Following our previous reports on the total cost of administration to small and medium enterprises (SMEs), and the impact of late payments, this study examines the issue of taxation on SMEs. For many new and small companies, profit margins can be very low, particularly when the cost of finance and building up stock is taken into account. Taxation – in all its forms – can have a significant impact on the continued viability of a company, and can represent a huge barrier to entry or growth. For governments who wish to encourage small businesses, the imposition of taxes seems unintuitive.
Across eleven countries surveyed, we find that there is a very strong inverse relationship between the size of a company and the (proportionate) size of its tax bill – that is, the smaller a company, the greater a percentage of its profits is paid in tax. To some extent this might be expected; not all taxes are entirely reliant on profit, and taxes on employment or land use can impact smaller companies more. However, the scale of the difference in some countries is remarkable – in Brazil medium-sized companies pay half the tax rate of micro companies. While there is a significant relationship between size of company and tax bill, the total tax paid does not always align to the headline corporation tax rates in each country. This may be due to government incentives or tax breaks, or general losses being brought forward and offset against the most recent tax bills. In any case, the key point – that smaller companies pay proportionally more tax – remains valid, and this will prevent these firms competing on a level playing field with larger companies.
There is a much weaker relationship between the age of a company and the amount of tax paid. While it is true that younger companies pay proportionally more tax, it is not clear that policies aimed only at young companies will have the required impact. Instead, any change in government strategy should be focussed on the smallest companies, no matter their age.