A crucial Budget for UK enterprise

For pundits, the year 2019 will be remembered for political histrionics and economic stagnation. Yet one thing it will not be remembered for is a Budget speech. This unusual break with tradition was more by accident than design – a snap General Election putting paid to the planned Autumn Budget speech in November.

Armed with a hefty parliamentary majority, Chancellor Rishi Sunak now has the chance to stamp his authority at the despatch box next week, but he faces a juggling act. The mood music from Downing Street has included some ambitious spending pledges, and Sunak is ostensibly on board with major fiscal expansion. But he faces a fundamental challenge: where is the money going to come from?

Relaxing fiscal rules is only part of the solution, so next week will shed some light on where taxes can be raised, and savings found. Rumblings suggest that the Treasury has seen sense in one respect, and that pension tax relief is no longer in the firing line. Cutting this tax break would be so outrageous and unpopular, that it is difficult to believe it could actually happen.

So, assuming sanity prevails on that front, Sunak will need to look further afield, and rumour has it that a target could be on the backs of those who play such a key role in wealth creation: entrepreneurs and British enterprise.

A disconcerting double

One of the real surprise packages on the rumour mill has been the mooted plan to axe entrepreneurs’ relief. At present, if business owners sell their company, they benefit from paying a capital gains tax rate of just 10 per cent (instead of 20 per cent), provided they still hold at least a 5 per cent stake. 

Yet estimates suggest abolishing it would raise a mere £2bn for the Treasury. More importantly, what kind of message does it send to budding entrepreneurs about the direction of travel in terms of support they can expect from this Government? And what will it mean for the Enterprise Management Incentive Scheme, which enables SMEs to incentivise the best talent in the UK with (potentially lucrative) share options? 

Another looming fiasco is that of IR35. This set of reforms was intended as a clampdown on off-payroll workers who are employees in all but name, yet who pay a much lower rate of tax and NI as a result of being classified as ‘self-employed’. From April, contractors will no longer be left to their own devices, and the onus will instead fall on companies to determine if the work they do is akin to a full-time, salaried employee – or ‘inside IR35’ – and whether they should be taxed as such.

This is having a detrimental impact, with companies simply side-stepping the legislation by laying these workers off. Roughly one in 10 of the 200,000 contractors used by UK private sector firms have already ended their contracts ahead of IR35. Freelancers and consultants have been caught up in the net too, with freelancer confidence said to be at its lowest level since 2014, according to the association of Independent Professionals and the Self-Employed (IPSE).

IR35 does, of course, have its basis in good intentions. Undoubtedly, there are some contractors in ‘disguised employment’, who hide under the cover of self-employment purely for tax avoidance reasons, and who do nothing to create wealth. But the majority of Britain’s army of self-employed workers also forego considerable benefits such as sick pay, holiday pay, pension contributions and job security. Besides, any disharmony caused within a workforce by pay imbalances associated with contractors should be for the employer to resolve, rather than the statute book. 

Let us not forget the flexibility and dynamism such workers bring to the table, which is pivotal for the 60,000 UK companies who make use of them - not least smaller firms. There has been belated tinkering at the edges, most notably with the ‘small companies exemption’. But if it goes ahead, IR35 will do immense harm, particularly in vital sectors such as tech and IT. The IPSE, and many others in the City, are lobbying for the reforms to be halted until a full review has been conducted, and we implore the Chancellor to follow their advice.

Against an unfair backdrop

The above duo of tax grabs is set against an increasingly-hostile landscape for entrepreneurs, contractors and small businesses. Who could forget the (ultimately unsuccessful) attempt by former Chancellor Philip Hammond in 2017 to hike NI contributions for the self-employed? Then there was the surprise announcement by the Prime Minister during the Election Campaign that the planned cut to corporation tax this year would be shelved – a blow for all businesses, entrepreneurs included.

But the most vexing imbalance of all, surely, remains business rates. It’s an ongoing controversy, and one which has precipitated countless reviews and consultations. But, given that it is the sixth-highest revenue stream for the Exchequer (raking in £30bn per year), it is perhaps unsurprising that barely any action has been taken to lighten the devastating load it puts on UK businesses – especially those on our high streets. 

The fact is that those who require a brick and mortar presence to trade are paying considerably more in business rates than their online counterparts. The current system, whereby the tax due is based on ‘rateable values’, is as arbitrary as it is outdated, and has a disproportionate effect on small businesses. A proposed two per cent cut would represent a good start – but more radical reform is needed to create an equitable system that gives high street shops a fighting chance. 

An opportunity to be grasped

Much like the austerity-weary public, we welcome extra fiscal spending - which may become all-the-more essential given the outbreak of coronavirus, and how it has unnerved markets. But we are also strong proponents of balancing the books. Increased government expenditure therefore requires higher taxes, which will never be universally popular. But alienating entrepreneurs and enterprise - the lifeblood of the economy - is perverse.

A Government can’t be everything to everyone. Yet this one has casually bandied about slogans such as being ‘the party of small business’ and wanting to ‘turbocharge the economy’. The above simply does not marry up with such rhetoric.

Nevertheless, Wednesday’s Budget is a huge opportunity for the Chancellor to turn the tide of opinion, and signal to the best and brightest wealth creators in this country that he will have their back as we embark upon a new economic era. Let’s hope it is one he doesn’t squander.