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‘Overlooked’ mid-market firms essential to UK economic recovery

26 October 2015

  • Mid-market profit up 110 per cent in last five years as FTSE 100 profits shrink three per cent
  • 50 per cent rise in staff numbers in the UK mid-market since 2010
  • BDO publishes blueprint to help build a balanced “New Economy”

The high-performing but overlooked UK mid-market must be at the heart of Government plans to rebalance the economy, according to accountancy and business advisory firm, BDO.

New figures, published today, reveal that the UK’s mid-sized businesses (firms with a revenue between £10 million to £300 million) are a thriving area of the UK economy, growing turnover by nearly 55 per cent in the last five years (from £0.65 trillion to £1.02 trillion).

Over the last Parliament the mid-market has outstripped the FTSE 100 in many key areas of performance. In terms of profitability, the UK’s mid-sized firms can boast profits up 110 per cent compared to a FTSE 100 shrinkage of three per cent.  And on employment, jobs growth of the UK mid-market today is almost three times faster than that of the current FTSE 100.  The UK mid-market now employs 50 per cent more people than it did in 2010 (6.1 million jobs in 2014/15).

Making up only one per cent of UK companies in 2014/15, the UK mid-market accounts for nearly a third of all private sector turnover and 1 in 4 private sector jobs.

Yet, despite being such a powerful engine for growth, the UK’s mid-market remains ‘overlooked and undervalued’ according to BDO.  These mid-sized firms are agile enough to adapt to the new economic realities - and big enough to take advantage of the opportunities offered by global growth- but too small to achieve the levels of attention FTSE firms command from the media and policy makers. Equally, they are too large to benefit from policies specifically tailored to small business.  Hence, the UK’s mid-market remains stuck in a policy and profile gap.

With rebalancing the economy the top political priority for the UK Government, through initiatives such as the Northern Powerhouse and the new independent infrastructure commission, BDO is calling for policy-makers to determine a bigger role for the mid-market in their thinking and help this already successful sector expand further.

BDO’s new report – Building the New Economy - suggests three broad areas where the Government needs to focus its policy thinking:

  • Making the most of the UK mid-market
  • Helping UK businesses grow internationally and attract inward investment
  • Creating the regional and sector powerhouses that will fuel our economy

Proposals include changes to tax and investment structures to unlock mid-market potential by facilitating longer-term planning, rewarding business growth and encouraging expansion by exporters.

Three key policy recommendations from BDO’s “Building the New Economy” report specifically focused on how to rebalance the economy through the mid-market are:

Use Long Term Lending Trusts to encourage investment in mid-market businesses:

Today, mid-market firms can struggle to find the long term finance they need to invest for the future. Long term lending trusts would offer income tax relief to savers investing in long-term debt funding for ambitious businesses (as currently exists through the successful Venture Capital Trust scheme) for at least five years. There would be strict requirements on the type of business that could seek loans from the LTLT, which would cost the Government only £310 million a year to run and could unlock billions of new long-term loans.  Although there is a cost to this policy it would fuel further growth which will result in a greater tax take.

Zero VAT for supplies to exporters:

The UK currently allows manufacturers to zero rate their exports. However, it is less generous with reliefs for domestic companies that supply to UK exporters. In contrast, Ireland has a more generous relief for regular exporters, where a qualifying exporter is able to inform its suppliers of its export authorisation and those suppliers can then zero rate their supplies to the qualifying exporter. We recommend that the UK introduces a similar relief.

Reduce the overseas tax barriers for UK exporters opening a new branch or subsidiary overseas:  

Taxation should be an instrument of economic policy and used to drive and encourage internationalisation of mid-sized businesses. When bi-lateral tax agreements are re-negotiated, the UK Government should take the opportunity to agree an exemption for UK businesses when opening a new branch or subsidiary from local taxes up to a de minimis level of economic activity of £1 million of total sales.

Simon Michaels, Managing Partner, BDO LLP, said: 

“Now that we are on the road to recovery, it is essential that we do not repeat the mistakes of the past and perpetuate an unbalanced economy too heavily reliant on one sector or region.

“The Government has started tackling the issues and plans around the Northern Powerhouse, devolving powers to cities and infrastructure investment are all very welcome.  More can be done though, and encouraging Britain’s mid-market has to be at the heart of Government plans.  Yet currently the mid-market falls into a policy and profile gap – too big to benefit from the policies aimed at small businesses and too small to get the attention lavished on FTSE firms.

“We would like to see a ‘new economy’ that harnesses the entrepreneurial spirit of UK businesses and puts the mid-market front and centre of the UK’s growth plans.

“Germany’s Mittelstand is rightly lauded in its own country and it’s time our own ‘Brittelstand’ got the same recognition”.

To download the full report please visit www.bdo.co.uk/neweconomy

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