Small Business and Taxation
Small Business and Taxation
Introduction
Small business is defined as a business that employs at most 250 employees. These kinds of businesses play a significant role to the economy of the United Kingdom. In the UK, small businesses collectively employ at least twelve million individuals. They also account for a significant portion of the private sector since they account for more than 58 per cent of the country’s private sector. Their contribution to the economy is also immense since they contribute about 52 per cent of national GDP. Despite their contributions to economic growth and employment, small businesses in the United Kingdom are faced with a number of challenges. Conversely, the UK economy consists of a substantial percentage of small and medium enterprises. Taxation laws and other regulations are the major issues facing small businesses in the UK. This paper looks at small business taxation in terms of the resulting effects and other factors associated with tax laws and related regulations in the country.
In contrary to the hardship faced by small businesses in the UK, the businesses happen to be key drivers of innovation (Moore and Garnsey, 2007). Small businesses produce more innovative ideas that are larger than their respective share of employments. Such innovations are not purely based on product innovation but also on new technologies and new processes (Jones, 2006). Such innovations could be associated mainly with large firms but the truth is that innovativeness is a common feature among small businesses, which go unnoticed. Innovations usually lead to greater efficiencies as well as increased productivities throughout the economy. It however come out that taxation policies may deter these small firms from employing innovative efforts.
Research Questions
In this research, the study seeks to answer the following questions:
What would be the effect of increasing the level of tax like corporate tax on small businesses’ activities?
What would the impact of increasing these taxes on the firms’ finances, employment, innovation, and investment, as well as the wider UK economy?
Research Objective
The study objective is to find the effect of different forms of taxes on small businesses and on the entire UK economy.
Literature Review
Taxation mainly contributes to the reduction of investments, innovations, as well as employment in small businesses. Empirical studies have shown that an increase in taxation in small businesses provide disincentives for their engagement in the activities, in which they have some noticeable strengths such as entrepreneurial activity investments, innovations, and employments. Taxes on capital or even on profits reduce incentives for businesses to their efforts in investing in new equipment, increasing their levels of return on investment (Jones, 2006). Most of the taxes resulting to adverse effects include corporate tax and business rates. These taxes also reduce entrepreneurial activity rate within the UK economy. Again, increased taxes on labor like national insurance to the employers reduce the abilities of small businesses to incorporate new staff. This is said to consequently lead to the reduction of headcount by small businesses, especially due to the high costs that are associated. Empirical evidences linking high labor taxation to increased employment or low employment seem to be very strong.
From a global scope, the global economy is said to have recorded an annual contraction in 1946 as its first time. Recessions such as the case of the year 2009 were argued to have been the first recession during the globalization error. This happened with a widespread downturn, which spread through global trade as well as the connections of financial markets. Credit crunch is believed to have been the main factor that triggered the recession (Kirchhoff, 1996). Credit crunch led to the loss of confidence amongst banks within the backing system especially in the UK.
Other effects caused by the credit crunch involved the collapsing of interbank lending markets, which resulted from high exposure of banks to vulnerable assets like residential mortgage backed securities (Petersen and Rajan, 1994). These securities on the other hand were incorrectly assessed especially in terms of the associated risks thereby being over-valued. This aspect has remained to be a global issue in which there was a collapse in the growth of credit as well as investment (Keasey and Watson, 2004). Again, a sharp inventory cycle came about as firms try to boost their cash potions and make possible adjustments in production as a way of lowering demand. For consumers, they are said to have increased their savings and significantly reduced spending. All these were done to respond to credit availability reduction.
To respond to the crisis, one of the major ways established by policy makers in the UK and around the world includes taxation. The taxation policy was to be initiated through an insurance scheme backed by tax-payers (Keasey and Watson, 2004). This was the only way that individuals and small business firms could benefit from the scheme. The implication of this review is that while taxation on small businesses is seemingly harmful to the businesses in various ways, some policies are essentially important especially when taxation is the only way forward to ensuring that small businesses survive some financial of economic crises (Messina and Walton, 1996).
Research Methodology
This section involves an explanation of the key steps to be taken in collecting the primary research. While the use of secondary data is critical, primary data is very important in providing a way in which factors that can hardly be obtained via primary research are also incorporated in the research. Primary data would use sample surveys as the sampling method. To obtain data information from respondents, questionnaires are largely advocated. The use of questionnaires would be advantageous due to the factor that people would have adequate time to respond to them. Some business concepts are very confidential, and respondents may not be willing to deliver information through other techniques such as interviews. Interviews are considered less confidential compared to questionnaires. In questionnaires, respondents can provide their answers without disclosing personal of other secretes, thereby preserving their identities to the research. The questionnaires would be structures in a way that respondents could respond to most of the questions comfortably. The questions would be based on general knowledge about small businesses especially how taxes could affect their growth and the roles that the small business firms play to the United Kingdom’s economy.
