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The Tax System Is Unfair On Small Businesses: Here’s 7 Ways To Fix It

From taxes on dividends to the forthcoming national insurance hike, today’s SMEs are seemingly hit by a never-ending onslaught of taxes which could leave them at a significant disadvantage. Here are some expert suggestions on how to remedy this…

If the past two years of furloughing, the supply chain crisis, hiring pressures during the ‘Great Resignation’, transitioning to Brexit, the sharpest rise in inflation in 30 years, the costs of overseeing a digital transformation, a fourfold increase in energy bills plus business models being torn asunder due to the pandemic haven’t been hard enough on the UK’s 5.5m small-and-medium-sized businesses (SMEs), forthcoming changes to the tax system aren’t going to make things any easier.

Over the next few months and years, a national insurance hike, a 1.25% surcharge on dividend income, proposed changes to corporation tax – not to mention the ongoing confusion of Making Tax Digital – are all set to deliver a financial blow to many small businesses at a time when cash flow issues are more acute than in previous years. These changes have been attacked by organisations such as the British Chamber of Commerce and the Institute of Directors, who said the national insurance increase and new tax on dividends (which the government plans to use to boost health and social care spending) was “exploiting public sentiment at the expense of some of the most productive and entrepreneurial segments of the economy”.

The Association of Accounting Technicians (AAT) has recently published a Time for Change report wherein a range of experts from across the political spectrum have outlined a series of strategic ideas that could make the UK tax system fairer. Many of their proposals would have clear benefits for SMEs. From scrapping business rates to pegging corporation tax at 15%, here they are…

 

1. Scrap unfair business rates

The problem: Business rates are no longer relevant or fair in an era of online trading and homeworking. They were introduced way back in 1572 as a tax on physical property. Many physical high-street retailers have struggled to stay afloat in the pandemic, while e-commerce giants – which don’t need valuable high street space – have coined it in.

Business rates can also unfairly penalise companies when they invest in their businesses in a way that raises the worth of their premises –  including installing equipment. Not exactly the way to encourage firms to grow.

The solution: Replacing business rates with a commercial landowner levy (CLL) could be a game-changer. The CLL would be measured by the value of the land – not the value of the building – and landlords, not the tenants, would pay for it. This would be good news for the 61% of SMEs in England who currently pay business rates despite not owning their premises.

Over 500,000 SMEs who currently pay rent will no longer need to pay business rates (or the CLL either). The Liberal Democrats who are behind the idea believe this would help revive town centres and the high street at time when nearly 50 shops are closing every day.

A CLL may also boost the manufacturing sector too. Business rates today often use machinery and equipment in their calculations. By discontinuing the rates, the Liberal Democrats estimate that average tax bills for manufacturing premises will drop by 22%. “Scrapping business rates would encourage manufacturers to invest in the UK, in turn increasing productivity and wages,” writes Sarah Olney MP, Liberal Democrat Spokesperson for Business, Energy & Industrial Strategy (BEIS).

In his spring statement, chancellor Rishi Sunak announced business rates will be reassessed in 2023. Until then businesses working in retail, leisure and hospitality will receive a 50% business rates discount capped at £110,000 per company.

 

2. Cut Corporation Tax for businesses

The problem: The headline rate of corporation tax (paid by companies whose profits are over £250,000) will rise from 19% to 25%, in April 2023.

There are fears this could make businesses less competitive, causing companies to  move or expand abroad, or shifting transactions to lower tax locations.

The solution: Conservative MP Sir John Redwood suggests the UK pegs its corporation rate to 15%, which is the new global minimum agreed by 136 countries as part of the OECD’s landmark deal last year. “In a medium size economy open to the world, we cannot afford higher rates than the world average,” says Redwood. One example is Ireland, which has a corporate tax rate of 12.5% until it complies with the OECD’s new minimum, “collects much more revenue from big business relative to national income”.

 

3. Green and social issues

The problem: Big business behaving unethically and ignoring green issues. Just 20 companies are responsible for a third of all carbon emissions, according to Climate Accountability. Yet, many multinationals shelter their profits in tax havens such as Bermuda and the Cayman Islands, depriving domestic governments of tax revenues that could be ploughed into SME investment, tackling the climate crisis or funding social care. 

The solution:  Let’s reward companies that behave ethically. The idea is called Social Offsetting and comes from Tom Burgess, chair at Taxpayers Against Poverty.

