BUSF_A01.qxd

Investment decisions

Tax avoidance

Perhaps where the distinction between small and large businesses is likely to be most

profound, in the context of taxation, is in the extent to which they take actions purely

for tax reasons.

Since small businesses typically can know the personal circumstances of the share-

holders, actions can be taken that will maximise the net (after-tax) wealth of those indi-

viduals. For example, where all shareholders pay income tax at a high marginal rate,

it might be to their net advantage for profits to be retained by the business instead of

being distributed as a dividend. This would possibly lead, in the long term, to a cap-

ital gains tax liability on disposal of the shares, but this may be more tax efficient.

16.5 Investment decisions

We saw in Section 16.2 that most small businesses seem to pursue a growth/wealth

enhancement objective. This implies that the NPV investment appraisal technique is

as relevant to small businesses as it should be to large ones. In fact, the evidence sug-

gests that NPV is not as widely used by smaller businesses. Table 16.2 shows the rel-

ative popularity (between large and small businesses) of the main four investment

methods used in practice in the UK.

Although the Arnold and Hatzopoulos (2000) survey is not very recent, it provides

the most up-to-date, comprehensive information that compares the investment

appraisal practices of larger and smaller businesses. It should be noted that the smaller

businesses in this survey were listed companies with capital employed of between

£40 million and £60 million. In other words, these ‘smaller’ businesses were still rather

substantial.

Table 16.2 shows a clear disparity between the two groups of businesses. Larger

businesses were heavier users of the two discounting methods (NPV and IRR) than the

Table 16.1UK corporation tax rates (2008/09)

Profit range Rate

up to £300,000 21%

£300,001 to £1,500,000 Sliding scale between 21% and 28%

above £1,500,000 28%

Table 16.2Investment appraisal methods used by large and small UK businesses

(percentages using method)

Larger businesses Smaller businesses

Net present value 97 62

Internal rate of return 84 76

Payback period 66 71

Accounting rate of return 55 62

Total 302 271

Source: Arnold and Hatzopoulos (2000)