Lowering and simplifying tax for small business

George Osborne is giving a speech to the Chartered Institute for Personnel and Development and the British Chambers of Commerce today, about simplifying the administration of income tax, national insurance and VAT:

“In his last Budget, Gordon Brown increased the tax rate on small businesses from 19% to 22%. This was the third increase in three years.  The Chancellor also introduced yet another set of complex tax reliefs that most start-up companies won’t actually be eligible for. If his past tax reliefs are anything to go by, even the companies that could claim the relief won’t be able to afford the tax advisers they need to do so.

As the Director of the British Chambers of Commerce has said, these measures will hit those looking to grow their business. The Conservative Party will continue to oppose the Chancellor’s latest tax rise for small businesses. We are fighting this measure every step of the way in Parliament. Should we fail to defeat Labour on this, we will look very carefully at how we can reverse the increase in the tax rate."

Update: Download full speech here.

Deputy Editor

Comments

[Charlie Elphicke]

This is incredibly good to hear. Cutting taxes on business is key if we are to see faster economic growth and be more competitive as a nation.

It also shows what an incredibly positive agenda the Shadow Chancellor and his team have when it comes to the management of the ecomony.

[TaxCutter]

Why can't all businesses, regardless of size, have a tax rate of 19%! Small business can suffer because typically it lacks the lobbying power of big business that can take advantage of certain tax reliefs and planning that your small entrepreneurial firm cannot.

Charlie - can you make your comments on the Treasury team a bit less critical please

[Oberon Houston]

Brown has said that the tax changes are not aimed at bona fide small businesses, but at single man limited companies, who are in effect using limited status to avoid PAYE tax. I would be interested to hear if the changes are impacting genuine businesses as a result of this. Trouble is, most of these people he is targeting work in very high value jobs which actually should be protected (aerospace, automotive design, energy etc.). By going after these folks Brown could drive leading edge technology overseas and cause a brain drain and a lower tax take in the end.

Personally I am in favour of keeping small business tax as low as we can to encourage an enterprise economy, something Labour started out doing when first in power, but now seems to be reverting to type behaviour again. Sadly in Scotland the business rates reduction was not implemented and Jack McConnell’s ridiculous claim that Scotland was the “Best small country in the world” should read “worst” according to latest OECD data.

I am glad George has focused on this piece of policy as it is extremely important, not just for those directly effected but everyone.

[Yet Another Anon]

Easier to simplify tax and regulatiopn generally and cut back on it significantly, attempts to simplify it for a group will increase bureaucracy including for those then needing to jump through hoops to show they are from that group.

[W Wormell]

Flatter, lower and simpler taxes will help DC to appease the right in the party, whilst pledging to increase the personal allowance and allowing relief for small businesses will please the modernisers.

Hopefully this will keep the flat-tax UKIP at bay.

[John F]

Lower and simplify taxes for small businesses, yes very good idea so how about the same for everyone.
How about a personal allowance of £12,000 then a flat rate tax of 19% for all, businesses and indivduals alike.
The increased personal allowance would be good for people on low incomes, pensioners, apprentices, trainees etc.
Also, people would think the flat rate of 19% is reasonable thus no need for them to stay in the black economy and cheaper than hiring expensive accountants to find ways around paying it.
The other benefit would be, as was found when the high rates of tax were reduced by Mrs Thatcher, the amount collected would rise because of what Adam Smith called the common good.
But will this happen, probably no because the receivers of the taxes, government employees, the BBC etc. will mount a campaign designed to appeal to the envious and jealous, like they did with the community charge.
Personallly, if I,m only paying 19% tax and the multi-millionare is paying the same, no problem.
So George and Dave, go for lower and simpler taxes for all of us

[Charlie Elphicke]

Small steps, Taxcutter. Small steps.

I think you are too timid in where you want to get to at 19%. I am on record on the Platform of this site and elsewhere as favouring an across the board business tax rate of 15%. I believe that would pay for itself over the course of a Parliament and prompt a great boom in UK business. That is where I would like us to get to. Yet I recognise that it will take time.

The key thing here for me is that the Shadow Chancellor and his team are looking at reductions in small business tax, while the Labour Government has imposed rises on small business taxation. What the Shadow Chancellor is saying is very welcome.

[Account Deleted]

Given the mere mention of the notion of 'flat tax' in an advanced economy (the 2005 German elections) almost allowed the Christian Democrats to lose an unlosable election I think it would be madness to even suggest it.

Good to see some tax relief and simplification for small business, but would be nice to see tax relief for individuals too...

I don't think some people realise how damaging tax complexity is. One firm, worse at serving the customer but better at tax avoidance may end up with a better bottom line than another firm, which just happens to have bad tax accountants... Allowing the crap firm to expand at the expense of the good one. So in the long run we all suffer, not just business directly.

