Does tax avoidance among global corporates put UK SMEs at a disadvantage?

The spotlight is firmly on tax reduction among large global firms operating in the UK – but is the practice putting smaller domestic companies on the back foot?

The HSBC tax scandal, wilfully fuelled by politicians looking to appear tough on what they call immoral tax practices, has put the spotlight firmly back on big business and its relationship with HMRC.

The British public occasionally vocalises its opposition to global giants such as Google and Starbucks using their considerable financial and legal clout to minimise their tax bills. And in the run-up to the general election parties from all side are queuing up to explain the ways they will prevent global brands from doing so. But in reality very little has changed, or is likely to change, in this area.

For all their bluster, no politician wants the Googles and Amazons of this world to take away their UK bases. Even if they find (perfectly legal, Growth Business’s lawyers have urged me to stress) ways to keep the HMRC at bay, the jobs created and the prestige of having these brands in the UK ensures they’re not going anywhere.

So if we work on the premise successive governments are not significantly going to move the dial on corporate tax collection, where does that leave the smaller domestic companies just starting out in marketplace? If they don’t have the time or resources to strip their tax contributions to the bone are they already on the back foot before they begin? It’s a question that Growth Business took to some of the leading voices out there to get their views.

Other factors
Carter Backer Winter senior Partner Andy White believes smaller companies are often at a disadvantage in the business world – but that tax affairs are not necessarily their biggest concern.

“Clearly if a large global corporate is suffering a lower tax rate it does put individual SMEs at a disadvantage – there can be no doubt about that because the large corporate is going to be able to undercut in so many ways,” he said.

“But I would say the various commercial advantages the large corporate has in terms of branding, buying power and so on probably put the SME at a much greater disadvantage.”

So White does agree with the premise that SMEs are suffering at the hands of global corporate competition, albeit partly due to a number of factors that have nothing to do with tax. But he does offer a counterargument based on the large corporates’ impact on the wider British economy.

“If you look at the number of people that Starbucks and people like that employ in the UK then you might argue having those global brands here gives all companies a tremendous boost because it’s generally good for growth in the economy. So I think it depends very much from whose perspective you’re looking at it from.”

So we’ll call that one a score draw I suppose. Yes for individual companies the tax disadvantages can be damaging ¬– but by lifting the economy the large corporates are improving trading conditions for every British business.

Cost and complexity
Software company Postcode Anywhere CEO Guy Mucklow has a slightly more straightforward view of the issue. He explains that, although he understands the commercial logic behind minimising tax liabilities, the behaviour has “distorted the playing field for smaller UK businesses who simply can’t compete on equal terms”.

“Small businesses and individual tax payers haven’t been able to match the cost and complexity required to reduce corporation tax liabilities to virtually nothing,” he said. “And, more to the point, we’ve ended up picking up the tab for the shortfall in tax revenue as a consequence.

“I think that it’s high time some of our senior politicians stop fawning to these global businesses and ask them to take their social responsibilities more seriously.”

We thank Guy for being so candid about his views – and they’re certainly views that many people in the UK share. But there are others who see tax avoidance as not only acceptable but just good sense for businesses of all sizes. It’s fair to say business growth expert Shaz Nawaz of AA Accountants falls into this category.

He claims that some smaller businesses are only at a disadvantage because they are simply not aware of the tax reduction options available to them.

“If companies can find a way to legally mitigate their tax affairs that’s a good thing because it increases cashflow,” he said. “But many entrepreneurs and small business owners aren’t aware of the options available to them.

“There are products available to smaller businesses. There is an entry level, typically set as a net profit of £100,000 – occasionally £200,000 – for access to these tools. But generally methods to reduce tax as certainly not only available to the larger companies.”

Negative rhetoric
Nawaz also argues that is not just a lack of awareness that leads to those options being ignored. He cites the negative rhetoric around the practice coming from Westminster as a reason why it is not more widespread. Additionally the demonising of high-profile tax avoiders like Jimmy Carr and Gary Barlow has led to trepidation among small businesses concerned about their reputation.

“In the past five years the appetite for tax reduction has pretty much died out apart from among those entrepreneurs who are open to risk,” he explains. “I see this as a bad thing. If there are loopholes in the system then entrepreneurs should be taking advantage of that.”

David Ingall, former president of the UK200Group, believes that when trying to play on an even playing field, “companies in this country have always had to overcome obstacles of one sort or another”.

“Whether it is governments subsidising their home-grown businesses, tariffs protecting home businesses or other protectionism – playing on a level playing pitch is a constant issue,” he adds.

He also believes it is the government’s responsibility to ensure large global firms’ tax practices are not another area in which the trading environment is skewed towards one group or another.

“Tax avoidance on the part of global corporations is a part of their own survival strategy,” he says. “Tax evasion (the illegal bit) cannot be countenanced in any way and governments around the world are trying to enforce compliance.

“If global companies are gaining a competitive edge in the UK by using aggressive tax practices here then it is down to our own government to make sure that both their own tax take is equitable and that home-based companies are on an equal footing.”

So there are several ways to look at this issues it seems. Most people seem to agree that companies looking to grow in the UK marketplace should be approaching their tax affairs in a savvy way to become competitive. But will that ever mean they can make an even playing field with large corporates? Opinions on this seem to be slightly more mixed.

Ultimately how growing companies manage their tax affairs is up to each individual business owner. They are well within their rights to try and reduce tax in the same way that the global giants do – but whether they have either the means or the inclination to do so remains to be seen.