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The Impact Of Taxation On Business Innovation

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Introduction

Taxation is the amount which is required to be paid by individuals as well as business concerns on their wealth and income. All the rules and regulations that are related to tax are imposed by the legal and regulatory authorities.  Whether a business is small or big it is essential to pay appropriate taxes so that all the operational activities can be performed successfully. HMRC (Her Majesty's Revenues and Customs) is the non ministerial division in UK who is responsible to perform all the taxation collection related activities. All the business entities are liable to pay appropriate taxes according to their business revenues (Bal, 2014).

If an organisation is misguiding the legal body than strict action can be taken against them. As most of the business entities are developing continuously and implementing innovations at their work place hence government has also taken initiative to support them. In UK the government has imposed a tax credit which is specifically designed to offset research and development expenses. In the research paper impact of taxation on business innovation has been discussed that includes different assumptions, evidence and examples, literature review and personal comments on this concept.

Theories And Assumptions

Entrepreneurial innovation and taxation:

In present world, taxation plays an important role, in growth and development of economy. As a small entrepreneurial business firm it is the responsibility of management to widely believed to have and brought effective innovation practise and methods. This will bring efficiency among existing worker and develop more employment growth to economy. The main objective and purpose of entrepreneurial innovation is to bring invention in the policies and procedure of existing business firm that will support in reduction of taxes paid by company and increase the profitability during a financial year. In UK, entrepreneurship is encourage with the support of tax reduction for small companies and by different government support strategy. In order to bring efficiency and effectiveness in various business operation of company an entrepreneur is responsible as the play the role of provider of breakthrough  invention to improve the companies (Bednar-Friedl, Behrens and Getzner, 2012). The important document the describe the different  part played by small entrepreneurial entity and large established business entity in the innovation process in the UK.

So in that case the small entrepreneurial business entity must create a large portion of discovery inventions and on the other side the large developed entrepreneur business firm helps to deliver more detailed and specific ordinary Research & development. In general, an innovation, consistence economy holding desired entrepreneurial activity. It is observed that in companies large share of funds and monetary benefits for basic research in a company is might by financed through labour taxation and on the other side the in the other part are left for the profit taxation.  

When an entrepreneur focuses to improve the profit and performance of company they must tries to make best and effective use of their resources. This will only can be possible in case if entrepreneur knows each and every aspect of taxes policies and other rules and regulation to avoid or reduce the impact of taxes on profitability. It is observed that personal income tax, payroll tax and capital gain tax have a direct impact on the different activities performance by entrepreneur of small and large business firm. It also leave all individual entrepreneur or entrepreneur working in small and large companies with less expendable capital.

Thus the theory hold that the more higher the tax rate will make entrepreneur to think twice regarding their investment in business project or other operation activities (Canming, 2013).

Taxation on Research and Development

In today's world, contribution of research & development to grow the productivity of economy, develop the performance of each and every unit of company that support to increase the overall performance of economy. And it help in the achievement of social purpose and objective. Innovation in small business are basically is an expensive activity and this is basically done because every organisation wants to grow and develop in term of profit and man-force strength. It is observed that manager of company in order to remain at the top in industry and maintain competitive advantage are constantly developing and creating new techniques and technologies that will help them to reduce the impact of taxation and improve the profitability. But in the same context it has been determined that almost every small and medium sized companies lack the sufficient workforce and resources that make them unpowered to invest in feasible research & development project. But recently, the newly developed techniques an d technology, fresh material and rational property developed by advanced business firm could be priceless to the community (Enkel and Mezger, 2013).

So in respect to make the research and development department the UK government has formulated a new tax credit policy that help to reduce the expenses of companies on R&D. Thus as a result of new tax credit policy many small and medium business firm are able to foster innovation in order to attain the best market position.

R&D tax credit are mainly formulated to add incentive innovation in the developed economy. So, if small and medium business entity in UK are focused to qualify the research and development Tax credit, then their manager have to properly investigate about the market conditions and demonstrate investment in the fresh and developed processes, material, technologies etc (Jiang, Zhang and Feng, 2014).

Business Innovation Research

In present era, every companies needs innovation and inventions in their business operation that help them to improve the performance and productivity of companies. Manager of small fir are always looking in to applies some or other innovation management theory that help other member of companies to work in most effective and innovative manner. This would also help them to have a specific solution to the problems faced by companies that may hinder their performance. In business innovation manager focus on innovation funnel at the starting point, it is consider to be the visualization tool that help to disclose the actual difference between the open and closed innovation method implemented by small and large companies to improve the business operation. Thus the open funnel innovation theory is basically applied as a central concept that support to grow the different key insights about open innovation and this not only focus to summarize and visualize but also support to connect open and new innovation to the existing management and other practices.

