled “Tax the weighty burden 2012” which discusses the true tax burden on UK businesses and how this is way beyond just the headline corporation tax which everyone thinks of.

Their point is that UK businesses are far too heavily taxed and that this in turn deters enterprise and risk taking. They may just have a point.

A number of key issues come out of the report which really makes you think:

  • In addition to corporation tax at between 20 and 24%, companies also pay the following taxes: business rates, employers national insurance, road fuel duty, climate change levy, irrecoverable VAT, insurance premium tax, vehicle excise duty, and so the list goes on! Most of these are not influenced by profitability or the ability to pay as taxes on profits are.

  • The impact of this is that businesses effectively pay between 32 and 41% in tax, meaning that the first four to five months of their annual profits are for the benefit of the state and not their stakeholders!

  • That this overall rate of tax increases with the size of the business. So the more successful you are the higher the rate of tax you pay!

Does this make any sense? Is it fair? Does it encourage enterprise? The IOD argues that it doesn’t and that it is counterproductive. In fact a lower tax burden would encourage businesses more and overall the economy would benefit.

There are many elements of the tax system on businesses that do not make sense and certainly could be argued not to be fair. Business rates are proportionately much higher than Council Tax, yet businesses only use a fraction of the services that private residents use. In fact they drive economic prosperity to the area where they are located. Through employers national insurance employers are penalised for growth and taking on extra employees. Something which will be even worse with the introduction of auto-enrolment pensions.

One other nonsense area of business taxation which the IOD report does not cover is the huge differential that exists now between the owners taking income and the capital gains tax they pay should they sell the business. Presently with Entrepreneur’s Relief available on up to £10m of lifetime gains, a business owner will only pay 10% tax on the sale of his business. However, if he chooses to continue to run his successful business and income he takes out will be taxed up to the highest rates of 50%, plus national insurance. This seems to be a huge incentive to sell rather than build further for increased prosperity.

It really does seem that the tax system is working against the huge need for smaller enterprises to grow to get us out of the doldrums!

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