Germany’s famed Mittelstand has been a long time goal and rival to the UK’s resilient mid-market. Recent research revealed that the UK has surpassed Germany’s pride and joy, and the segment is now among the largest in the world in relative terms, comprising more than 8,000 businesses and employing 3.4 million people.
Britain’s burgeoning mid-market is hardly united. Exactly how far away are we from a strong Brittelstand, and can any of the segment’s concerns be addressed at the Spring Budget on March 16?
Greater policy focus
Although mid-market enterprises (MMEs) create one in four private sector jobs and contribute £1 trillion to the UK economy, the majority of government policies are geared towards catalysing the growth of small businesses, and sustaining the stability of large businesses. This had led to many industry experts to refer to the mid-market as the ‘forgotten middle’ of the UK business landscape.
“There is a lot of focus on small businesses and larger enterprises, but what about the mid-sized companies? Their desire to scale and expand into new markets is being hampered by policy, red tape, process and the skills crisis. This has to change through access to better support from HMRC, a workable apprentice scheme and better infrastructure,” advised Dafydd Llewellyn, managing director, UK SMB at Concur.
While hopeful for strong policies favouring the mid-market, David Brookes, tax partner at BDO, does not expect the Chancellor to announce any new measures to support this segment of business. “We do however hope, at the very least, (the Chancellor) will acknowledge the importance of the mid-market to the UK economy and find some way to recognise this engine room of future economic growth,” he stated.
Chris Maule, chief executive and founder of UK Bond Network, shared his thoughts on the need for government policy to incentivise growth in the mid-market. As Sajid Javid, the Business Secretary, recently admitted, the government’s policies for MSBs ‘were very thin on the ground’. In order to achieve the desired ‘Mittelstand’ status, we hope to see measures in the forthcoming budget that will further support MSB growth,” he said.
More access to finance schemes
According to Maule, 63% of business with revenues of over £1.1 million are being ‘held back’ due to inability to access finance.” But leaving mid-sized companies to fend for themselves cannot be allowed to continue. With this in mind the Chancellor should continue efforts started in 2013 with the access to finance schemes, as well as incorporating recommendations from the Public Accounts Committee to build a clear strategy ensuring that MSBs are made aware of appropriate funding options for their needs.”
Access to finance is a key factor for growth for MMEs, as revealed by an industry survey by the British Business Bank. MMEs tend to take on a sophisticated approach to using financing, using a hybrid mix of financing sources, depending on what they are seeking to fund. The survey also revealed that most businesses (79 per cent of the respondents) do not seek third party advice when accessing finance. With stronger policies and support networks in place, the mid-market can have a clearer view of financing options.
Accelerating reductions to corporation tax
Corporation tax currently stands at 20 per cent. The government has pledged that this will be reduced to 19 per cent in 2017 and 18 per cent in 2020. According to Richard Godmon, head of corporate tax at Menzies, this is a top concern for the mid-market. “Moving these dates forward would promote business confidence at a time of legislative uncertainty in the lead up to the EU referendum. If the Chancellor is keen to maintain the UK’s “open for business” status and attract foreign companies to invest here, this could be a shrewd move.”
Supporters of a low corporation tax rate argue that it will boost the economy, producing greater wealth and jobs. Critics counter argue that lowering company taxes produces a “race to the bottom”.
“As corporation tax rates fall, so too will the net R&D tax benefit that many businesses rely on,” Justin Arnesen, director of R&D tax and grants at Ayming said, acknowledging the other side of the coin.
“This will have a negative impact on direct and indirect R&D government funding and could potentially give businesses less incentive to make an R&D claim. The gap between the benefit profit-making companies receive from making R&D claims compared to loss-making companies is already narrowing.
“If the incentives for companies to invest in R&D are less attractive then there’s a great risk that the impact of this investment will be diminished, even though the benefit of the Government incentivising businesses to invest in innovation is clear. Private rates of return for R&D investment are estimated to stand at around 30 per cent.”
With the referendum on Brexit fast approaching, Arnesen stressed the importance of the Chancellor either increasing the R&D rates or at least assuring that the government will continue to further invest in the development of the UK business landscape, to avoid the risk of businesses move their R&D centres out of the country, to areas with with lucrative R&D tax regimes.
Richard Godmon additionally predicted a large reduction in Entrepreneur’s Relief as a “very real possibility”.
“This has been on the cards for a while and I suspect the Chancellor may move to reduce the lifetime allowance, which is taxed at a reduced rate of 10 per cent, from £10 million to £5 million,” he added.
“This would be a blow for business owners, and could lead to more individuals spreading ownership of their organisation jointly with their husband or wife, effectively doubling the value that can be extracted from the sale of the business at the 10 per cent tax rate. However, there are implications over and above tax that need to be considered in this scenario! Failing this, funds above the threshold will be subject to a capital gains tax rate of 28 per cent.”
Continued momentum around exporting
A majority of MMEs actively export goods or services outside of the UK according to the British Business Bank. A third of these businesses that export, exports accounted for half or more of their sales. Unsurprisingly, government policy for the mid-market has always been favourable towards exporting. Currently, over 3,000 MMEs are now receiving government support to break into new markets overseas, and the UKTI continues to support homegrown business successes through its expansive global network.
Research from Grant Thornton indicates that increasing exports by 17 per cent to 45 per cent of GDP, the level achieved by Germany, would lead to an additional £84 billion created for the UK economy. Despite this opportunity for growth, reportedly less than half of businesses currently identify international markets as a potential profit centre.
Other issues high on the mid-market agenda include addressing the skills shortage, and the Budget’s impact on the Pound Sterling. The impact of all these areas on sustaining the growth of MMEs remain to be seen.
Read responses to the Chancellor’s Budget 2016 announcement on March 16.