Thus it is observed that choosing the best and most appropriate souring modes is significance that further support to execute open innovation successfully. Manager also uses this method of innovation as a stage- Gate process that is used in managing the already closed innovation process of company (Jinghuan, 2013). This will make available of choice manager would have in order to make their operation and activities to be successful and productive. Thus the gate process strategies is used decrease the technological and various market uncertainties that may be the reason that reduce the profitability and productivity of company.

From the the above mention, theories/ assumption it has been observed that entrepreneur innovation help to reduce the impact of taxation on profitability of company. In UK government have developed R&D tax credit that help to reduces the expenses incurred by companies on different Research and development project. Manager of companies are focus to improve the profitability of business operation thus they apply the concept of open innovation method that help to develop new invention. That further support to attain the market share and increase the economy of UK (Martins, Rindova and Greenbaum, 2015).

Litrature Review

According toSu´arez Serrato and Zidar (2016), the taxation is an important element of business and every one is obliged to pay the taxes according to government rules and regulations. The study shows incidence of state corporate tax changes on firm owners, workers and landowners using a spatial equilibrium model and find that these groups bears respectively 40, 30-35 and 25-30 percent of burden. As tax system promotes the innovation and entrepreneurial activity in countries. The United Kingdom is a developed country and an effective tax system of that country is very helpful in the encouraging innovation in country and organisation.

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According to Nechaev and Prokopeva, 2013, to promote the economic growth innovation, and enhancement of innovation process efficiencies are very helpful. As innovation can be a transformative tool for economic development and economic growth. Enhancement of innovational process is considered as a great tool for the overall development of country. The countries which has more innovational activities is considered more developed counties in respect to those which do not have any innovative promotional activity. Modern economy is depended upon the innovation and innovational activities. These activities needs to be promoted by the government of country in order to development of countries

According to Folomev and Revazov, 2001 and Thalassinos et.al, 2014, taxation and an effective financial structures is considered as one of the most efficient tool for stating regulations of both national and international economic processes. As an effective tax system of country can be very helpful in promotion of entrepreneurial activities in country. The entrepreneurs are promoted to come up with new ideas and get tax subsidies on their ideas. This is one way to promote the innovation in country. As tax system of country have directly or indirectly make impact on the innovation and new business. The effective financial structure attracts and invites the foreign entrepreneurs to start their own venture and contribute in growth of nation.

According to Aghion and et.al., 2018, the quantity and quality of is being produced depend optimistically on the hard and efforts and resources invested by the inventors as well as by business firms. The progressive tax rates systems can be a safeguard to high possibility of failure inherent to the start up. As some government social insurance programs can motivate entrepreneurs to take risks and start their venture. As there are many factors involved for bringing an idea to the market, taxation and government policies is one of them.

According to Dynkin, 2005, As analysis shows shows that higher the innovative development level which is analysed by Global Innovation  Index is mainly observed in countries with high tax burden rated on individual and low on legal entities, in particular the field of insurance prize to foundations which have vital impact on prime cost of innovative goods and services.

According to Franklin Allen, 2012, the taxation can have both positive and negative impact on the business innovation. As government always tries to come up with those tax policies which enables entrepreneurs to come up with new ideas and make contribution in economic development. The research shows that the government of UK have their effective tax system and an efficient financial structure which enables in house and foreign entrepreneurs to initiate their innovative ideas in UK and get benefited by the tax policies of country.

According to Michael J. Graetz and Rachael Doud, 2013,  innovation is very important for economic growth of any country. The research and development activities are helpful in leads to innovation successfully. As tax policies of countries have significant impact on the achievement of overall organisational goals and grab a share of income from innovations. The division of appropriate rules regarding taxing IP and for taxing IP revenue has become challenging for the tax departments.

According to Moresi, 1998 and Scheuer, 2013, evaluated effective tax policies in models of asymmetric substance with business choice where government faces a trade off between the efficiency can equality. The tax incentive for entrepreneurs and redistribution of gains from innovation can be aligned in better way in order to promote the entrepreneurial activities it the economy and nation. The research shows that tax systems of country can make huge impact on the economy and their entrepreneurial ventures. An optimal financial structure leads to an efficient economic growth. It promotes the innovative and entrepreneurial activities in the country.