The research would focus mainly on small businesses within the UK and more specifically in London City. The focus would be on those businesses having an employee capacity of at most 250 workers. These types of firms make up the small business enterprises in the United Kingdom. The respondents focused would be the owners, managers, and directors. This selection would depend on the leadership style within the selected firms. A sample of 20 firms would be used to conduct the research. After the data is obtained, the results would be generalized to reflect all small business firms within the UK. The generalization would then be backed up by secondary data, which depicts similar effects based on earlier results.
Analysis
The study results showed that small business firms are hardly comfortable with those tax policies in the UK. Most of these policies favor specifically the large companies and firms, which can push through of evade the effects of taxation policies in the country. The data obtained for the firms is as shown in table 1 below:
Table 1: The effect of taxation for small businesses having a £100,000 as the taxable profit
Tax year 2009-10 2010-11 2011-12 2012-13
Corporation tax rates – small businesses (%) 21 21 20 20
Corporation tax (£) 21000 21000 20000 20000
Annual Investment Allowance (AIA) (£) 50000 100000 100000 25000
First Year Allowance* (40% of bal 50000) 20000 0 0 0
Tax savings from AIA + FYA (£) 14700 21000 20000 5000
Tax payable (£) 6300 0 0 15000
Source: HYPERLINK “http://www.taxpartnersuk.com/news_detail.php?news_id=22” http://www.taxpartnersuk.com/news_detail.php?news_id=22
From the table, 2010 tax budget seem to have intended to cheer small business firms up by announcing a reduction in corporate tax by up to 20 per cent. This policy was initiated to welcome the previously announced labor budget. The corporate tax decrease seems to be very soothing to small businesses in that it could boost their growth among other economic and financial benefits. However, even reducing the taxable profits from £100,000 to £25,000 seems to have not favored the small business firms within the UK. Besides other adverse effects as shown in the table include annual investment allowances reduction. The most significant effect is that VAT increase to 20 per cent would push the small business firms to adjust their plans for their investments. These adjustments would be in both assets and in other aspects.
Discussion
Small businesses in the UK are face with many problems besides the taxation policies’ effects on such firms. First, the owners have to make informed choices and consider many factors whenever they are deciding the best way in which they have to carry out their businesses or a trade. Some of the main choices are between incorporation and even unincorporated media. Tax treatment of capital returns within small businesses pushes for certain decisions, some which could harm the business or in some cases, the small business firm could benefit significantly. In the United Kingdom, disincorporation and capital gain tax are controlled by Section 162 of the Capital Gain Act 1992 (Lawson, 1997). This act controls the way business transfers are done especially from a small business to large companies or corporate organizations. Precisely, the impact of taxes on small business is frequent in terms of altering the growth of small firms, preventing them from creating job opportunities, and other adverse economic effects. In general, the impact of tax policies on small businesses comes back to the UK economy and the global economy as well.
From the study findings, tax rate policies affect small businesses in terms of their growth, job, creation, business planning, and their ability to seek financial help from banks among other factors (Lyson, and Tolbert, 1996). Corporate tax seems to be the main tax policy that affects small businesses but other forms of taxes such as Value-added tax (VAT), personal income tax, payroll tax, and capital gain tax affect small businesses greatly. The effect of these taxes is that they leave small business firms with less capital for their expansion.
Conclusion
While corporate tax seems to generate the biggest threat to the success of small businesses, other tax policies also affect these businesses whether positively or negatively. Taxes are used by the government to obtain funds that enable it run government projects as well as in the attempt to control the economy. In all cases, it comes out that tax policies have greater effect on small businesses than on large business organizations. Typically higher tax rates take away almost proportional amount of capital from small business firms. This happens despite that these types of businesses comprise of the largest proportion of the UK economy. The UK should structure its tax policy system in a way that safeguards small businesses. This would in turn contribute to higher GDP and more job opportunities.
Bibliography
Jones R 2006, ‘Moving from Unemployment to Self-employment’ in South West Labour Market Review Autumn edition. Employment Service.
Keasey, K. and Watson, R. 2004, ‘The bank financing of small firms in the UK – issues and evidence’, Small Business Economics, Vol. 6, No. 5, pp. 349-362.
Kirchhoff, B.A. 1996, ‘Self-employment and dynamic capitalism’, Journal of Labour Research, Fall.
Lawson, T. 1997, Economics and Reality, London: Routledge.
Lyson, T.A. and Tolbert, C.M. 1996, ‘Small manufacturing and nonmetropolitan socioeconomic well-being’ Environment and Planning, Vol. 28, No. 10, pp. 1779-1794.
Messina, M. and Walton, P. 1996. ‘Company Taxation’ International Tax Report, February, pp. 8-11.
Moore, I. and Garnsey, E. 2007, ‘Funding for innovation in small firms – the role of government’, Research Policy, Vol. 22, pp. 507-519.
Petersen, M.A. and Rajan, R.G. (1994), ‘The benefits of lending relationships – evidence from small business data’, Journal of Finance, Vol. 49, No. 1, pp. 3-37.
