The complex world of taxation and its impact on SMEs

As SMEs fight to survive the recession, complex tax laws seem counter-productive in encouraging these businesses to step up and take a role in the UK economy. Vince McLoughlin, Partner at business, tax and charity advisory company, Russell New, takes a look at the problems and possible solutions.

As the Government and financial think-tanks look at ways to kick-start the economy, the focus is often on the role and contribution of SMEs. However, the bigger players and their recent associated bad press in regards to corporation tax avoidance – combined with taxation red tape – could act as a deterrent for more of these important businesses to flourish . It is natural for companies to look at ways to legally reduce their tax bill as with any other cost of business – but celebrity scandals and news of multinational corporations taking advantage of loopholes have understandably made smaller businesses question their own tactics in reducing tax for fear of falling foul of the law when they perhaps haven’t been doing anything wrong. In turn, this cycle of fear can hinder growth, which can be detrimental to the greater UK economy.

One of the main problems for all businesses trying to negotiate and understand the veritable minefield that is taxation law. As the Government tries to balance the books and find ways to draw in more tax-related income to boost the coffers, new legislation, schemes and restrictions are being introduced on a frighteningly regular basis. For SMEs that may not have their own in-house accountants or advisers, this makes it increasingly difficult to navigate their way through the most efficient processes to get the best financial results for their business while still acting within the law.
Without clear and concise guidelines and rolling updates on exactly what is allowable and what may be pushing the boundaries of tax efficiency, together with scaremongering headlines and the fear of potential legal and fiscal consequences, SMEs are becoming more and more reticent to take advantage of the tax breaks available. These types of concerns, while reasonable in light of recent history, can put them under unnecessary financial pressure rather than giving them the freedom they need to enjoy growth, create vital jobs and, in the long run, contribute more to the economy and community.

With the reputation of the UK tax system suffering due to the negative publicity over the last year or two, the spotlight is falling on all businesses liable for corporation tax – including the smaller companies that are so essential for improving our economic position. With a massive 95% of organisations in the UK being classed as micro-businesses, there is so much potential for them to assist in turning around our fortunes and leading us through the difficult financial position we have found ourselves in over recent years.

However, as more red tape and legislation is introduced in order to reduce the opportunity for large companies to benefit from offshore avoidance schemes and other borderline ‘nefarious’ tactics, it’s not just the guilty parties that are going to be hit. It can be difficult to target those who have the capability of using complex tax structures so the more tax laws that are introduced, the more complex the process of good accounting and tax efficiency becomes for the smaller businesses too – meaning that more money needs to be invested in getting the right kind of help to understand and manage the dos and don’ts of taxation.

So what can SMEs do to ensure they’re getting the best breaks possible when it comes to their tax liabilities, while staying in line with the rules? Well, knowledge is power; the most important thing to do in the first instance is to get guidance from somebody you can trust. You need to make sure that the information you’re being given is completely up-to-date at all times, with an adviser who is also proactive in informing you as soon as new changes are implemented. While you may think you can find the necessary details online or through word-of-mouth from other business associates, there’s no substitution for professional advice from somebody whose job it is to keep themselves and their clients on the right side of the law.

SMEs also need to do everything they can to make sure that they are claiming tax relief where they can, rather than being scared into submission and paying more tax than is necessary. We still have, enshrined within our moral code, the concept eloquently imparted by Lord Tomlin that a person is allowed to arrange his affairs so the tax attaching under the Acts is less than it otherwise would be. Capital allowance incentives, corporation tax rates, Research and Development and Patent Box reliefs, dividends and many other elements of tax planning need to be considered so that these businesses can realise their maximum growth potential.

Attention to detail and due diligence along with professional advice will help businesses navigate the turbulent and confusing waters of tax responsibilities. While the rules are complicated and ever-changing, the problems are not insurmountable as long as you plan well.