New Sage research reveals micro-businesses being penalised by tax system

An economic report published today by Sage (FTSE: SGE) reveals that micro companies report the highest percentage of time spent on tax administration. This demonstrates a strong negative correlation between a company’s size and tax administration burden, with micro-businesses[1] spending up to 6 days per year on tax-related accounting.

This new research also highlights a negative correlation between proportional tax payment and age of an SME. For firms with a turnover of less than $1 million, there is a significant difference in tax paid by those that have been in business for less than 5 years. Younger companies pay 34% of their profits in tax on average, compared to companies older than 5 years, which pay 23%.

The report “A Taxing Problem: the impact of tax on small businesses” found that small companies and micro-businesses pay between 22% and 27% of their profits in tax.

The evidence suggests the UK’s smallest businesses pay a higher proportion of their taxes relative to profits compared to their larger counterparts, with recent research showing that nearly half (42%) of FTSE 100 businesses pay less than the 20% corporate rate.[2]

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UK snapshot: A Taxing Problem

No. of days spent on tax administrationProportionate to total working daysProportion of profits
Micro-size businesses60.6%22%
Small-size businesses110.2%27%
Medium-size businesses280.1%20%

Undertaken by Plum Consulting, the research analyses the impact of direct and indirect costs of tax on small & medium businesses, based on a survey of over 3,000 companies across 11 global markets. The report reveals a strong negative correlation between the percentage of profits that a firm pays as tax and its size–both in terms of its headcount and turnover. This is on top of the additional indirect costs to tax. Tax-related accounting significantly diverts businesses’ resources from more productive business activities, with five percent of a company’s workforce being dedicated to these tasks.

Stephen Kelly, CEO, Sage: “Despite many governments paying lip service to the support of Small & Medium Businesses, this report shows the disproportionate global tax picture, where bigger companies are clearly at an advantage. Disproportionate rates of tax, Shakespearean relics like business rates and unmanageable administration are all tax pain points for entrepreneurs, the heroes of the economy. They want to see a more sensible tax system to support their growth and unlock their potential.

“We need to champion the needs of the business builders, put pressure on governments to reform these outdated policies which are stifling innovation and empower smaller firms to realise their true scale of growth potential.”

Small & medium businesses make a significant contribution to the UK economy, making up 48% of GVA, and 55% of total employment. The success of these businesses is crucial to the growth of the economy, and it is important to help drive their productivity and growth by recognizing the numerous issues they face as result of their size. Limited resources and large payments such as annual tax bills contribute to cashflow problems and operational inefficiencies, on top of the impact of unproductive hours SMEs log every year dealing with administrative burdens.

Research findings suggest that that the main issue lays within the way the tax system is structured; tax is not sufficiently progressive, meaning that micro-businesses and small & medium businesses are at a disadvantage compared to large companies.

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