One of the biggest problems in government policy is that it tends to be written by people who have no experience of how it will actually affect the day-to-day lives of people on the ground. Added to this is the tendency for new laws and regulations to be piled on top of each other, by different areas of government or by different generations of policymakers, without anyone taking a step back to look at the impact of government as a whole.
In few places are these truths more apparent than in the way the state interacts with smaller businesses in the UK.
A survey commissioned by the Business Department (BEIS) itself found that only a quarter of businesses agree with the statement that ‘government understands business well enough to regulate it’ (and only 2 per cent strongly agree). More concerningly for the government and the Conservatives, a YouGov survey for the Centre for Policy Studies (CPS) found that small business owners feel the current government is not on the side of small businesses, by a margin of 62 per cent to 24 per cent. For the party which traditionally prides itself on being the champion of those who create jobs and wealth, this should set alarm bells ringing.
Small and family businesses are the backbone of the UK economy. Around three quarters of the millions of jobs created in this country since 2010 have been in SMEs. Around half of all private sector jobs are in small businesses (firms with fewer than 50 employees), and these companies have an overall turnover of some £1.4 trillion. But when it comes to the rules they have to follow and the taxes they have to pay, in many cases these smaller firms are treated no differently to a large corporation with thousands of employees.
A corporate tax code which makes War and Peace look like a short pamphlet is less of an issue if you have your own compliance department full of clever lawyers and accountants, but if you’re a small local business run by family members and a handful of staff, it can be a Kafkaesque nightmare.
The BEIS survey found that small employers are much more likely than large ones to believe the overall level of regulation is an obstacle to success (44 per cent compared to 31 per cent). In the CPS YouGov poll mentioned earlier, 75 per cent of the small businesses surveyed thought that the tax system was too complicated, with just 18 per cent saying it gets the balance about right, and 1 per cent thinking it is too simplistic.
A big part of the problem is that, as the Office for Tax Simplification has noted, the UK currently has “a corporate tax regime operating on a one-size-fits-all basis”. This despite the fact that our CPS survey found 64 per cent of the public think the tax and reporting system for smaller businesses should be simpler than for larger ones, with just 19 per cent disagreeing.
With all this in mind, the CPS is launching a new report today, Think Small, authored by Nick King, our Head of Business, who is well placed to look at this area as a former Special Adviser to Sajid Javid when he was Secretary of State for Business. The idea is simple (indeed, that is kind of the point): a new voluntary scheme which allows firms with a turnover below £1 million to opt out of much of the existing tax bureaucracy and instead pay a new Simple Consolidated Tax (SCT). This would be calculated as a flat percentage of turnover, and would lift SMEs out of the four big tax systems they currently have to navigate: Corporation Tax, Employer’s National Insurance, VAT and business rates.
This is modelled on the existing Flat Rate Scheme that is available for VAT, where companies pay a percentage of turnover instead of having to go through the rigmarole of recording and submitting their VAT receipts. But the SCT goes much further as it would be available to many more firms and covering all four big taxes.
We commissioned Capital Economics, an economic consultancy, to model the proposed scheme and work out what sort of rates we would be looking at to make the scheme broadly revenue neutral. We have tentatively suggested a rate of 12.5 per cent, though if the Treasury/HMRC were to take up the idea they may well calculate this differently (they may also want to have slightly different rates for different types of businesses, as with the Flat Rate VAT scheme). The important thing is that the principle is taken up and implemented, and that simplicity remains at its heart.
It is important to emphasise that this policy is not in itself a tax cut. The chief benefit for businesses who choose to opt in is the elimination of vast amounts of administration, freeing up time and resources and getting rid of a lot of stress and confusion. Our YouGov survey found that if this scheme were on offer and their business would be paying roughly the same level of tax as before, 72 per cent of small businesses would prefer it to the current system. Even when presented with a scenario where the rate was set at a level where their company would actually be paying more tax than before, more than one in four said they would still prefer the SCT, because of the benefit it brings in reduced administration.
People sitting in Whitehall often end up putting together rules which look clever on paper but are impenetrable for the ordinary people who have to traverse them in their daily lives. In pursuing the perfect system, which has rules in place to cover every scenario, you can end up with a terrible one. Taking a pragmatic approach, which recognises that smaller businesses have different needs and capabilities to their larger counterparts, and which takes a balanced approach between sensible and necessary tax requirements on the one hand, and simplicity and ease of use on the other, is the conservative way to tackle these issues.
As a country, we are one of the best places in the world to do business. That is something we should build on and give our millions of businesspeople the space to create the jobs and growth our communities need.
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