Despite wider economic uncertainty, the majority of SME and Mid-Market businesses in Scotland are planning to grow in 2019 but most struggle to see the value of tax relief in driving that growth, according to new research from KPMG.
While 96% of businesses are predicting to grow at least 5% for the year ahead, less than one in three (29%) see the tax system as a key driver, highlighting the need for a better understanding of current tax reliefs and incentives on offer.
KPMG’s Backing Business Growth survey spoke to 1,000 small to medium-sized enterprises (SMEs) across the UK – including 100 in Scotland – to explore attitudes towards the tax system and whether it is providing the most effective incentives and support for growth ambitions. Each business surveyed in Scotland has an annual turnover of at least £10m and 83% are privately owned.
Businesses in Scotland understand importance of tax but don’t make full use of reliefs on offer
The majority (84%) of respondents in Scotland said tax was important in making business decisions but only one in five (22%) said they were making full use of the tax reliefs and incentives which currently exist in the UK.
Businesses were clear in identifying the policies they felt were the greatest drivers of job creation and innovation, such as additional tax relief for employee training, tax efficient share rewards and additional R&D tax deductions. However, they were less clear on linking tax initiatives driving creativity and productivity, with no single particular initiative standing out.
Alan Turner, head of tax for KPMG in Scotland, said: “Understanding how well the tax system is working for SME and Mid-Market businesses - the engine-room of the Scottish economy - could not be more important, especially as we move towards a post-Brexit economy.
“It’s positive to see businesses are planning to grow, however, our research shows there are significant gaps where businesses struggle to use the tax system to help them reach their goals and find it difficult to link tax initiatives to specific outcomes.”
Calls for tax system simplification
Almost two-thirds of businesses in Scotland feel that current tax policy is broadly on the right lines to encourage growth (69%). However, a similar number (64%) say simplifying the tax system should be the priority of the government and (62%) believe the current system is too complex.
Contrast between fast growth and moderate growth businesses
While across the UK, the majority of those surveyed do not think tax is a ‘driver for growth’, segmenting businesses by growth expectation revealed differing attitudes between companies expecting fast or moderate growth.
Among higher growth businesses, 78% think the tax system supports growth compared to just 18% within the moderate growth segment.
Similarly compared within the 27% of businesses that say they are making maximum use of the tax system, this rises to 75% in the fastest growing segment, suggesting that growth businesses are more engaged with the tax system. The report found further differences when looking at the size of firm, its location and the sector that it operates in.
Alan Turner said: “The data shows businesses consistently feel there is too much complexity in the system. The right incentives are there but making the most of them is not always straightforward for SME and Mid-Market businesses, which are often resource-constrained.
“Furthermore, a business’s level of engagement can depend on a number of factors such as growth aspirations, size of company, location and sector.
“One possible way forward is to provide more explanation of the intentions behind policies which might help raise awareness amongst these businesses. Equally, businesses need to view tax as a valuable lever to grow or invest and should consider it upfront as part of the decision making process, rather than retro-fitting it during the tax return cycle. Only through better engagement and understanding will we be able to drive growth from the tax system through to business.”
Regional differences
Across the UK businesses were split on how policy could best drive local activity:
- Job creation: Around half of business (46%) in Scotland believe additional tax relief for training is the best driver for growth, compared to only one quarter (26%) in London
- Innovation: 46% of companies in Scotland see tax efficient share awards for employees as key to driving innovation, in comparison to 26% of companies in the UK as a whole
- Creativity: Whilst 20% of businesses in Scotland and UK-wide said that additional tax relief for R&D expenditure would encourage creativity, 23% of Scotland based businesses saw 100% tax relief on machinery acquisition as key compared to only 16% of the rest of the UK
Alan Turner