# Impact of Tax Reforms and Regime on SME Positivist Scholar View
## Introduction
Small and Medium-sized Enterprises (SMEs) are widely recognised as a crucial component of the United Kingdom’s economy. The tax regime and its frequent reforms therefore have a significant effect on their operation, profitability, and growth. This essay will examine the impact of the UK’s tax system on SMEs, but it will do so from the specific theoretical perspective of a legal positivist scholar. Legal positivism is a school of jurisprudence which holds that the law’s validity is determined by its source, such as an enactment by a sovereign legislature, rather than its moral content. This perspective dictates that the law is what it *is*, not what it *ought* to be.
This essay will argue that a positivist analysis of tax reforms affecting SMEs focuses on the formal validity, clarity, and hierarchical structure of the tax rules, rather than their economic fairness or social justice implications. By examining key areas like Corporation Tax, Value Added Tax (VAT), and the Making Tax Digital initiative, this essay will demonstrate that from a positivist viewpoint, the ‘impact’ on an SME is simply the legally prescribed consequence of applying a valid set of rules created by a recognised law-making authority.
## The Positivist Approach to Tax Law
To understand the impact of tax law on SMEs from a positivist perspective, it is first necessary to establish the core tenets of this legal theory. Legal positivism’s central claim is the separation thesis: there is no necessary connection between law and morality. The leading modern positivist, H.L.A. Hart, proposed that law is best understood as a system of rules. In his seminal work, *The Concept of Law*, Hart (1961) argues that a mature legal system consists of a union of primary and secondary rules.
Primary rules are those which impose duties or grant rights to individuals. In the context of taxation, a primary rule would be the legislative provision that obliges a company to pay Corporation Tax on its profits, such as the Corporation Tax Act 2009. These are the fundamental commands of the system.
Secondary rules are rules about the primary rules. They confer powers and are essential for the functioning of a legal system. Hart identifies three types:
1. **Rules of Change**: These rules govern the process of creating, amending, and repealing primary rules. In the UK tax system, the annual Finance Act passed by Parliament is the principal mechanism of change, demonstrating the legislature’s ongoing authority to alter the tax regime.
2. **Rules of Adjudication**: These rules provide procedures for determining whether a primary rule has been broken and for resolving disputes. The UK’s tax tribunal system, starting with the First-tier Tribunal (Tax Chamber) and escalating to higher courts, embodies these rules.
3. **The Rule of Recognition**: This is Hart’s most crucial concept. It is the ultimate secondary rule that provides the criteria for identifying valid laws within the system. In the UK, the rule of recognition specifies that what the ‘Queen-in-Parliament enacts is law’ (Wacks, 2020, p. 97). Therefore, a tax provision is legally valid if it is part of an Act of Parliament, regardless of whether it is considered fair, popular, or economically sensible.
From this viewpoint, a positivist scholar would not analyse a tax law based on its fairness to SMEs. Instead, they would focus on whether the law was created through the correct procedure (i.e., passed by Parliament), how it is amended (via a Finance Act), and how it is enforced (by HM Revenue & Customs and the tribunals). The ‘impact’ is simply the legal consequence that flows from this valid system of rules.
## Analysing Key Tax Reforms from a Positivist Lens
Using this positivist framework, we can analyse the impact of specific tax rules and reforms on UK SMEs by focusing on their status as formal, valid laws.
### Corporation Tax
The duty for incorporated SMEs to pay tax on their profits is established by the Corporation Tax Act 2009 and the Corporation Tax Act 2010. These Acts contain the primary rules of obligation. From a positivist standpoint, the validity of these rules is unquestionable as they are statutes enacted by Parliament. The rate of Corporation Tax is subject to frequent change via annual Finance Acts, which are a clear exercise of the ‘rules of change’. For example, the main rate was increased from 19% to 25% in April 2023 for companies with profits over a certain threshold.
A positivist scholar would observe that this change has a direct legal impact on profitable SMEs, increasing their tax liability. The scholar’s analysis, however, would stop there. Arguments about whether this increase stifles investment or is ‘unfair’ to small companies emerging from the pandemic are questions of policy or morality, not of legal validity (Hart, 1961). The positivist is concerned only with the fact that the new rate is the legally correct rate, posited by the sovereign, and that SMEs are legally bound to comply.
