The authors describe the development of a model for the evaluation of the tax affairs of UK small unincorporated firms (with fewer than 20 employees). After a brief review of the literature relating to small-business taxation, the main parameters of the NatWest/Manchester Business School tax model for unincorporated businesses are established, Subsequently the model is employed to evaluate small-business taxation from two angles. First, the authors offer a post-1999 budget analysis of the impact of taxation on small-business owners and their employees. Second, the authors discuss a set of proposals which have the potential to improve the neutrality of the tax system towards small-business owners' decisions.
Different capital-structure theories are reviewed in order to formulate testable propositions concerning the levels of debt in small and medium-sized enterprises (SMEs), and a number of regression models are developed to test the hypotheses, The statistical results indicate that age and profitability, are negatively related to gearing, whereas size, asset structure, risk, nondebt tax shields, and the level of debtors each have a positive relationship with gearing. These relationships are maintained over time, but the magnitude and significance of the coefficients vary over business economic cycles, The results indicate that the last recession may have changed the borrowing behaviour of small businesses. After the dramatic experiences of the longest and deepest UK recession, small-business owners appear to be more cautious in raising external finance, and the results suggest that they may wish to grow only when there are sufficient internally generated funds, especially profits, to finance new investments. The results also suggest that the last recession had an effect on the lending behaviour of financial institutions, which still appear to be more cautious in their lending policies—even after the recession. The authors examine a number of policy implications that emanate from the findings, and discuss a number of possible actions that the government could undertake in order to enhance the financial development and prosperity of SMEs across the economic cycle.
In this paper we examine, using the NatWest/Manchester Business School (MBS) tax models, the impact of taxation on the small business sector over the last few years. Because it is known that a small number of growth businesses provide most of the new wealth and additional employment created by the small firms sector, consideration is given to the combined effect of the different elements of the tax regime on small firms, with particular reference to the tax implications of business growth. The NatWest/MBS tax models, for incorporated and unincorporated small businesses, contain accounting data for a stratified random sample of almost 4000 small UK firms. These data are employed to estimate the total tax burden borne by small firms in the United Kingdom, including the total value of taxes collected from this sector by the Exchequer and the aggregate value of compliance costs borne by small businesses. Unincorporated firms employing fewer than 20 staff contribute just 5% of government revenues, and small limited companies with fewer than 100 employees provide 15% of total taxes collected. These figures of total tax revenues together with estimates of the compliance costs borne by small firms are assembled into tax indices for incorporated and unincorporated firms, set at 100 in 1994/95. Changes to the total tax burden are traced from 1994/95 (the base year in the models) up to 1996/97 in the light of the changes introduced in successive budgets. Although the index for small companies falls by 2.5 points across this period the position of unincorporated firms remains virtually unchanged. The reasons for these differential effects are considered and explained. We identify three important areas in which the growth and development of small business is restrained by the tax regulations currently in force: sales growth, employment generation, and investment for the future, We conclude that the fiscal barriers in these areas could be reduced by raising the VAT registration limit (initially to £100 000), by compensating small businesses for the cost of collecting tax on behalf of government and by reducing the level of taxation on profits reinvested in small businesses.
