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The Tories need a more radical tax plan

15 November 2019

4:44 PM

15 November 2019

4:44 PM

Today the Conservative Party announced that it would cut business rates for shops, cinemas and pubs. The proposal sounds great, but the moment you look at the detail, you groan. There’s a percentage cut… to a discount… that applies to a subset – yawn. Has someone brought George Osborne back?

Recent polling shows that the Conservatives have become the party of the working class and they have always been the party of small business. In the remaining weeks of the election campaign, the Conservatives should be looking to make policy announcements that bind in the loyalty of these groups. Why are they tinkering when they could do something radical with a transformative impact?

Earlier this year, the Centre for Policy Studies (CPS) suggested such a thing. In a report, they suggested that small businesses should pay a single tax on a straight percentage of turnover. This would replace: PAYE, National Insurance, VAT, Business Rates, Income Tax and Corporation Tax (even the list is long). The CPS suggested that if the tax were set somewhere between 11.5 per cent and 13.5 per cent of turnover it would remain broadly revenue neutral.

Surveys of small businesses confirm that the heaviest regulatory burden they face is the complexity of complying with tax legislation. A report by the Federation of Small Businesses stated that 77 per cent of small firms use tax specialists to calculate their tax liability, spending a staggering £5,000 on average on tax compliance per year. It also suggested that small businesses lose an average of three weeks a year to tax compliance. A third of those surveyed said that tax had stopped them from growing their business.

Such a reform would save small businesses thousands of pounds in compliance costs as well as hundreds of hours a year spent dealing with taxes. This is time that should be devoted to running businesses, providing goods and services and creating employment. A simpler tax system would also enable people to trial new business ventures with lower up-front cost, risk, and worry, helping to create the innovation we need in a post-Brexit world.

Business rates are probably the most psychologically punishing of taxes – and do the most damage to our high streets. This is because you have to pay them irrespective of whether your business earns a single penny. Imagine being a young person who would like to test out a business idea in a shop front on a run-down high street. Knowing that business rates are payable without you having had a customer or earned a pound is enormously off-putting and damages high-street regeneration.

The turnover tax sounds like a no-brainer – where is the downside? Well, different businesses have different underlying cost to revenue ratios. So if you use a turnover tax, some firms will pay more tax than others on their actual income. This sounds unfair. In reality, I would argue, unfairness is already baked into the UK’s complex tax code. There are so many opportunities to claim additional deductions if you structure your business this way or that, or find a way to label costs as A instead of B, or ask your tax accountant to chase down every last opportunity for tax minimisation. Many small businesses are not aware of tax reduction opportunities simply because of the sheer complexity of it all. That unfairness would be removed. But a turnover tax could be voluntary – any small firm with disproportionately high underlying costs compared to revenue could continue to pay tax as they do today.

There are 5.8 million small businesses (with 0 to 49 employees) in the UK today, which account for three fifths of the employment in the UK. Many are family businesses. Small businesses are often rooted in the local community and are more likely to respond to community needs than anonymous corporate giants. Drastically cutting tax complexity for small businesses would give them some advantage back. It would literally give them hours in their week, as well as hard cash. Lowering start-up costs would reduce the risks of going into business and would spur UK innovation after Brexit. It would help regenerate the UK’s high streets and create new opportunities for small businesses in struggling small towns. Cutting bureaucracy, supporting small businesses, building communities, energising struggling towns and regions. There’s still time to get this commitment into the Conservative Manifesto.


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