A research report on profit distribution and investment patterns of unlisted companies was published on the HMRC website on 17 September 2015. The quantitative and qualitative research looks at the reasons for company behaviour including tax planning and growth plans. This is intended to assist HMRC to deliver a tax system that helps companies to invest and expand.

Around half the companies surveyed that kept a certain level of retained earnings mentioned financial security as a motive, especially in the case of micro companies. Around one company in five mentioned that retained earnings would be a useful source of finance for future growth and expansion or for planned investments.

A number of companies saw retained earnings up to a certain level as a buffer against economic difficulties or cash flow issues, and above that level the retained earnings were seen as a source of funds for investment. Companies in the survey that engaged in capital spending, investment in intellectual property or investment in digital technology mostly financed these investments through internal funds. This was especially true of micro enterprises, while larger companies were more likely to also use debt finance. The smaller companies tried to avoid debt, seeing loan finance as more expensive than use of internal funds for investment.

The survey found that tax considerations weighed the most in decisions on directors’ remuneration, rather than investment decisions. Around 67% of the companies in the survey paid directors’ remuneration in the form of salary; around 58% used dividend payments; and around 46% used both methods. Around a quarter of the companies paying directors’ remuneration mentioned that tax was a factor in their decisions about remuneration.

Companies that were expecting to grow listed the main barriers to growth as lack of working capital, strong competition, poor economic conditions or lack of available skilled employees. Only 3% of the companies surveyed that were looking to grow mentioned high tax liabilities as barriers to growth.

Wider business and economic considerations were more relevant to decisions on growth and investment than tax considerations. Where tax had a role in investment decisions this was mainly in connection with the tax and administrative burden of recruiting employees.

Some companies suggested tax improvements such as improved incentives to invest in new products, higher capital allowances or support in the tax system for recruitment of apprentices. The participating companies making these suggestions did not however mention their level of awareness of the tax reliefs already available.