The Chancellor is facing fresh calls to reduce Corporation Tax to 15 percent. Yet there are far better ways to give a boost to UK businesses – not least smaller ones. Here we urge Hammond to take a more lateral approach, beginning with an overhaul to NICs, Business Rates, pensions and Universal Credit.
A predicted £100bn black hole from the Brexit fallout. Calls for further fiscal devolution to UK cities and regions. Demands to ease pressure on ‘just about managing' families. The Chancellor has his work cut out for him in his first Autumn Statement.
The Treasury has so far kept its cards close to its chest. But one move is almost certain: a commitment to stick with Osborne’s pledge to cut Corporation Tax from its current level of 20 percent to 17 percent by 2020.
If yesterday’s reports are to be believed, the Prime Minister is also set to reaffirm her predecessor’s vow that the UK has the lowest Corporation Tax rate among G20 nations – which, if Trump follows through with his promise to reduce the US tax rate to 15 percent, would see the UK making a further substantial reduction.
But if we’re in the game of cutting taxes, is this the wisest one to cut?
First, the main rate of Corporation Tax is already down from 28 percent in 2010. Second, it is a tax that only affects incorporated businesses making a profit. Third, government surveys show that just 20 percent of small businesses who say tax is an obstacle to success point specifically to Corporation Tax. And fourth, the UK already has one of the lowest Corporation Tax rates in the OECD.
If the Chancellor wants to give UK Plc a boost, he would do better to look elsewhere, including at National Insurance Contributions – which affect millions of self-employed workers – and Business Rates – which are crippling the UK’s high streets and leading to clone towns bereft of soul and identity.
But the Chancellor can do more than just tinker with taxation. It’s time the Treasury also looked at using welfare policy as a means of kick-starting businesses. Social security can be as much a springboard as a safety net, and if designed correctly could help people grow their businesses into financially sustainable ventures – ventures that may become net tax contributors and employers.
Early next year, the RSA in partnership with Crunch will publish a new report that carries these themes forward. In it, we will urge the government to move from a ‘low road’ to a ‘high road’ approach in its treatment of the self-employed and micro businesses – one where blunt tax cuts give way to a more sensible tax system, where broad-brush red-tape culls are replaced with more intelligent regulation, and where welfare policy becomes part and parcel of enterprise policy.
Here are several early ideas from our research:
National Insurance Contributions – The disparity in National Insurance Contributions paid by employees and the self-employed has to end. The self-employed pay a lower rate of NICs, and have no equivalent of Employer NICs paid on their behalf. This creates incentives for bogus self-employment and makes it all but impossible to argue for extra welfare coverage for people who work for themselves (e.g. Statutory Maternity Pay and Statutory Paternity Pay). A fairer system would see the self-employed paying the same rates as employees, but the tax rise could be eliminated for low earners by shelving the planned cut in Corporation Tax and diverting the money to finance a rise in the thresholds at which NICs kick in.
Business Rates – The UK’s business property tax is not fit for purpose. The amount that businesses pay is based on the ‘rateable value’ of their property, but revaluations happen infrequently leaving business owners facing big tax hikes that are often unexpected. The government should commit to more regular revaluations, but it should also explore the scope for a more fundamental overhaul. The Rates system takes little account of economic cycles and what a business can afford to pay, and was designed for a world before e-commerce began hollowing out high street footfall. A shift to a tax based on profit or revenue, rather than property value, is one possibility.
Pensions – The government recently granted the self-employed eligibility to the new Single Tier State Pension – not insignificant but unlikely to be enough to prepare most people for retirement. And with only 1 in 5 self-employed business owners contributing to a private pension, there is an urgent need for the government to step in where the market has failed. One solution is for the government to ‘nudge’ business owners to save with a provider like Nest, for example by presenting an enrolment question on tax self-assessment forms. The Chancellor should also look again at the design of the new Lifetime ISA, and consider whether the eligibility age could be increased from 40 to 50, and whether small withdrawals could be allowed that do not cost savers their bonus if drawdowns are paid back within a short period.
Universal Credit – The government’s flagship welfare programme is back on track after a rocky period. However, it is still beset by several design flaws – not least in the way it treats self-employed claimants. The introduction of a Minimum Income Floor (MIF) is for all intents and purposes a benefits cap designed to stop unprofitable businesses being subsidised by the government. While the intention of the MIF is reasonable, the concern is that its punitive design will sink businesses that could have otherwise been viable in time. We recommend the government extends the ‘Start Up Period’ where people are exempt from the MIF from 1 to 2 years, giving would-be business owners more time to find their footing. The Universal Credit reporting period should also be aligned with the new self-assessment quarterly updates – ensuring that the tax and welfare regimes are in sync.
The RSA is working with Crunch, the online accountants for micro businesses, on a project that seeks to deepen our understanding of what works in supporting the self-employed and micro-businesses.