[Michael McGowan]

These changes, if changes they are, do not apply to many, even most, small businesses which are not companies (because it is often suboptimal to incorporate) but are sole traders or partnerships. Those small businesses will still continue to pay tax and NICs at normal income tax and NI rates i.e. well in excess of 19%.

[Helen]

Lowering and simplifying taxes for small businesses sounds a good idea though details are needed. Just one problem. How do you define a small business? And what happens if that business wants to grow? Special regimes are counter incentives. Why not lower and simplify all tax? Too hard to grasp?

[Bill]

The whole tax regime needs simplifying. Lawson made a good start but the Tories lost the initiative under Major's administration with his desparation for cash and consequent stealth taxes which gave Gordon the excuse for all his.

I've been exposed to a bit of tax work in the past and must admit have wondered at the complexity of our tax regime. A couple of thoughts. I guess it is historic but is it a "good" thing that we don't tax entities on their worldwide income but only on what is earned or repatriated to the UK? And do we really need the tax breaks for employee share schemes (I know they are complex and varied) and for the venture capital industry. If the overall level of taxes were not so high in the first place start ups would not need additional tax incentive. And I see no reason for private equity to get massive breaks on established going concerns: private or plc (quoted or unquoted).

[Les]

///Brown has said that the tax changes are not aimed at bona fide small businesses, but at single man limited companies, who are in effect using limited status to avoid PAYE tax///

The short answer to this is the simplification of the tax regime such that there are no specific (tax) advantages arising from operating as a one-person company rather than as an employee or, indeed, as self-employed.

It is not widely appreciated that an employee can also claim tax relief against genuine business expenses though this does not arise very often as most employees are reimbursed for these directly by the employer who deals with the tax issues arising therefrom.

The single rate of tax for corporations and individuals is an excellent idea which would be even better if it also replaced the overly-complex system of National Insurance Contributions.

A simpler system would reduce compliance and collection costs--as John F says, there would also be less tax-avoidance if the rate were regarded as reasonable.

In 'Blue Tomorrow', Kit Malthouse proposes the replacement of all taxes by a single tax and this seemed very feasible when I heard him speak on the subject several years back.

I despair when I read that the Shadow Chancellor will fight a specific change in the tax regime--what we need is a complete overhaul.

[Oberon Houston]

Did Osbourne not talk about flat tax rates previously, then seemed to go quiet on the idea. Personally I think that there is a risk if we propose dramatic changes to the tax system, it may get complex trying to do that and maintain the reassurance on public spending. Brown would then manipulate this to scare the electorate , as he has done before very effectively with much less dramatic proposals. In applying regressive or progressive taxation changes it can be difficult to predict outcomes in the near and long term, therefore I think we should look at implementing then in a measured way.

[Bill]

From a pragmatic view, Oberon is probably right. It beggars belief though that in twenty years I can think of only two worthy major reforms of note in the fiscal and monetary area: Lawson's cutting income tax to 40% and Brown's making the BofE independent (but on terms). At that tortoise-like we could all be dead/retired before anyone else attempts anything putatively useful. I've forgotten my history but didn't the Tories(starting with Peel) sweep away a host of similarly destructive taxes in twenty years from the 1840s to the 60s?

PS
There was of course a third reform which was not worthy to say the least: ERM.

[Adam Tugwell]

Businesses have long needed a champion and it stands to reason that it should be the Conservatives who provide one.

This Government is set on penalising the hands that feed it in a way which completely beggars belief.

Entreprenuership and the risks taken in creating enterprises, many of which provide incomes for multiple families, should be actively supported and encouraged, not seen as yet another cash cow for a shopaholick Government.

[TomTom]

It might be an idea to make Equity cheaper....at present it is taxed before Profit can reach Retained Earnings; and Dividends are taxed as they are paid out........no wonder Debt is preferred with its interest expense deductibility.

Small businesses thus become equity-thin and overdraft dependent and then built assets through investing in property using SIPPs and SSAS funds to get deductibility. The whole basis of small business becomes tax-avoidance rather than growth

[bill]

TomTom could be right. Treat debt and equity the same.

[Paul Oakley]

One discrepancy which must be addressed for sole traders is the cash accounting system. At present, those with a turnover of less than £660,000 are not obliged to pay their VAT to HMRC until payment is received from the customer. By contrast, the "true and fair" accounting system imposes upon businesses of all sizes a liability for tax as soon as an invoice is issued and not when payment is received (if ever)

[Charlie Elphicke]

Flat taxes are attractive initially, yet when you drill down, there is a bit of a problem.

Assume you make the personal allowance £10,000 then have a flat rate of 30% (ignoring NICs for the moment). The winners would (very roughly) be people earning up to £20,000 and those who gain from the lack of a higher rate (around £40,000). The losers would be the people in the middle.