According to B. H. et.al., 2009, The variables used to estimate that innovation is highly effected by the taxation system of any country. The government provides the tax incentives for the promoting innovation in country. There are some countries where innovation is not up to the mark due to certain tax and policies. As taxation system has huge impact on the business innovation. Due to lack of tax incentives and policies the countries are unable to grow and make business innovation is right way. As research says that there are nations which provides a superior financial system and effective tax policy which ultimately leads to the growth of economy and growth of business innovation.

According to Fraser and Simkins, 2012, there are factors which contributes to the overall process of economic integration as well as innovation of business. The study and evaluation of impact of tax leverages on the combination of economy are becoming increasingly significant in terms of assuring the economic growth within the unions of economics as well as enhance the efficiency of foreign economic relations for every state. For better economic growth it is considered innovation is an effective tool and tax system of country is considered as barrier as well as boosting tool. As an effective tax system is a boosting tool for the economic growth and where as bad tax system is considered as the barrier for business innovation. Countries now days use simple and effective tax systems for promotion of business. As the growth of business is ultimately considered as growth of economy also. The tax incentives is being provided in the both direct and indirect tax in order to encourage entrepreneur so that they come up with some creativity in the business.

Evidence / Examples Potential Quotations

Glenn Keys and Dr. Andrew Walker both are entrepreneurs and co executive chairman  of Aspen Medical. Entrepreneurial Innovation and Taxation strategyhave been used by Glenn Keys and Dr. Andrew Walker in order to expand their business with new innovations in different locations including UK. All the efforts of government to foster innovation including the framing of tax system has been analysed by the entrepreneurs to expand the business in UK. Government of UK supports the business innovations as it can help to launch new and innovative products in the market that can result in increased national income (Nian, 2015).

In UK legal authorities are providing opportunities to the businesses who are going to launch innovation in the market. Aspen Medicals negotiated with the government regarding the payment for expansion and than launched their business in UK. When most of the countries are facing with a huge disease Ebola at that time Aspen Medicals launched antidote for the disease by considering all the tax related regulations. It was an innovation which was launched by Aspen Medical all around the world to expand its business. The business of the organisation have suffered as well due to the taxation policies. It is very difficult for those organisations who are operating business in multiple countries to follow the taxation policies of all of them. UK's government has supported to the organisation and helped to launch the innovation successfully (Santana, 2012).

Big change is a mobile workforce management company who is currently operating its business in UK. It has used Taxation on research and development while it was doing research in the market. Research and development credits have been used by the organisation as it was a start up company and launching with innovation. It was founded in year 2013 by Martin Port. It has launched Job Watch app in the market which is very beneficial for the individuals who are willing to work in mobile sector. According to legal body of UK all the business get benefited with the help of research and development credits as it helps to reduce the expenses that are concerned with research and development activities.

Government has imposed this policy mainly for small business so that they can grow faster and attain higher profits by operating business effectively. This approached has helped the organisation to save the cost of R & D. The saved amount can be used by the company in its operational activities for the purpose of  enhancing operational effectiveness and ability (Si-Hua, 2012).

Brain broker is a technology consulting company which is operating in united Kingdom. This company is established in the year of 2016 and has its headquarters in UK. This company is based on an innovative idea of providing technological consultancy services which is founded by  Larry kotch, Jonathan Lemer and Sebastian Shaw. This company has its main operations limited to the area of UK.

The main aim of this company is to provide services like consulting other small and medium enterprises about how technology can help their business to grow and expand. Services provided by this company includes consulting about the technological issues, providing  information about benefits of recent technological trends and providing technical data about how companies can expand their business. In order to effectively conduct their operations, this organisation uses “Business innovation research theory”. This theory is related with the activities of research and investigation which a company requires to conduct in order to know about technological aspects which can help them to attain their organisational objectives (Van Thong, 2014).

This company acquires ample of benefits due to its innovative approach. Brain broker operates in United Kingdom's economy. Government of United Kingdom is always known for supporting their innovative business in order to develop a trend of innovation and commercialisation. In order to support this company, government of UK has provided various benefits such as tax reduction and loan at low interest rate. Every business start up requires ample amount of capital which can not be procured from self finance. In order to resolve this problem, government of UK has provided low interest loan to this company so that they conduct their business with all the resources that are essential for them.

Personal Comments

From this research paper it has been analysed that various policies have been imposed by UK government to support business innovation. Tax credit is one of them which is introduced to reduce the expenses that are involved in research and development activities of the businesses. UK government is very much concerned with the economic growth. Legal authorities in UK giving opportunities to those businesses who are using innovation as this will help to increase their profits and they can contribute higher amount in the national income. This will also help the economy to grow faster (Vella, Yevgenyeva and Englisch, 2013). Government introduced this policy mainly for small and medium business enterprises as they get less affected due to the economic changes. When most of the large organisations in UK are facing with low profitability due to Brexit at the same time start ups, small and medium business are trying to grow and also helped the economy to be stable.

