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UK Tax Regime Confusing Entrepreneurs

by Jason Gorringe,, London

17 August 2007

Approximately one third (32%) of Britain's small business owners do not know what they will be paying in corporation tax this year, according to new research by Bank of Scotland Business Banking.

The survey into financial literacy levels amongst small business owners in Britain also revealed that more than a third (35%) remain oblivious to the impact of the government's recent changes to the tax regime on the financial affairs of their business.

The survey, conducted in April and May this year, polled 1,000 owners/senior executives of businesses with an annual turnover of up to GBP1 million. It found that despite the widespread confusion around tax, there is an otherwise high level of financial literacy amongst Britain's small business community. Nine in ten (90%) entrepreneurs claim to understand the rules, processes and procedures for managing the financial affairs of their business, despite the fact that three quarters (75%) have no qualifications or training in dealing with such matters.

The report suggested that the understanding demonstrated by the majority of small businesses appears to stem from their hands-on experience. Over half (55%) of all small business owners in Britain take total responsibility for the day to day financial aspects of running their business, while only two in ten businesses (19%) are largely dependant upon external assistance to help manage their organisation's financial affairs.

Those who take complete responsibility for the management of their company’s finances work an average 49½ hours per week - five hours longer than those who take a ‘back seat’ and have little or no responsibility for managing the finances, the research found. Compared to the standard 35 hour week, those who run a business and also insist on looking after the finances are working two extra days a week.

When it comes to sound financial management, it appears that Britain's SMEs are in safe hands, the report suggested. Eight in ten (81%) small business owners either know exactly, or have a very good idea of, their cashflow position on any given day. Nearly three-quarters (73%) assess their cashflow position and make forecasts or projections at least once a month.

The survey appeared to suggest that business owners in the south east are the most tax savvy, with more than half (54%) saying they knew exactly or had a very good idea of how much corporation tax they would have to pay in relation to the last financial year. Entrepreneurs in Wales were less clued up about tax, with only 37% claiming to know how much tax they will pay. On average, just under half (47%) of British entrepreneurs were aware how much tax they had to pay, while one-third (32%) had little or no idea.

Commenting on the report, Mark Curran, Head of Relationship Management at Bank of Scotland Business Banking, observed that:

"Small business owners are confident in their own abilities to administer the financial management of their businesses - a skill which appears to have been largely self-taught. Such a high level of financial literacy can only be good news for the economy, leading to fewer insolvencies resulting from financial mismanagement. Despite this, there is still a great deal of confusion surrounding the overly-complicated tax regime for SMEs. With so many small business owners taking responsibility for the management of their financial affairs, it's vital that they are able to understand their tax liabilities. Simplification of the tax regime for SMEs is required if this knowledge gap is to be filled."

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