A new report has revealed just how much cash fast-growth businesses generate for the government coffers – with startling results
There is no denying that 2012 has very much been the year of the entrepreneur. Politicians and business leaders alike have been lining up to tell us that those people who are starting and growing their own businesses are the antidote to the worst recession in living memory.
But much of this attention has focused on the job creation element. We are constantly bombarded with figures concentrating on how many jobs are created thanks to SMEs. The Federation of Small Businesses (FSB), for example, says that small and medium-sized companies account for 47% of private sector employment, while other estimates put it a lot higher.
But, actually, what a lot of people – both politicians and the public – don’t take into account is the amount of tax revenue that is generated by fast-growth businesses, says Duncan Cheatle, founder of Prelude Group who commissioned the research conducted by PwC. “The bit of the story I’ve never seen written about before is the total amount of tax these founders and businesses produce over a period of time and what that equates to in terms of pubic sector services and jobs.”
It goes without saying that corporate tax is a hot topic right now. Recent discussions about Starbucks’ tax practices have caused a lot of heated debate in the business community, with competitors arguing that because other companies pays less tax they have more cash to reinvest into the company, thereby giving a competitive advantage.
A fair argument, says Rob Hamilton, founder of serviced office company Instant Offices, one of the participants in the Prelude report. In fact, the importance of transparency around tax practices is one of the main reasons he became involved in the research. “We’ve always paid a lot of money in tax and so when high-profile, equity-owned businesses don’t pay their tax properly it does feel pretty unfair,” explains Hamilton.
“The government needs to work harder to create a more level playing field where we’re all in the same boat” he argues. “At the moment, I feel disadvantaged against businesses that for one reason or another have managed not to pay tax.”
Hamilton’s resentment is understandable, for SMEs pay a huge amount of money in tax in the UK. One of the aims of the research was to show in real, tangible terms just what the money pays for. So it took the amount paid in total tax and worked out the number of NHS nurses that would pay for. This highlighted, for example, that Instant Offices paid a total of £19.5m in tax in the last five years – equivalent to 920 nurses.
These days, around 30% of Instant Offices’ turnover goes to HMRC – though for other businesses it can be higher still. Among the seven fast-growth companies who had their books pored over by PwC for the research, on average, 44% goes out in salaries to staff and 41% in taxes to the government: only 15% is retained or distributed to shareholders.
This goes against popular sentiment, which seems to suggest that all businesses are looking for handouts, says Cheatle. “I think there’s a bit of a misnomer here about businesses being on the take. The reality is that the large majority of people who start and run businesses are doing it out of a passion to change the world, or to do something better,” he argues. “There is an assumption that far more of the profits of companies go in the pockets of these ‘greedy’ business people. And that’s so disingenuous. We wanted to highlight that this isn’t the case.”
For Andrew Noble, founder of occupational healthcare provider Health Management, starting a business wasn’t for financial gain. In fact, Noble abandoned a lucrative career in the City to launch his company. “You have to ask why people run businesses,” he ponders. “And the answer is often for reasons related to independence, doing something creative, creating a team, doing something you’re proud of and being able to give back.”
Just because an organisation doesn’t operate a not-for-profit model, this does not mean that there isn’t an element of altruism, argues Noble. “In a world inhabited by a lot of takers, it’s nice to be able to be a bit of a giver,” he says.
And Health Management has certainly given back to the UK over its decade-long lifespan. In the last five years alone, it has paid £24.8m in tax – equivalent to paying the wages of some 1,170 nurses.
Despite public perceptions, neither Noble nor Hamilton founded their businesses with the sole aim of making money. Yet in the process of scaling their extraordinary businesses, they have generated jobs and much-needed income for government coffers. And it’s about time we recognised them for this contribution, says Cheatle.
“We thank our public servants, like our nurses – and quite rightly too. But how about thanking the people who pay their salaries?”