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Advance Critical Writing: Tax Exemption Add in library

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Question:

Should government grant 1 year tax free for the first time bussiness owners. Discuss?

 

Answer:

Introduction:

The British government has been emphasizing the startup programmes in the upcoming years. This is initiated to pave the path for entrepreneurs as they want to get a foothold in the business world by participating in a wide variety of schemes and programmes. So when one becomes a small business owner, it is their responsibility to make tax payments which they didn’t make during the time of their employment. The profits from any business activity create a center of attention for the tax payments. In this regard the type of the taxes relies on the nature of the business and the revenues of the business (Cordes, Ebel and Gravelle, 2005). Every business in the UK is liable to make either income tax payment or the Corporation tax payments on their net profits. If the business is a sole proprietorship or partnership then the net profits forms the taxable personal income through which income tax payments must be made. If the business is a registered company then the net profit becomes accountable for corporation tax. There is also the Value Added Tax (VAT) on the sale of goods and services and also the National Insurance Contributions. It is also necessary to note that all those businesses that export or import from outside the European Union are also liable to pay duty. The focus of the essay is to argue whether the government should remove tax on the first business owners for the first year of their business operations.

Should government grant 1 year tax free for the first time bussiness owners:

It has been argued by Robert J. Gordon that the first time business owners or the entrepreneurs should be exempted from the taxation scheme at least for the first year of their business operations. This is because the small business startups already have a plenty of factors that they need to consider for their business operations for the first time. The first business owners have to lease space, establish connection with the suppliers, appoint workers and apply for different kinds of licenses and permits, so paying taxes above all these arrangements are unwelcomed and pose to be an unnecessary burden for the entrepreneurs (Fishkind and Kautz, 2001). So it is advisable for the government to waive tax for the first as the revenues tend to uncertain and low. Tax exemption is the monetary exemption which provides a relief from the taxable income. In this case, the type of tax exemption that is argued for is the removal of tax on a certain section of the society which is the first time business owners.

Adam Smith assumed that the numerous exemptions tend to suppress the efficiency of the consumption taxes. Smith also opposed the tax exemptions for specific regions and industries. The segregation of the business as a start up business and thus initiate a tax free environment for them is something that Smith has never followed. The theories of taxation by Smith followed the simple principle that the taxes must be levied for supporting the limited government and therefore the taxation system must satisfy equity, transparency, convenience and efficiency (News.heartland.org, 2015). Much has been changed due to the increase in the start up business and entrepreneurs in the UK.

The startup business highly depends on the private investment so the government must make the commencement of business conducive for the investors. The investors fund ideas and restraint caused due to taxation may perish those ideas. Thus, it is suggest by the economists and the financial analysts that the first time business owners must operate in a tax free environment at least for the first year (Blazek, 2004). This system is evident from the Singapore tax exemption scheme. This type of exemption attempts to encourage the new business and provides a stimulus for the entrepreneurs within the commercial environment which are challenging in most of the times (Kim, 2014). According to the Internal Revenue Service, the underlying principle of this system is to ascertain that the people who don’t have employers denying taxes for them are making payments for their fair share of taxes for the purpose of social security and medicare. Thus, the argument for tax payments might seem sensible for the case of established business owners but for the startups the huge taxes does not make any sense (O'Connor and O'Connor, 2009).

 

The new businesses have erratic cash flows and they are not able to predict their share of revenue after three months of their business operations. The more crucial problems lie in the fact that many business owners would be left with no cash after starting the business to make the estimated tax payments. The problem that occurs through the proposed tax system of the IRS is that they want the business owners to calculate their quarterly taxes on their entire yearly income and not on the quarterly income. This has been an erroneous method as some business may be subject to underpayment penalties and others may have overpaid (Poterba and Verdugo, 2011). The tax expert Keith Hall of the National Association for the Self Employed (NASE) depicted the quarterly payments to be the most misunderstood, illogical and complicated for the new business owners (Walker and Sipult, 2010).

If the taxes are exempted for the first year of the new business then there will be an expected increase in the investment which will enable the startups to make increased investment in the recruitment of the skilled staffs which will facilitate growth in the business. Capital Gains Tax (CGT) for instance is regarded as an inefficient tax on the capital as it reduces the investment by locking up capital in less productive investments. The CGT ends up in channelizing the investments away from the risky assets like the startup business debts. But not all things are positive for the tax exemption there is certainly disadvantages for the government to implement tax exemption for the first time business owners. The formation of the tax exemption requires a lot of time and money for registration, keeping records and annual filings etc. this required for the new business to hire accountant and attorney for the execution and the completion of the process of tax exemption (Gumpert, Hines and Schnitzer, 2011). For a new business, it becomes quite expensive to execute this process. It must also be noted that the non-exempt organizations are often under public scrutiny which is quite troublesome for the first time business owners (Kaiser, 2012).

Conclusion:

The argument of the essay was about the tax exemption of the new business owners for the first year of their operation by the operation. Based on the discussions in favour of the tax exemption, it is argued that the government must incorporate a tax free business environment for the first time business owners which will encourage the entrepreneurs, increase the level of investment, increase the hiring of skilled staffs and all of these will drive the company and the business towards growth. This is evident from one of the startup business among the 21 new enterprises zones in the UK which relocates to any zone where they can qualify for the 100 per cent tax exemption for their business over a period of five years. The enterprise investment scheme provided income tax relief of 30-50 per cent for the investors who invest up to £200,000 into new business ventures. This scheme supports the entrepreneurs to acquire adequate traction in their business. Every country must realize the importance of this scheme so that they are able to encourage new business and foster growth in their economies. Thus, it is suggested that the government must permit tax free business operation for the first business owners for the first year of their business mainly due to the unpredictable, uncertain and erratic cash flows and revenues.

 

References:

Blazek, J. (2004). Tax planning and compliance for tax-exempt organizations. Hoboken, N.J.: John Wiley & Sons.

Cordes, J., Ebel, R. and Gravelle, J. (2005). The encyclopedia of taxation & tax policy. Washington, D.C.: Urban Institute Press.

Fishkind, R. and Kautz, R. (2001). J.K. Lasser pro estate and business succession planning. New York: John Wiley.

Gumpert, A., Hines, J. and Schnitzer, M. (2011). The use of tax havens in exemption regimes. Cambridge, Mass.: National Bureau of Economic Research.

Kaiser, M. (2012). Modeling the horizontal well severance tax exemption in Louisiana. Energy, 40(1), pp.410-427.

Kim, A. (2014). Exempt small business start-ups from quarterly tax filings. [online] Republic 3.0. Available at: https://republic3-0.com/exempt-small-business-startups-from-quarterly-tax-filings/ [Accessed 2 Aug. 2015].

News.heartland.org, (2015). Adam Smith on Taxes | Heartlander Magazine. [online] Available at: https://news.heartland.org/newspaper-article/2003/11/01/adam-smith-taxes [Accessed 2 Aug. 2015].

O'Connor, T. and O'Connor, T. (2009). Tax exemption as a marketing tool: The Irish Republic and profits derived from artistic creativity. Journal of Business Research, 62(10), pp.1002-1006.

Poterba, J. and Verdugo, A. (2011). Portfolio Substitution and the Revenue Cost of the Federal Income Tax Exemption for State and Local Government Bonds.National Tax Journal, 64(2, Part 2), pp.591-613.

Walker, M. and Sipult, L. (2010). Nonprofit Sales Tax Exemption: Where Do States Draw the Line?. Nonprofit and Voluntary Sector Quarterly, 40(6), pp.1005-1019.

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