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East Anglia: Medium-sized firms being held back by tax system, says CBI/Grant Thornton report

PUBLISHED: 06:00 23 June 2014 | UPDATED: 15:01 23 June 2014

Phil Hall of Grant Thornton.

Phil Hall of Grant Thornton.

Constable Photography. St Neots

Medium-sized businesses (MSBs) employing between 50 and 500 people are being held back from further growth and job creation by the UK tax system, according to a survey from the CBI and Grant Thornton.

The research, called “Stuck in the middle”, shows the tax system is acting as a brake on growth, disrupting cash flow, absorbing management time and dampening export ambitions.

MSBs do not have the resources of large companies to navigate tax rules, nor do they receive the targeted support the Government directs at small businesses, the report says.

The CBI and Grant Thornton are calling on the Government to make a number of changes to the tax system which include improving cash flow, widening access to Research & Development tax relief and making it easier for MSBs to export.

Richard Tunnicliffe, CBI director for the East of England, 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.

“The Government must urgently review rules around R&D investment, international tax requirements and take steps to stop MSBs from being treated like large companies when it comes to corporate tax payment.”

Phil Hall, tax partner at Grant Thornton’s Ipswich office, added: “As the UK’s economy continues to emerge from the recession and gather pace, it is vital that businesses do not face administrative burdens that impede their growth.

“This is especially true for MSBs which make up just 1.8% of businesses but employ 16% of the UK’s workforce and generate nearly a quarter of private sector revenue.

“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.

“The MSB community often struggles 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 its potential in order to drive UK growth as a whole. 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 £1.5m 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. 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.

Phil Hall added: “Looking more broadly at the tax system, the Government has set out a sensible plan to reduce corporation tax. However, this is not the only tax which businesses pay, so the Government should replicate this strategy to reduce the overall burden facing businesses.”

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