Superstar medium-sized businesses are being held back by tax. Could these measures help?

Medium-sized businesses (MSBs) are often the unsung heroes of the economy.

Only 1.8% of companies in the UK fall within the £10m to £100m-turnover MSB bracket, yet these businesses generate a whopping 23% of private sector revenue and employ 16% of the nation’s workforce, punching well above their weight.

That makes them a crucial part of the economy, yet they need more support. Their growth is being help back due to the current tax system, says a new report from the Confederation of British Industry (CBI) and Grant Thornton.

They claim the current tax system is damaging MSB’s growth by “disrupting their cash flow, absorbing management time and dampening export ambitions”.

John Cridland, director general of the CBI, explained: “Medium-sized firms are not able to benefit from the incentives that small firms do and at the same time most cannot afford to have an army of tax consultants on speed dial to help them wade through the complexities of the system.

“The government must urgently review rules around R&D investment, international tax requirements and take steps to stop medium-sized firms from being treated like large companies when it comes to corporate tax payment.”

The CBI and Grant Thornton are calling on the government to introduce the following measures to aid the growth of MSBs:

· Raise the threshold for the Quarterly Instalment Payments system from £1.5m to £5m. Under the current tax system, when a business’ annual taxable profits reach £1.5 million it has to pay tax up front on a quarterly basis instead of annually. Many MSBs are caught by these rules even though they don’t have the cash reserves to manage them, diverting their finances away from investment.

· Change the SME R&D tax relief to allow all growing businesses to benefit as long as they do not have a controlling investment stake from a larger company. Equity finance is an important alternative finance product for MSBs to be able to access, but growing firms are sometimes deterred from using it. Under the current tax rules if a business is more than 25% owned by another company, despite not being a controlling stake, they do not qualify for the SME R&D relief so the Government should raise this level to 50%.

· Raise the threshold for exemption from transfer pricing rules from firms with less than 250 employees to firms with up to 500 employees. We should be encouraging MSBs to break into new markets to export their goods and services abroad but as businesses become more established in overseas jurisdictions, the tax burden increases, particularly transfer pricing requirements.

· Roll out HMRC proposals to provide a designated named HMRC official to the largest MSBs, on a demand basis, as soon as possible and in the meantime improve digital communications through emails and live chats. According to Grant Thornton research, 45% of MSBs said tax was a factor in slowing down their commercial decision making, while half of respondents (51%) said they spend ten hours a month (120 hours per year) on tax management. In particular, MSBs report difficulties in getting through to HMRC on the phone and then finding the correct person to deal with their request.

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