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KEY POINTS
- Small businesses need a stable tax policy.
- Government needs to identify the benefits they offer and encourage them.
- The current definition of ‘small’ is appropriate.
- Factors that could be considered in a small business tax policy.
Small business taxation is the bread and butter of many tax advisers and accountants in practice. We regularly advise our clients on the tax implications of various strategies, structures and business decisions, acting in many cases as the financial strategic director for our small business clients.
But small business tax policy seems at best a rudderles
s craft.
Overtaken annually by one initiative after another, many of them well-intentioned (and indeed some of them less so), some seeking to ‘support’ small businesses, others designed to rein in a particular small business tax planning technique – and often both at the same time.
We have one tax measure designed to help and support smaller businesses, such as the annual investment allowance, but at the same time proposals are still being considered for legislation to prevent the evil of ‘income shifting’.
Here we go again
Advisers of small businesses have been tossed on the stormy seas of the corporation tax nil rate, the non-corporate distribution rate, income shifting, IR35, hikes in small business tax, and now the Conservative party has stated that (if elected) it will set the small company rate on a downward trend again.
It proposes initially to reduce the rate to 20%, but thereafter seeks to reduce it still further, paid for by the abolition of ‘complex tax reliefs’ (the annual investment allowance, I suspect). Advisers would be forgiven for thinking, ‘Here we go again’.
Is it necessary or desirable to have a separate ‘small business’ tax policy? We might bemoan the current state of affairs, but are we (as, I would propose, the experts in the field) right in seeking a policy structure addressing smaller businesses?
I think the first justification for requesting this must be the lamentable legislative track record of the last decade in the absence of any over-arching policy on smaller businesses.
Whether that policy is ‘the Government wishes to support small businesses through the tax system’, or ‘the Government believes that small businesses are a bunch of tax-fiddling cheats’, at least a considered and well-argued policy position would allow tax law to be developed consistently rather than the somewhat random approach we have experienced recently.
So I would argue for a policy-driven approach, which would still recognise that some issues transcend the policy-led legislation, but which would also ensure that these issues are the exceptional ones.
What policy?
If we accept that an overall policy-driven approach is the best way forward, then what might be the relevant components of small business tax policy? Before I jump in to argue that small businesses must be supported and looked upon favourably by the tax system, I should give myself a reality check.
I run a small business. All of my clients run small businesses, and I have to accept that my views might be coloured by this. I am willing to accept that big business might argue that they should be treated more favourably; after all, they provide lots of jobs, lots of tax revenue and so on.
But big business already has a lobby, and the sorts of ‘initiative’ that I have already considered impact little on them.
Yes, they have a fair slice of anti-avoidance legislation to interpret and respond to every year, but I would argue that they are adequately equipped to deal with that.
In a wider picture, looked at in the national interest, what are the benefits of a small business tax policy that is supportive? There is no doubt that ‘from little acorns…’ but many small businesses that I know do not want to get much bigger. There will always be the budding Richard Branson, but many just want to do a good job locally and get on with running their businesses.
Is small beautiful for its own sake? Maybe the smaller business model is the key to sustainability? Local businesses providing jobs for local people, based near their homes and reinvigorating the local economy (which, locally to me, is now termed a ‘micro-economy’).
Why buy cheese imported from Portugal when the farm down the road makes one that is just as good, and employs five local staff to boot? Fewer air miles, local jobs: surely this is something policy might recognise?
If small businesses might be the key to an enlivened economy, small business tax policy might therefore recognise that contribution. Small business owners and advisers will argue they are the engine room of the economy, particularly over the past two years.
Large businesses (and specifically banks) have let us down spectacularly in recent years, but smaller businesses, they would argue, have slogged away to get through the economic maelstrom by sheer force of will. Not for them the complex financial instruments that nobody understands, instead a life of early mornings, late nights and drawing no pay if necessary.
The over-reliance on the single sector of financial services in the UK economy has turned out not to have been a good thing. I would not venture to argue that small businesses contribute equally with their larger siblings to GDP, but they are an important aspect of a more diversified, more balanced economy.
Round pegs
So small businesses might be incentivised because they provide jobs, or they might grow into large businesses or they are part of a sustainable economy, but if those are the policy drivers (and I do not challenge that view), what about the ones that don’t fit? The businesses that don’t want to employ anyone, or only want to employ their children?
What about those one or two-person businesses that are based in the country but where the owners then travel to the city to work, bringing no real benefit to the local economy beyond what they spend at Waitrose or the farmers’ market?
What about those whose only definition of growth is ‘as much money as I can make on my own behalf, but no more’, or those who have laudable aims of being local, sustainable and providing employment but have no real idea of business and therefore fail spectacularly?
If the Government is to develop a supportive small business policy, then setting out the characteristics that are to be supported might help with formulating that policy.
However, a business that creates three jobs in a market town by employing the owner’s three children part-time while at university needs consideration for the benefits it brings, and not shouts of ‘foul’ and new legislation down the line.
What elements would make up this policy to support small businesses? The key aspect is stability, not changing the parameters or desired behaviours unless a really significant case is made to do so. This means the policy must be properly thought through and the design elements established at the outset.
What is ‘small’?
Finally, how might we define a small business for this purpose, once we have decided which behaviours policy regards as beneficial?
‘Small’ is traditionally looked on as up to 50 employees and meeting certain financial criteria relating to turnover and balance sheet. In my view this is an adequate measure, which has the added benefit that any policy drivers can dovetail in to any EC definitions and requirements.
I would not here argue for any separate definition or separate incentives for one-person businesses, or those with ten employees or fewer (often referred to as nano-businesses and micro-businesses, respectively). I think that any policy structure would be adequate if it addressed the sector currently defined as small.
What incentives or support could tax policy provide to small businesses? As I have indicated above, Government must first decide what it is about small businesses it admires or wishes to support. This might be:
- potential for growth and therefore contribution to GDP;
- employment; or
- sustainability.
Other factors may well be added, but only when ministers (or their advisers) really understand what makes small businesses tick.
We have a general election in two weeks’ time. I am not convinced that any of the parties have sufficient understanding to make clear commitments – but I shall continue to ask.