Research and development tax credits are launched for small business who are having staff members less than 500 and their turnover is under 100 million pound. All the businesses who are willing to quantify this credit have to be according to requirements of government. As there is lack of awareness among small business owners about research and development credits hence they are not able to take full advantage of this scheme that may help them to reduce their expenses at the time of business innovation. As HMRC has introduced this tax credit for the business so that they can conduct all the innovation related activities appropriately and it has resulted positively for companies. Various business have saved 33 penne on each pond which has been invested by them in research and development process. This policy of HMRC have also helped to create a stable business environment for organisations where they can grow and increase their profitability (Xingqiong, 2013).

This policy was imposed in year 2000 since than all the business are started to take advantage from this. While writing this research paper the researcher have also observed that research and development tax credits have enhanced technical innovations in UK as the government has started to support technology. Business started to make more money with the help of such type of innovations as local public of UK is very much aware of technology.

It has also been identified that government of UK is also supporting the organisations who want to expand their business in UK by launching new products. As it will help in economic growth hence the government is providing opportunities to the companies. When business entities try to enter in UK's market than legal authorities also provide them tax benefits so that they can establish their business successfully. Researcher have observed that regulatory bodies in UK are highly supportive as they are promoting business innovations because this will increase the number of new products in market which will result in increased national income and developed economy.

It is very beneficial for all the businesses who are willing to launch innovative products and services in UK's market because they will have less tax implications and they can grow faster there. For all the organisations it is very beneficial for the companies who are willing to expand their business in different geographic locations because the government will help to successfully launch the business and operate all the activities appropriately (YANG, TANG and YAO, 2015).

When a start up with a innovation launches in UK than government provide full support to the business owners as they can help to grow the economy faster. Government also help to conduct the research successfully with less interference of legal authorities. Ever business have to conduct a research in the market before launching a new product so that it can be determined that customers will accept the product or not. Regulatory bodies in UK also decrease tax rate for the innovative business as it can help them to operate business appropriately. When a new and innovative product launches in the market than government give full support to them as they can help to overcome from all the economic challenges that are faced by a country.

All the companies who are using business innovation get various tax benefits from the side of the government as it helps both of them. Organisations can save funds and the economy of the country can grow faster if the business are generating higher profits. As government has imposed research and development tax credit policy for the business entities so that their spendings in research and development can be reduced in order to operate business appropriately. The researcher have figure out that government in UK supporting the new business as well as foreign business to launch innovative products as it can help the economy to grow faster. Foreign trade is also promoted by the legal authorities by reducing taxation rates for the business organisations.

Taxation on business innovation leave positive impact on companies because they get different types of taxation related benefits from the government so that their business can be operated appropriately (Yuemei and Jie, 2017).

Conclusion

From the above research paper it has been concluded that taxation has impacted the business innovations positively and negatively. Government of UK has imposed tax credits for the business who are following innovation, this policy helps to reduce the expense that are going to be invested in the process of research and development. As a business grows after implementing innovation than the profits get increased and then government impose new rules on the businesses to pay tax which will decrease the interest of business owners in the innovation.

When corporate tax rates reach to the peak it will result adversely for the economy of a nation because this will reduce the effectiveness of the the organisations.

References

  • Bal, A. M., 2014. Taxation of virtual currency. Institute of Tax Law and Economics, Faculty of Law, Leiden University.
  • Bednar-Friedl, B., Behrens, D. A. and Getzner, M., 2012. Optimal dynamic control of visitors and endangered species in a national park. Environmental and Resource Economics. 52(1). pp.1-22.
  • Canming, L. Y. Y., 2013. Fiscal Decentralization, Local Government Spending Preference and Residents′ Subjective Well-being: The Data after the Tax Reform [J]. Journal of Zhongnan University of Economics and Law. 4. p.001.
  • Enkel, E. and Mezger, F., 2013. Imitation processes and their application for business model innovation: An explorative study. International Journal of Innovation Management. 17(01). p.1340005.
  • Jiang, W., Zhang, C. and Feng, W., 2014. Evolution trend analysis in the gap among four regional state revenues and expenditures in GuangDong province since 2000. South China Journal of Economics. 6. p.011.
  • Jinghuan, Z. X. L., 2013. The New Progress of Study on Local Government Fiscal Competition. Journal of Zhongnan University of Economics and Law. 1. p.008.
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