18 July 2018

Britain urgently needs business tax reform to remain competitive


Yesterday, the All-Party Parliamentary Group (APPG) for Entrepreneurship released the first of three papers. The report, authored by Sam Dumitriu, calls for a series of tax reforms that would help ensure Britain remains internationally competitive.

APPGs are a broad church. Chess, rowing, mindfulness – if you can think of it, there is a decent chance there’s an APPG representing it. As Secretariat of the APPG for Entrepreneurship, it is our job at The Entrepreneurs Network to coordinate the group and ensure Parliament is kept up-to-date with the needs of entrepreneurs.

When we surveyed entrepreneurs on which tax breaks were beneficial to their business, we discovered that many policies were unknown, even to the relatively savvy business owners in our 10,000-strong network. Perhaps this shouldn’t be a surprise though – when we surveyed MPs last year we discovered the same thing. Patent Box, which allows companies to apply a lower rate of corporation tax to profits earned from patented inventions and certain other innovations, was near the bottom of the list of entrepreneurs and MPs who had heard of it.

What’s the point of a tax relief that nobody has heard of? Today’s report calls for HMRC to experiment by carrying out randomised controlled trials into the effect of including detailed advice about tax reliefs alongside other correspondence with business.

What’s worse than a tax break that nobody has heard of? Tax breaks that aren’t giving a decent bang for their buck. That’s why the report calls for policies to be regularly reviewed by the Treasury to test whether or not they are achieving their behavioural objectives in a cost-effective way. Whether you broadly think businesses should be taxed more or less, everyone can agree that public spending should be as efficient as possible.

There is a model for how to do this effectively. In Canada, the government is required to publish an annual Tax Expenditure Statement, which includes in-depth reports on one or two tax expenditures.

Today’s report also gets into the weeds. No report of business taxation is complete without dealing with business rates. The report calls on the Government to assess rateable values upon the underlying land value of a commercial site rather than on the value of the property itself. This would ensure that commercial property owners are not deterred from investing in productivity-enhancing improvements.

When we surveyed entrepreneurs, over half thought Business Rates were quite or very damaging for entrepreneurship in the UK and 40 per cent believed Business Rates were harmful to the success of their own business. As Nobel Prize winning economist William Vickrey puts it, business rates are “economically speaking, a combination of one of the worst taxes—the part that is assessed on real estate improvements …—and one of the best taxes—the tax on land”. The UK could turn to Estonia, Denmark, Taiwan and some US states for models of how to put theory into practice.

The Individual Saving Account (ISA) is the most successful financial product of recent years. Allowing existing Stocks and Shares ISAs to invest in the shares of smaller, unlisted companies would follow successful moves to expand ISA treatment to P2P lending and the AIM. This would level the playing field and enable a wider proportion of the public to take advantage of the tax benefits of investing in early-stage businesses. In effect, this would democratise existing support for startups.

The Enterprise Investment Scheme (EIS) is another popular and successful tax break. The tax relief offered to investors has become a stalwart of Britain’s entrepreneurial ecosystem. However, more can be done to make them work even better. Today’s report suggests we allow family members to invest in them, introduce a Scale-Up EIS at a reduced rate but higher cap and improve the Advanced Assurance process.

Marginal tax reforms might not be as exciting as the cut and thrust of starting and scaling a business, but without the right policies entrepreneurs will be stymied and Britain’s economic growth, employment and wages will stagnate.

Philip Salter is Founder of The Entrepreneurs Network.