Flat rate tax no panacea

2005

Although three-quarters of small firms in Britain would like to see the introduction of a flat rate tax, they have been warned that the reality of such a revolution might be far less attractive than at first sight.

More than seven in 10 small and medium-sized companies think the UK's tax regime has become too complicated and three quarters believe the answer lies in the introduction of flat rate tax, according to research by business advisors Tenon.

Fewer than one in five (18 per cent) of businesses are happy with the current tax regime and among those that aren't, the message is loud and clear: bring in flat rate tax.

Only 13 per cent – less than one in seven - believe that a single rate for personal and business tax is the wrong answer.

Earlier this year, an OECD report found that it is complexity of a tax regime rather than the level of taxation itself that has the biggest effect on national productivity and business prosperity – a fact that explains why high-tax Scandinavian economies are among the most competitive in the world.

The perceived simplicity of a flat tax regime emerged in the Tenon research as one of its biggest attractions. Almost all (98 per cent) of those in favour of flat rate tax think it would be less time consuming and a similar proportion said it would be simpler to administer. Nearly eight out of 10 businesses also believe it would save them money.

Set against this, more than a third (37 per cent) of those opposed to a flat rate tax think it will end up being more time consuming and difficult to administer with a similar proportion believing it will cost them more.

The bi-annual research, conducted by GfK NOP on Tenon's behalf, questioned managing directors, financial directors and senior directors of 500 small and medium-sized businesses for analysis by the Tenon Forum, an independent think tank of entrepreneurs.

Andrew Stone, Chief Financial Officer of The Anderson Group of Companies and member of the Tenon Forum, said that the findings represented "an overwhelming call for change".

"Small businesses are tired of struggling with endless red tape. They want to get on with doing what they do best, and believe the complications of the current tax regime stymie business success," he said.

SMEs from a broad spectrum of sectors, including manufacturing, construction and agricultural companies, were asked their views on the taxation system in the UK. Flat rate tax was particularly popular with retail, leisure and utility companies, of whom 84 per cent were in favour of the change.

But Andrew Hubbard, Director of Taxation at accountancy and business consultancy firm Tenon argues that businesses should be more cautious.

"It's not surprising that business managers aren't happy with the UK's tax labyrinth, but no one knows yet exactly what a flat rate tax system will look like.

"While it's understandably appealing to have one rate for business and personal tax, there are a number of dangers. Ultimately, it depends on where the level is set.

"And when it comes to making things simpler, it's worth reminding ourselves that inheritance tax is supposedly set at a single rate, but there are endless loopholes and opportunities for ensuring your liability is minimized. Flat rate tax could quickly become as complicated as the current system.

"The largest proportion of business tax received by the Treasury comes from the 30 per cent paid by the largest companies," he pointed out.

"To impose a flat rate it would need to be touching on 30 per cent to keep the treasury's coffers full. This leaves SMEs facing a massive increase in liabilities. In short, beware the wolf in sheep's clothing."