UK Tax Burden on Growth

The Weighty BurdenA report from the Institute of Directors (IoD) says that the current UK tax system is a burden on business growth, acting as a barrier to job creation and stunting businesses’ expansion.

The IoD policy paper Tax – The Weighty Burden, released last week, associates taxation on business with negative factors like the perceived limitations placed on entrpereneurs and shareholders unwilling to take risks.

In a nutshell, the report focuses on the notion that if tax is "too high" then investors fear they will not get a good return on their investment.

The report points out that whilst companies are taxed between 20 and 24% of their profits, this is not the only tax they are subjected to; National Insurance, Corporation Tax, VAT, business rates, fuel duty on transport etc. The "real" figure for taxation on British SMEs is estimated to actually be somewhere between 32 and 41% – The bigger a business gets, the more it pays proportionately, says the IoD.

Furthermore, the policy paper looks at the simplified approach of how much small and medium-sized enterprises work for the state before they work for themselves – so for the first 4 or 5 months of the year, all business profits are taken by the tax man. The IoD report adds another dimsension, proposing a three-part view with how much profit is taken for 1) the state 2) re-investment in the business and 3) reward for investors.

One example of the stifling effect of tax was that a "micro business" with 5 employees might typically wait 117 days before taking any profit for itself, having paid the tax man all profits for the year so far. But should the firm wish to expand to take its workforce up to 20 staff then the figure would rise to 140 days before the enterprise could take anything out of profits for itself. If through success the business were to havce a workforce of 100 employees then the tax burden would last for 152 days.

The IoD’s Head of Taxation, Richard Baron, had this to say:

“It may be easy to think that bigger businesses have broader shoulders, but it’s important to remember that they only got to that size because someone took a chance on their idea. It is always risky to start, or to expand, a business. Entrepreneurs and investors will not put their money on the line if the return after tax is too small. At a time when there are already so many economic risks and unemployment is so stubbornly high, we cannot afford to make it so difficult for businesses to invest and grow.”

The Institute of Directors proposes that the corporation tax rate be slashed to just 15% and that Employers’ National Insurance is reduced to 10%

Even more radically, the IoD points to the joint project with the Taxpayer’s Alliance, the 2020 Tax Commission, where The Single Income Tax report proposes a flat 30% rate tax across the board (over £10,000), cutting the road fuel duty and abolishing stamp duty.

For more information on the IoD’s report see their PDF Tax – The Weighty Burden.

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