Currently, small businesses are exempt from many regulations, while their medium sized counterparts are not. On 3 October 2022, the UK government announced an extension in the definition of small business for regulatory purposes to those with fewer than 500 employees (previously set at fewer than 50).

This new threshold will apply to all new regulations under development, and to those under current and future review. The Tax Faculty has begun to consider how this might apply to tax law. Size limits can apply in the tax legislation to exclude businesses from a regulatory burden, but they are also used to limit the availability of reliefs or incentives.

Size limits designed to reduce regulatory burdens

On first glance, the transfer pricing rules are one example where an exemption for small or medium sized enterprises applies. But this could have a much wider application, obviously not limited to tax matters.

For example, gender pay gap reporting currently applies to companies with 250 employees. While a move to 500 would reduce the administrative burden for employers, it would seem contrary to the policy aim of gender pay transparency. However, the government has been very clear in its press release that “These are not blanket exemptions, and they can be overridden in appropriate cases as a result of the policy development process.”

Tax reliefs and incentives

The press release also made clear that this is an initiative primarily designed to “harness the freedoms the UK has since leaving the EU to remove bureaucratic and burdensome regulations.”

However, it is not certain whether this will result in favourable shifts in tax policy for ‘small’ businesses where eligibility for a tax relief or incentive is limited by reference to the number of employees. Time will tell if reliefs become available to an expanded number of businesses as a result of the threshold adjustment or whether this is simply a measure designed to reduce paperwork.

The Tax Faculty will continue to work closely with the government to establish more clarity for businesses as to how this shift might affect their tax position.

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