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‘Overlooked’ mid-sized firms should get tax relief, says report

Martin GillA new report has called for a series of tax reliefs to support Britain’s “undervalued” mid-sized companies which could play a major role in economic growth.

Companies supplying exporters should be eligible for zero-rated VAT, it says, and exporters opening branches or subsidiaries overseas should also get tax relief.

The measures are contained in a report entitled Building the New Economy from accountancy firm BDO which argues that despite being such a powerful engine for growth, the UK’s mid-market remains “overlooked and undervalued”.

They are seen as too small to achieve the levels of attention FTSE firms command from the media and policy makers. Equally, they are too large to benefit from policies specifically tailored to small business. Hence, the report’s authors say the UK’s mid-market remains “stuck in a policy and profile gap.”

BDO is calling for policy-makers to determine a bigger role for the mid-market in their thinking and help this already successful sector expand further.

Three key policy recommendations from BDO’s “Building the New Economy” report specifically focus on how to rebalance the economy through the mid-market:

1. Use Long Term Lending Trusts to encourage investment in mid-market businesses: Today, mid-market firms can struggle to find the long term finance they need to invest for the future. Long term lending trusts would offer income tax relief to savers investing in long-term debt funding for ambitious businesses (as currently exists through the successful Venture Capital Trust scheme) for at least five years.

2. Zero VAT for supplies to exporters: The UK currently allows manufacturers to zero rate their exports. However, it is less generous with reliefs for domestic companies that supply to UK exporters. In contrast, Ireland has a more generous relief for regular exporters, where a qualifying exporter is able to inform its suppliers of its export authorisation and those suppliers can then zero rate their supplies to the qualifying exporter. We recommend that the UK introduces a similar relief.

3. Reduce the overseas tax barriers for UK exporters opening a new branch or subsidiary overseas: Taxation should be an instrument of economic policy and used to drive and encourage internationalisation of mid-sized businesses. When bi-lateral tax agreements are re-negotiated, the UK Government should take the opportunity to agree an exemption for UK businesses when opening a new branch or subsidiary from local taxes up to a de minimis level of economic activity of £1 million of total sales.

Martin Gill, Head of BDO LLP in Scotland,  said: “Now that we are on the road to recovery, it is essential that we do not repeat the mistakes of the past and perpetuate an unbalanced economy too heavily reliant on one sector or region.

“The Government has started tackling the issues and plans around the Northern Powerhouse.  More can be done though, and encouraging Scotland and Britain’s mid-market has to be at the heart of Government plans.

“We would like to see a ‘new economy’ that harnesses the entrepreneurial spirit of UK businesses and puts the mid-market front and centre of the UK’s growth plans.

“Germany’s Mittelstand is rightly lauded in its own country and it’s time our own ‘Brittelstand’ got the same recognition”.

The report reveals that Scotland’s mid-sized businesses (firms with a revenue between £10 million to £300m) have grown turnover by 63% over the last five years from £32 billion to £52bn.

Employment among this group has risen by 39% from 220,000 in 2010 to 306,300 in 2015.

Despite making up 1% of companies, the Scottish mid-market accounts for 15 % of private sector jobs and nearly 20% of all private sector turnover.

Across the UK between 2010 and 2015, the mid-market has outstripped the FTSE 100 in many key areas of performance. In terms of profitability, the UK’s mid-sized firms can boast profits up 110% compared to a FTSE 100 shrinkage of three per cent.

Jobs growth of the UK mid-market today is almost three times faster than that of the current FTSE 100. The UK mid-market now employs 50% more people than it did in 2010 (6.1 million jobs in 2014/15).

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