“Social offsetting would use financial incentives to encourage socially responsible business behaviour,” he says. “Those companies that take these incentives would quickly be seen as good employers and have an easier time not just in attracting customers but in attracting the best employees.”

In the Time for Change report, Burgess argues tax breaks could be awarded to those firms that:

  • Pay a living wage to its workers
  • Sensible executive pay.
  • Have profit-sharing programmes
  • Offer adequate training and flexible hours
  • Use renewable energy
  • Don’t avoid tax by shifting profits overseas

Social offsetting would use financial incentives to encourage socially responsible business behaviour. Those companies that take these incentives would quickly be seen as good employers and have an easier time not just in attracting customers but in attracting the best employees.

Tom Burgess Taxpayers Against Poverty

4. Scrap National Insurance and the Social Care Levy

The problem: The government’s health and social care levy introduced in April has stoked controversy in the business world, not least because much of the £1.34bn that the government intends to raise via the 1.25% increase on the dividend tax rate is likely to come from sole traders, self-employed and SME directors who mostly pay themselves using dividends. Meanwhile, the 1.25% increase in national insurance – which also comes into effect from April – could make it more expensive for SMEs to employ staff.

The solution: Tax expert Stephen Herring suggests the UK scraps the National Insurance hike and Social Care Levy altogether, while the manufacturing industry has also called upon Rishi Sunak to abolish it too. To soften the blow, Sunak said he would increase the employment allowance for small businesses to £5,000 – a tax cut of £1,000 for 500,000 small firms.

 

5. Abolish Pay As You Earn (PAYE) tax

 The problem: Under PAYE, most employees on the payroll at British businesses have tax deducted from their salary ‘at source’ before they receive it. But it’s a process that can also encourage some bad financial habits, says Mark Littlewood, director-general at the Institute of Economic Affairs thinktank.

“For many Britons, paying tax is something that happens without requiring any real engagement from them,” he says. “When they receive a payslip at the end of the month they see the amount they have paid to HMRC, but they never really ‘own’ that money. It never enters their bank account, so it can be mentally written off as the cost of doing business… [PAYE] therefore hides from many people the real cost of taxation.”

The solution: Littlewood suggests scrapping PAYE and other taxes paid directly to HMRC. This “would force people to see the money going out of their account at the end of the year” which would “change their mindset around tax rates.” If employees completed their own annual tax return, it could certainly ease the burden of many SME directors, many of whom are often bogged down in admin of payroll and PAYE.

 

6. The super-rich

The problem: The wealth gap between the UK’s richest and poorest households continues to swell. According to the Office of National Statistics, those households in the richest 1% percentile are now worth an average of £3.6m each, while the poorest 10% have £15,400 or less. Meanwhile, oil and gas companies saw profits rocket over the last year – Shell saw annual profits quadruple to $20bn/£15.1bn – at a time when many UK households have experienced a sharp rise in energy bills.  

The solution: As the UK plans to reach net zero by 2050, Tom Peters, head of advocacy at Tax Justice UK, suggests a special carbon wealth tax be introduced to target the super-rich, as they contribute more to greenhouse gas emissions (the Treasury estimates higher-income households consume three times more carbon than their lower-income counterparts). Meanwhile, Labour have proposed a ‘windfall tax’ on the profits of oil and gas companies, which they say would help reduce energy bills for low-income consumers.

 

7. The bloated tax system

The problem: SMEs face a bewildering array of taxes in coming months and years. There isn’t just the forthcoming national insurance hike and tax on dividends to deal with; but a forthcoming Plastic Packaging Tax, Building Safety Levy, Residential Property Developer Tax and Economic Crime Levy. Changes have also been mooted to existing taxes such as increases for Scottish Income Tax thresholds, plus a new regime for late payment of VAT and late filing of VAT returns.

The solution: A tax hiatus. Sarah Beale, CEO at the AAT, calls for a three-five-year period with no taxes: “Imagine if we were to have a sustained period with no new taxes, no changes to thresholds, no changes to the applicability and criteria of any tax. Such a period of certainty would benefit businesses large and small as well as their accountants.” She also suggests the UK government publishes a clear tax strategy which sets out tax policy, similar to Scotland’s recent Framework for Tax.

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Christian Koch

Christian Koch is an award-winning journalist/editor who has written for the Evening Standard, Sunday Times, Guardian, Telegraph, The Independent, Q, The Face and Metro. He’s also written about business for Accounting Technician, 20 and Director, where he is contributing editor.

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