This budget is an opportunity to reset and repair relations with entrepreneurs. Every single one of the Government’s priorities depend upon business investment and innovation. Yet the incentives for entrepreneurs to invest and innovate have been cut at successive budgets. Entrepreneurs’ relief was cut, corporation tax went up by 6pp, and now taxes on employment are set to rise.
The Chancellor’s support for business during the pandemic was vital, but now higher taxes risk crushing a fledgling recovery already threatened by a global supply chain crisis, labour shortages, and debt overhangs.
At Budget 2021, the focus should be on removing long-term barriers to investment and modernising the tax system to support innovative businesses.
Create a Permanent Unlimited Investment Allowance
If we are to lift sluggish productivity and transition to a Net Zero economy, then we will need a step-change in investment. The super-deduction showed the Government’s intent, allowing businesses to write off 120% of their spending on new productivity enhancing-equipment. But the measure was temporary, it will expire in 2023 and at the same time Corporation Tax will jump to 25%. When that happens, the independent Office for Budget Responsibility forecasts investment to decline substantially. In terms of competitiveness, the UK will fall from 18th to 31st on the Tax Foundation’s International Tax Competitiveness Index.
If we’re to become a high wage, high productivity economy then we need a long-term pro-investment solution. The Government should allow businesses to write-off all investments in plants and machinery immediately. Super-deduction aside, Corporation Tax creates a bias in favour of current spending and against long-term investment. This change would eliminate that bias for most types of investment.
The Government should also look at how tax reform could green our industrial buildings and accelerate the transition to Net Zero. As Eamonn Ives, who wrote our Green Entrepreneurship report notes, almost all old capital is worse for the environment in terms of energy efficiency than new capital - “On average, today’s light bulbs, televisions, kitchen appliances, computers – you name it – are now all markedly more frugal in terms of the power they need to run. If we are to drive emissions down further, uptake of newer, cleaner, greener goods will need to accelerate.”
To supercharge investment in greener infrastructure, they could create a Green Structures and Buildings Allowance set at a higher rate than the Structures and Buildings Allowance (3%), or even 100%.
Reform and Replace Business Rates
Businesses have waited a long time for the Government to fix a Business Rates system that almost everyone agrees is broken. There are rumours they will be forced to wait longer as the Chancellor is set to merely announce sticking plasters and put off fundamental reforms for another year.
The key problem with rates is that they act as a deterrent to investment. Businesses that invest in solar panels, wind turbines, or energy efficiency are hit with higher bills. When Tata Steel rebuilt the blast furnace at Port Talbot their rates bill increased by £400,000 per year.
In the short-term, the Government should exempt all plants and machinery (e.g. blast furnaces, turbines and generators, and silos) from rateable values.
In the long-term however, the Chancellor should announce a shift to a Business Land Tax levied on commercial landlords. This strengthens investment incentives while accelerating the adoption of greener tech. Like the Unlimited Investment Allowance, it would benefit capital-intensive businesses which are disproportionately outside London and the South East.
Modernise EMI and R&D Tax Credit
Innovative startups will drive growth in the years to come, but nurturing their development will require modernising the tax system. EMI, a targeted tax break for stock options, is popular among startups and widely seen as essential to the UK’s tech ecosystem. But it is becoming increasingly uncompetitive compared to what’s offered in the EU and the US. The limits have not increased since 2000 and many early-stage businesses are now ruled out. Increasing the asset capitalisation limit from £30m to £100m would allow more UK scaleups to access the relief and compete for talent internationally.
Similarly, the UK needs to dramatically increase private sector investment in R&D if we are to meet our 2.4% GDP target, but at the moment many business expenses on research are not covered by the R&D Tax Credit. For instance, purchasing data sets or using cloud computing (instead of server rooms) isn’t covered. As a result, the relief has fallen out with the way the modern economy works. It’s time to fix that.
The Government has consulted and commissioned reviews on both these measures, it’s now time to be bold and act.
What not to do: Tax Capital Gains or Online Sales
At the past two budgets, there has been talk about hiking Capital Gains Tax to fund new spending. This would be a mistake and would undermine the UK’s startups. Entrepreneurs have already been hit by sharp restrictions on Entrepreneurs Relief. Further hikes risk chasing away international entrepreneurs, which is a problem when half of the UK’s fastest growing companies were founded by entrepreneurs born overseas.
It’d also be a mistake to create new taxes on online sales. This wouldn’t be levelling the playing field, but punishing SMEs who have used e-commerce to survive the pandemic. Selling goods online is one area where the UK is a leader, instead of penalising success the Government should look at how it can help even more businesses selling online.
Image Credit: HM Treasury.