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Lower taxes would help small firms unable to access finance

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A new report has argued that small firms are facing serious obstacles to growth, some of which could be overcome by lower business taxes.

A study from think-tank, the Centre for Economics and Business Research (CEBR) claimed that the 4.8 million firms in the UK with fewer than 250 employees have a greater turnover and make a greater tax contribution than FTSE 100 companies.

While the FTSE 100 companies amassed a turnover of £1.4 trillion in 2009, they were outstripped by the collective of UK SMEs with a total turnover of £1.6 trillion.

SMEs also generated 53 per cent of corporate tax income for the government.

But the study highlighted some of the problems that smaller firms have been encountering this year.

Bringing together data from Government statistics and research carried out by a number of business groups, the CEBR said that bank lending to SMEs has declined by 4.5 per cent in 2010.

The high cost of borrowing was blamed for the drop since small firms are more likely to be deterred by expensive lending terms than large companies.

The issue has been complicated, the CEBR continued, by the dependence of small businesses on the banks as a source of funding. The study estimated that a mere 2 per cent of small firms had access to equity finance.

To help such businesses, the CEBR study proposed that the small profits rate of corporation tax be reduced further. It is due to drop from 21 per cent to 20 per cent next April.

The report said: “A low tax model would foster stronger growth in profitability and allow SMEs to grow organically by reinvesting profits rather than seeking costly sources of external finance.”

More also should be done to ensure that large companies and local authorities comply with the prompt payment code as a way of easing cashflow problems for smaller firms in the supplier chain.