Minister hears about problems facing small businesses

Treasury Minister, Dawn Primarolo, listened to evidence from leading experts recently, detailing the problems owner-managed businesses have with taxation issues, particularly IR35. The presentation was based on the results of a survey by the All Party Parliamentary Small Business Group, which included the views of members of the UKTECH network, who were acknowledged in the report.

In May, the APPSBG, the largest of its kind in parliament, called on freelancers and small businesses to Tell MPs what you think about the tax system participate in an online survey to investigate owner-managed businesses' taxation. The research sought to find out:

• what advice a small business seeks out before they choose their legal structure;
  
• what benefits, and what costs, are associated with each legal structure;
  
• the effect of recent changes to the taxation system on their business; and
  
• business owners' opinions on options for reform.

The results were analysed by academics and presented to parliamentarians, including Treasury Minister Dawn Primarolo and Shadow Treasury spokesman Mark Prisk, at a meeting of the APPSBG in Westminster. They heard leading experts, stakeholders and academics discuss some of the most controversial taxation issues of recent years.

The briefing, Owner-managed businesses and their tax, is attached at the bottom of this article. It was sponsored by Lloyds TSB, the ACCA (Association of Chartered Certified Accountants), the Federation of Small Businesses and the Forum of Private Business.

Key findings

The research suggested that an uncertain and ever-changing taxation system has had a detrimental effect on business. Over 50 per cent stated that IR35 is a big problem and some 60 per cent stated that the 19 per cent on distributed profits, announced in this year's Budget, will be a problem.

Chas Roy-Chowdhury, head of taxation at the ACCA and a speaker at the briefing, said: "Owner-managed businesses require a simple, certain and fair tax system. At present it is none of them. The Government must look at radical solutions to achieve those goals. Including, the abolition of the zero rate of corporation tax, the creation of a separate legal structure for self-employment, and the removal of the tax administration barriers that prevent small businesses trading in the EU"

At the briefing Dr Alan Southern, of the University of Liverpool Management School and the Small Business Research Trust (SBRT), also presented findings that suggested many owner-managed businesses had changed their legal status from sole-trader to limited company and that many did this in order to benefit from a reduced tax rate rather than, as the Government envisaged, as a step to growth.

The Government has since removed this 'incentive' via the dividend tax (IR591) after re-branding it as a loop-hole.

Of the 500 respondents, nearly half were from small businesses working in 'computer and related activities'. The report devoted a particular section to these businesses.

It said (page 16/17): "Earlier research had demonstrated that small high technology firms pay proportionately higher tax than small low technology firms. This seems to be an odd state of affairs given the former are readily cited as the type of company needed to support general levels of economic development, both in terms of local economic development and on aggregate, for the country as a whole. In absolute terms high technology firms appear to pay less tax than low technology firms, yet as a proportion of total assets high technology firms do pay greater levels of tax."

Summary

The summary of the findings said: This interim report has been able to raise a number of contemporary concerns about the systems of regulation and taxation facing the owner managed business. Income tax, corporation tax, national insurance taxes and uniform business rates form part of a broader level of costs to the small firm, that in addition, face a disproportionate burden from the costs of compliance. Owner managed businesses act as a collector of PAYE and VAT on behalf of the UK Government and they are also required to administer their own taxation, including deduction of taxes from employees. This comes at a much greater cost to the small firm."