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HMRC research into small company income

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HMRC has published a report on research commissioned during April 2016 into businesses with fewer than four employees, building on earlier research into unlisted companies’ reasons for incorporating and how they use their profits in relation to growth plans and tax planning strategies. The research involved telephone interviews with 1,000 small businesses, including 30 follow-up interviews.

Of the businesses surveyed, 40% had one employee, 33% had two, and 20% had three or four employees. A further 8% had no employees at all. Around 41% of the sample were sole traders with no other directors or shareholders involved.

In terms of finances:

  • 38% had a turnover of more than £100,000;
  • 22% had a turnover of between £50,000 and £100,000;
  • 37% had a turnover up to £50,000; and
  • 88% contained a ‘business critical’ individual whose work was crucial to the continued existence of the business. This was generally the owner-director.

In the last 12 months:

  • most were dependent on a single employee for a large proportion of their income;
  • 75% of companies made a profit;
  • 14% made a loss; and
  • 9% broke even.

Smaller business (in terms of both employee size and turnover) tended to retain a higher ratio of profits. Retained earnings were mainly used as financial security for the company, and as a source of finance for future investment or growth.

Employees were usually paid salaries (72%), while directors were more likely to be paid in dividends (62%), or a combination of dividends and salaries. Companies were heavily reliant on accountants for advice on these issues. There was little evidence among these businesses of connected employees who did no work for the company being paid a large proportion of the profits.

Respondents indicated that limited liability was a key reason for becoming incorporated, as other research suggests. Only around one in five incorporated because they had to as a ‘client requirement’.