Medium-sized businesses need more support to stop them from falling over the tax cliff

More support for Britain’s often-neglected medium-sized businesses: the Confederation of British Industry today publishes a series of proposals for tax reforms it hopes will enable many of these companies to fulfil their potential.

It is an important initiative, for Britain’s medium-sized enterprises do not always get the fair wind they deserve. While the scale and breadth of the “Mittelstand” companies of Germany are widely seen as the key to its long-term economic outperformance, their counterparts in the UK have rarely been targeted with specific support.

The CBI points out that medium-sized businesses employ 16 per cent of the UK’s workforce and generate 23 per cent of the private sector’s revenues but struggle with the cliff-like structure of the tax system – they fall into the gap between small companies given every support imaginable and large companies with the resources and systems not to need such help.

One good example is the requirement for a business to pay tax up front in quarterly instalments as soon as its annual taxable profits hit £1.5m. Businesses that breach this threshold suddenly have to adapt to a whole new cashflow model but rarely have sufficient balance sheet strength and flexibility to be able to do so. As a result, they’re forced to divert resources away from investment.

Similarly, businesses no longer qualify for very valuable research and development tax credits if another company or investor builds a stake in them of more than 25 per cent, even though this is some way off a controlling interest. This can act as a disincentive to businesses considering raising equity investment in order to grow – often a powerful mechanism for medium-sized businesses.

Transfer pricing, which affects exporters, is another problem. Firms with less than 250 employees are exempt from the transfer pricing regime, which can be onerous and expensive, but successful exporters that take on new staff and breach this threshold are suddenly plunged into the system.

Medium-sized businesses’ tax affairs are usually much more complicated than those of their smaller counterparts, yet HM Revenue & Customs has yet to implement its proposal to offer them a personalised service, which would mean each company being allocated a named individual official to work with.

Grant Thornton, which helped the CBI develop its proposals for tax reform, says 45 per cent of medium-sized businesses reckon their commercial decision-making process has been slowed down by tax considerations.

Implementing the reforms the CBI wants shouldn’t prove overly expensive. Raising the threshold for the quarterly instalment scheme from £1.5m to £5m, for example, will cost little. Nor should extending the R&D credit rules so that any company not controlled by another entity can qualify.

Medium-sized businesses have a good claim for being prioritised when it comes to deciding where money on business measures will best be spent. But that’s not been the view of policymakers thus far.

Are small businesses about to be caught out by changes to the law on flexible working? From next Monday, all employees in the UK will be entitled to at least ask their employer if they can work flexibly – currently, the law only applies to parents. But a survey conducted by the technology firm Citrix suggests about 45 per cent of small businesses don’t know about the new legislation and don’t have a policy on how to apply it.

The research also warns that small business managers who are aware of their changing obligations are in many cases very nervous about the impact of the legislation. Just 43 per cent say they actively support the change in the law, while 21 per cent expect it to have a negative effect on their business – despite government claims that the measures will have a positive impact on the economy as a whole worth £475m a year.

Andrew Millard, a Citrix director, urged small businesses to get to grips with the changes – and to be more positive. “Thanks to modern technology, putting efficient flexible working processes in place can be done both quickly and easily,” he said. “Work is something you do, not somewhere you go: as our own customers show us every day, those who are most flexible are increasingly the most successful.”

The recovery of the Alternative Investment Market continues to strengthen, with new data revealing that the London Stock Exchange’s junior bourse raised almost twice as much money in May as in the same month of 2013. More than 50 companies – including 13 market debutants – raised £544.3m on Aim during May, according to the broker Allenby Capital, 93 per cent up on last year.

The total sum raised on Aim to date this year now stands at £3.08bn, Allenby said, which is 144 per cent up on the first five months of 2013. In fact, Aim companies have already raised 33 per cent more this year than in the whole of last year.

The upswing follows several years in which Aim struggled to attract new companies and investors, particularly during the aftermath of the financial crisis. However, economic recovery and government support – Aim shares became permissible holdings for investors’ tax-free individual savings accounts last year, for example – appear to have given the market a new lease of life.

Allenby said investors were also attracted to the improving standards of the market. “We feel that Aim is going through a cleansing process where small companies are leaving the market and being replaced by larger companies of higher quality,” it said

“We’re a wholesaler of internet domain names – the business was founded in the 1990s by a far-sighted property developer who did some smart things after first coming across the internet, such as buying up potential country names such as uk.com. Today we have a technology team in London but business development people around the world who source new domain names and talk to retailers that ultimately sell those names to clients.

“Smartphones have been a huge driver of business – the more people who have access to the internet, the more vital it is for businesses to have a web presence, and that is what drives domain name sales.

“We’re also now exploiting a huge new opportunity – until very recently, the internet regulator has only allowed a handful of high-level domain names: the likes of .com, .org, .gov and the country codes with which people will be familiar. But now the market is opening up and the internet is being reorganised to have more high-level names available.

“We are already seeing huge interest for domain names such as .london, .xyz, .wiki and .build and we’ll be launching new offers in more than 20 other markets – this is a great chance for organisations such as small businesses and other groups to buy into domain names that much more accurately describe what they do or where they are.

“This is a hugely valuable business – we’re already listed on the Alternative Investment Market, but the IPO of GoDaddy in the US, which is the world’s biggest domain name seller, gives you some idea of what’s at stake; it’s worth up to $3.5bn.”