Tax system discourages companies from growing

A new report from the Institute of Directors, Tax – the Weighty Burden, released today (Wednesday 20 June), reveals that the British tax system increases the burdens on businesses as they grow, acting as deterrent to take on more staff and expand.

It is often thought that businesses only pay Corporation Tax on their profits at 24 per cent for large companies and 20 per cent for small companies. However, when all of the other taxes businesses pay - such as national insurance, business rates, road fuel duty on haulage and business motoring - are taken in to account, even the smallest businesses pay more than 30 per cent of their profits in tax, while medium-sized businesses pay more than 40 per cent.

To put this in concrete terms, profits from the first four or five months of the year are taken by the tax man. It is particularly damaging that this burden increases as a business grows. A micro firm with 5 employees would pay typically 117 days worth of profit in tax in 2012, but if it was ambitious and took the risk to expand to 20 staff this figure rises to 140 days. If, through hard-work and enterprise, the company were to make the leap to 100 employees the figure would rise again to 152 days.

Tony Attard, chair of the IoD North West, said: “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.”

He continued: "As a company grows and expands the government adds further burdens on cash flow asking that companies when reaching a certain size or adding subsidiaries pay corporation tax quarterly in advance. This is a massive disadvantage to growing companies and entrepreneurs taking on more risk."