UK Business Taxation System Issues - Essay Example

The UK business tax system, in common with tax systems in other countries, makes a number of special provisions for small businesses, both to encourage their growth and development and in recognition of the additional tax compliance costs they face compared to large business. You are required to select and critically appraise one such provision [1500 words] (preferably R&D credits provision, however if it is more convenient for author to write about any other provision, I wouldn’t mind). Research and development tax credits is a scheme available to all firms based in UK (in USA also there is a similar scheme). In accordance with the official website of HM Revenue and Customs (2008) ‘Research and development (R&D) tax credits are a company tax relief which can either reduce a company’s tax bill or, for some small or medium sized companies, provide a cash sum’. Through a different definition it is noticed that ‘Research and development tax credits are a company tax relief which can either reduce a company’s tax bill or, for some small or medium sized companies, provide a cash sum; the R&D tax credit works by allowing companies to deduct up to 150% of qualifying expenditure on R&D activities when calculating their profit for tax purposes’ (The Small Business Portal, 2006). It should be noticed that the above scheme can lead to the benefits stated above only if specific terms and requirements are met (as it will be explained below). The benefits offered by this scheme to firms across the country can be differentiated. Specifically for small businesses it is noticed by the UK HM Revenue and Customs that the particular scheme can lead to a reduction of the tax bill up to a percentage of 15%. On the other hand, it is also supported that ‘some SME companies not in profit can surrender their R&D tax losses for cash (in the form of a payable credit) of up to 24p per £1 of actual expenditure within specified categories’ (UK, HM Revenue and Customs, Small Businesses). The level of the benefit can reach up to a 100% of capital allowances for small firms that make a relevant capital expenditure. In order to understand the benefits offered for small businesses in UK under the particular scheme it is necessary to refer primarily to the definition of R&D scheme at least regarding its general characteristics. In this context, it is noticed that ‘broadly, in order to qualify, activities must be creative or innovative work in the fields of science or technology and undertaken with a view to the extension of knowledge and breaking new ground, whether that be through resolving some uncertainty or creating a new or substantially improved product, process or service’ (Gregory et al., 2008). In accordance with the above definition the specific scheme can refer to all small businesses’ activities while the benefits resulted for these firms can be differentiated in accordance with a series of criteria. The specific issue was examined by Stewart (2007) who referred to the view of a Treasury spokesman who supported that ‘R&D investment is of vital importance to the UKs continued strong economic growth in a more globalised economy; tax credits help to incentivise further investment as part of the governments wider innovation strategy; the most recent data suggests that business R&D investment grew by more 5 per cent in 2005’ (Stewart, 2007). In other words, the particular scheme should be characterized as of significant importance for entrepreneurs across UK and especially for the owners of small businesses who can have a significant tax relief (particularly valuable for the small firms that are not yet well established in the market and there is always the risk of a failure). The main aspects of the R&D tax credits are described by Gregory et al. (2008) as follows: 1) ‘The relief takes the form of a greater than 100% tax deduction for all qualifying R&D expenditure 2) Relief is given at 125% of actual expenditure, provided the total expenditure exceeds £25,000 3) The new relief is given on a volume approach ie the relief is based on a companys total qualifying R&D expenditure’ Additional notifications on the Research and Development tax credits scheme available to Small firms operating in Britain are made by Startups (2008). In this context, it is made clear that: 1) ‘The tax credit for R&D will rise to 175% in 2008 2) Small firms will now also be able to claim a 100% relief for new capital investment up to £50,000, and claim a new tax credit for environmental investment’ (Startups, 2008) On the other hand, it should be noticed that ‘UK businesses could lose out on two thirds of their potential research and development tax credit claims, if they don’t ready themselves for changes to the regime due to take place at the end of March 2008; time limits on claim periods reduce from six years to two on 31 March 2008; a business missing this deadline could miss out on four years worth of claims’ (Small Business News, 2007). Owners of small businesses in UK should pay particular attention regarding the deadline for applying for the particular benefit. Because in many cases a misunderstanding can exist regarding the application for specific benefits, it should be made clear to owners of small businesses that the above mentioned deadlines are absolute; after the specific dates no claim for the relevant benefits can be made. The above described scheme is expected to offer significant support to small businesses that have to face the extremely strong competition of the British market. In fact, in accordance with the UK HM Revenue and Customs ‘the aim of the tax credits is to encourage greater R&D spending in order to promote investment in innovation; by early 2006 about 22,000 claims had been made, just over 19,000 of which were made under the SME scheme and just under 3,000 of which were made under the large scheme, amounting to almost £1.8 billion of support claimed through both schemes’ (UK, HM Revenue and Customs, 2008). In other words, the benefits offered to small businesses in UK through the specific scheme have been already made clear to entrepreneurs in the country (in fact relevant benefits have been established for firms of all sizes). However, the importance of this scheme for small businesses is even higher – especially if taking into account the fact