### Value Added Tax (VAT)
The VAT regime, governed primarily by the Value Added Tax Act 1994, provides another example. A key rule within this system is the compulsory registration threshold. Businesses with a taxable turnover above this threshold (which has been frozen at £85,000 for several years) must register for VAT, charge it to their customers, and submit regular returns to HMRC.
The decision to freeze the threshold is a political and economic one, but for the positivist, it is a legally valid rule. The ‘impact’ of this freeze is that, due to inflation, more SMEs are being brought into the VAT system. This subjects them to a new set of legal duties concerning record-keeping and reporting. A positivist would analyse this as a straightforward application of a primary rule. The practical burdens this places on a small business owner—the time, the cost of an accountant, the potential for error—are consequences of the law, but they do not affect the law’s validity. The positivist concern is with the clarity of the threshold rule and the legal consequences of crossing it, not its economic wisdom (Lymer and Oats, 2015).
### Making Tax Digital (MTD)
The government’s Making Tax Digital (MTD) initiative is an excellent illustration of how procedural rules are changed. MTD mandates that businesses above the VAT threshold must keep digital records and file their returns using compatible software. The legal basis for this is found in regulations made under the Finance (No. 2) Act 2017.
From a positivist perspective, MTD does not alter the primary rule (the duty to pay VAT) but fundamentally alters the rules of procedure and administration surrounding it. It is a command from a body (HMRC) that has been granted authority by the sovereign (Parliament) to make such rules. The impact on an SME is the legal requirement to invest in new software and change its administrative processes. A positivist scholar would view resistance to this change based on cost or digital exclusion as legally irrelevant. The rule is validly made, and therefore compliance is a legal duty. The system provides for sanctions for non-compliance, which reinforces the positivist view of law as a system of commands backed by threats (a view associated with the earlier positivist John Austin).
## Certainty, the Rule of Law, and Positivism
A positivist approach inherently values the qualities of clarity, predictability, and certainty in law, which are central tenets of the Rule of Law. A legal system where rules are clear and public allows citizens to know their obligations in advance and plan their affairs accordingly. The UK tax system, with its thousands of pages of legislation and detailed guidance from HMRC, can be seen as an attempt to achieve this certainty. The existence of a formal tribunal system to adjudicate disputes further reinforces the idea of a self-contained, rule-governed system, which is a core positivist ideal (Raz, 1979).
However, even a descriptive positivist analysis can acknowledge that the immense complexity of modern tax law may practically undermine the ideal of certainty. While a rule may be formally valid, its complexity might make it difficult for an SME owner without specialist advice to understand their obligations. A positivist would not see this as a defect in the law’s validity, but might observe it as a tension within the system itself—where the pursuit of comprehensive rules paradoxically leads to a lack of practical clarity for the subject. This, however, is an observation about the system’s effectiveness, not a moral critique of its content.
## Conclusion
In conclusion, analysing the impact of the tax regime on SMEs from a positivist scholar’s viewpoint requires a strict focus on the formal properties of the law. This perspective separates law from morality and policy, instead concentrating on the source and structure of legal rules. The core of this analysis rests on Hart’s conception of a legal system as a union of primary and secondary rules, with Parliament’s sovereignty, expressed through the rule of recognition, as its foundation.
The impact of reforms in Corporation Tax, VAT, and MTD is understood not in terms of economic hardship or fairness, but as the set of legal duties, liabilities, and procedures that are the direct consequence of applying validly enacted rules. For the positivist, the tax system’s effect on an SME is a matter of legal obligation derived from the commands of the sovereign legislature. Whether these commands are wise or just is a separate question, belonging to the realm of political or ethical debate, not legal analysis. The positivist scholar’s task is simply to identify and describe the law as it has been posited.
## References
- Hart, H.L.A. (1961) The Concept of Law. Oxford University Press.
- Lymer, A. and Oats, L. (2015) Taxation: Policy and Practice. 22nd edn. Fiscal Publications.
- Raz, J. (1979) The Authority of Law: Essays on Law and Morality. Oxford University Press.
- Wacks, R. (2020) Understanding Jurisprudence: An Introduction to Legal Theory. 6th edn. Oxford University Press.
Legislation
- Corporation Tax Act 2009
- Corporation Tax Act 2010
- Finance (No. 2) Act 2017
- Value Added Tax Act 1994
