A Taxing Problem: The impact of tax on small businesses

Research undertaken by Sage and published in A Taxing Problem: The impact of tax on small businesses shows that those starting businesses face an uphill struggle because of arguably unfair tax regimes around the world. These give established businesses a competitive advantage.

Entrepreneurs are paying up to 10% more tax as a percentage of profits compared with big businesses and the newer a company is, the more it pays in tax. This stifles the start-up culture so invaluable around the world.

While many governments do offer some tax relief for businesses on the smaller end of the scale, many still face an identical tax regime compared to large businesses.

Analysing a survey of more than 3,000 companies across 11 countries, A Taxing Problem seeks to understand the scale of the tax problem, the ways it affects companies and where there may be remedies to the issues.

The small and medium-sized enterprises (SMEs) affected not only account for a significant (in many cases the majority) share of economic activity and employ a large share of the working population but they also drive innovative and vibrant sectors in virtually all parts of these economies and in every region and territory.

This is therefore a serious problem for all of us – and one deserving of the analysis and thought provided by this report.

A Taxing Problem offers invaluable data-driven insight into:

• The importance of SMEs around the world and the economic benefits they bring
• Corporate tax regimes around the world and the impact they have on SMEs
• The opportunities and costs of performing tax-related accounting
• Whether there’s a role for intervention to improve the situation and outcomes.

Excerpt from A Taxing Problem

For more insights into what you can learn from A Taxing Problem, here’s an excerpt from the report.

Introduction

This study has been prepared by Plum Consulting for Sage, to examine the situation in relation to taxation on small and medium enterprises (SMEs). SMEs make a significant contribution to the national and global economies.

For the 11 countries that we examine in this report, their contribution to the total GDP ranges from around 40% to 60%. SMEs also contribute to between 45% to 70% of the total employment in these countries.

Governments should, therefore, create an environment that makes it attractive for entrepreneurs to set up small companies as well as one that is conducive to the success of SMEs in the long run.

One way of creating a fostering environment for SMEs is through a favourable tax system.

A corporate tax regime that leads to new or small companies being taxed at an effective marginal rate that is higher than the market’s average could deter potential entrepreneurs from starting a business.

This is because the gains from doing so may be too low to tempt them to make a switch from their current economic activity. This could result in a smaller pool of SMEs in the long run.

In addition, a high tax burden can also put extra financial pressure on established SMEs. Companies have to pay their tax to a deadline or risk being fined, which would increase their tax bill.

However, making a tax payment could also reduce the company’s cash flow further. This can be a problem if the tax payment schedule coincides with a period of low cash flow. Cash flow could become negative creating negative impacts on the company’s operation.

In our previous report, The Domino Effect: the impact of late payments, the impacts of late payments to SMEs are examined. It was found that when companies are paid late, which can result in cash flow problems, they resort to measures that potentially have negative impacts in the long run.

These include reducing future investment, cutting annual bonus and staff pay, all of which adversely affect their growth prospect and ability to attract talents. Being saddled with a high tax bill at a time when cash flow is low would further increase the likelihood of these measures being implemented.