that ‘small and medium-sized companies are eligible for relief at 150% of actual expenditure (based on the same principles above)’ (Gregory et al., 2008). However, owners of small businesses in UK should pay particular attention in order not to miss the deadlines for the submission of the relevant claims. On its side, the HM has tried to offer to the public the appropriate information establishing also relevant facilities (seven specialist units, based in Cambridge, Croydon, Leicester, Maidstone, Manchester, Southampton, Cardiff, see website of the Small Business Portal, 2006) around the country in order for the interested parties to have all the necessary information in order to proceed to the submission for the above scheme. In practice the application of the specific scheme has been proved particularly important for both the government and the public. It should be noticed that in accordance with a series of data available by the HM Revenue and Customs ‘between April 2000 and April 2006 around 22,000 claims for R&D tax credits were made with almost £1.8 billion of support claimed’ (HM Revenue and Customs, 2008). There are also opposite views. More specifically, in accordance with Stewart (2007) ‘half of the £580m cost of Gordon Browns research and development (R&D) tax credit is wasted because firms are claiming the cash for research they were already planning to carry out, the Treasury has admitted to Shadow Chancellor George Osborne’. On the other hand, the above researcher admits that ‘the R&D tax credit is one of the Treasurys key policies for promoting innovation and raising the productivity of the UK economy’ (Stewart, 2007). The particular scheme has been also adopted by USA. In this context, the US Senator John Kerry has introduced a bill including a provision for increase of ‘the small business expensing for 2008, and to increase the net operating loss carry back period’ (Godfrey, 2008). The benefits offered by this scheme will be the following: ‘a) increase of the amount that small businesses can write off their taxes for new investments this year from USD125,000 to USD200,000 and b) allow small firms a longer carry back period for net operating losses - increasing it from two to five years’ (Godfrey, 2008). The application of this scheme in USA is expected to offer to the small businesses the necessary support in order to stabilize their position in the local market. It should be noticed that in order for the above bill to be effective in practice, appropriate information should be provided to small business owners in USA (like in UK) while attention should be paid by the interested parties regarding the terms of eligibility. Annotated Bibliography 1.http://www.bytestart.co.uk/content/news/1_12/claiming-R-D-tax-credits.shtml - The small business portal, (2006) - The specific site offers to the users valuable information regarding the Research and Development tax credit scheme available to all small businesses across UK. Moreover, useful addresses and contact details are available to the users in order to be informed further on the particular R&D scheme. It is noticed that the interested parties (entrepreneurs) can contact one of the specialist units (an option available from the 1st of November 2001) available across the country in order to be informed on the recent developments of the R&D tax credits scheme. 2.http://www.buildingipvalue.com/taxation/botha.html -Gregory, A., Botha, A. (2008) - The particular website ‘brings together advice in all three areas, provided by leading advisers in their respective fields; it has been designed to provide boardroom readers with a coherent and comprehensive framework on which to build their IP strategies’. The resource used in the paper refers to the benefits and the disadvantages of the R&D scheme available to small businesses in Britain. 3.http://www.startups.co.uk/6678842909600215895/randd-relief-increased-for-small-firms.html The specific website offers to businesses of all sizes that are established in UK valuable information that are related with all stages of business activities (i.e. from the establishment of a business until its resolution). 4.http://www.guardian.co.uk/business/2007/jan/14/politics.economicpolicy - Stewart, H. (2007) - The specific article written by Stewart was published in the Observer (online edition) on the January 14, 2007. The article criticizes the R&D credits scheme available to firms in UK. The benefits but also the negative outcomes (mainly for the British government but also for the public) are highlighted in this article while the arguments made are supported by relevant surveys. 5.http://www.smallbizpod.co.uk/news/2007/businesses-could-lose-out-on-rd-tax-credits/ The specific website addresses specifically the owners of small businesses. Useful information is provided regarding all aspects of these businesses’ operation. The article used refers to the possible loss by entrepreneurs of their rights on R&D credits if they don’t follow strictly the relevant deadlines. 6.http://www.tax-news.com/asp/story/Kerry_Praises_Small_Business_Tax_Incentives_In_Senate_Economic_Stimulus_Bill_xxxx29778.html This article refers to the R&D tax credits established in USA through the bill proposed by US Senator John Kerry at the end of January 2008. It is noticed that the benefits provided to small businesses’ owners are expected to be proved extremely beneficial for all small businesses operating in USA. The reference to the benefits resulted to US small firms by the specific R&D scheme is made in order to show the potential similar benefits of a similar scheme for small firms that operate in UK. 7. http://www.hmrc.gov.uk/randd/ This is the official website of the HM Revenue and Customs. Information is provided regarding the various aspects of the R&D tax credits. The interested parties can use the links provided in this website in order to get informed on any issue related with the particular scheme. 8..http://www.hmrc.gov.uk/randd/intro.htm This is another section of the HM Revenue and Customs website. The specific section refers specifically to the R&D tax credits available to small businesses. Valuable information is provided to entrepreneurs of small businesses regarding the benefits of R&D tax credits, the eligibility, the deadlines and the potential ways to apply for the particular scheme. Read More