The problem is not so much economic as political. The people in the middle tend to be the swing voters. And it tends to be quite easy to claim that the whole thing benefits the super rich. So you can expect a result similar to the German election if it is put forward and that's why politicians tend to be very careful about proposing flat taxes.

Safer political ground is to make the case for a larger personal allowance and end the fiscal drag on the higher rate threshold. This can be said to make taxes "flatter" and "simpler".

How then do all these flat taxes work so well in Eastern Europe? I suspect that the reason is that there were few obvious "losers" owing to the higher growth, the transition to a free market system and a lack of easy comparison with whatever went before.

[Oberon Houston]

TomTom: But companies can also use debt to grow effectively (gearing), and, like debt, dividends only becomes taxable when issued, which encourages re-investment to grow rather than take funds out of the business early. Possibly I'm missing something... is malcolm not a tax adviser?

Charlie: yes flat taxes are easier to implement when the starting point is zero, regressively applying them would be a much more difficult sell. Trouble is if everyone wins we need to reduce spending, which gets onto that ol' china problem.

A good start would be (as you suggest) realigning the allowances, scrapping tax credits, re-introducing married allowances etc.

Business taxation is an easier subject to deal with, in a way, politically as ordinary voters feel detatched, but... we are no longer the party of big business, does this mean we can be the champion of small business?

[Bill]

Re "And it tends to be quite easy to claim that the whole thing benefits the super rich."
The answer to that is to tax them. Make them liable on their worldwide earnings. We already have arguably one of the most benign tax regimes for the super rich and yet they are still able to keep money offshore free of the tax man. Perhaps raise, yes raise, income tax (but not above 50%) for those on mega bucks. And reverse this bonkers 10% CGT for two year old private equity deals.

[Downsize the NHS]

Talk is cheap. When are the Tories going to commit to a flat rate low taxation system?

Its what 90% of the party are crying out for

[Adam]

The reason that flat taxes were so acceptable in eastern Europe was that they had a real problem with being able to collect taxes (people weren't taxed under Communism).

Flat taxes made the whole thing much simpler. The taxman could look at the bottom line in your company's accounts. See what your total wage bill was, and take 30% (or whatever the rate was). Much easier for poorly trained taxmen. Much harder for companies to avoid tax.

After 200 years of income tax we simply don't have the same problem in the UK.

[Andy Cooke]

You could always do it step by step, funding it with the tax cuts from "sharing the proceeds of growth".

For example, suppose the economy grows just over 1% faster than inflation, giving us the ability to sustain current real-level spending in most things and increase in (for example) Health and Education. This would give £5bn per year (every year) towards tax cuts (simplified).

The static cost to increase the personal allowance to (say) £10k pa would be about £20 bn. The cost to lower the top rate to 30% would be about £10 bn. This would give a structure where, for earners, NI plus tax would be 31% for earnings above £10k at a flat rate (as by then the Brown plan to align top rate tax with UEL for NI would be in). No-one would lose out; everyone who paid tax would benefit from the upwards move of the basic-rate threshold, and those approaching the top-rate threshold would be grateful to see the rate dwindle.

Of course, static costs aren't valid in the long term - it's an implicit equation with hidden variables. As the burden lowers, the economy grows, tax receipts should increase over time (dynamically, the cost should be negative as per the Lawson cuts, or looking a centruy back, the Disraeli cuts to indirect taxes).

However, if we do it step by step and being able to fund each step statically every time, no-one can howl "what are you cutting!?". Additionally, the growth in the economy should not lead to a boom due to a sudden shock.

So - we need £30 bn to make sure that everyone benefits.

We can get £5bn - statically - per year. So go a sixth of the way in the first year - very loosely (the costs aren't linear of course), we'd get to about £1k up on the lower threshold and 2% or so off of the top rate. No cuts needed, no borrowing - the static cost is fully met.

Even if the expected growth is slow in coming, we can get 83% of the way there in 5 years. If we can find just £1bn per year in cuts in waste, it could be fully funded over one Parliament - even ignoring the increases that the cuts should bring in the longer term.

Bingo - one flat rate tax system with a high personal allowance, with everyone benefiting every step of the way - fully funded without cuts or borrowing.

With a stronger economy producing more tax revenue (in absolute terms) for the same rate, we could then cut and simplify other taxes (or do them concurrently if the dynamic boost is high enough) or lower the entire flat rate as well.

Additionally, it would loosen - to a degree - the Tax credit trap. Effective withdrawal/tax rates would drop from 85% to 65% and we could then work on other ways to skin the same cat.

Indeed, from this point, moving to Mark Wadsworths benefit/tax proposals from last year wouldn't seem at all shocking and the benefits of such a move would be inarguable.

[Chelloveck]

Ireland's corp tax rate is 12.5%, yes 12.5%.

Why would anyone seek to set up a business in the UK?

What we need from Osborne is at least a defineable, measurable target to convince us that these warm and welcome words and not just weasel words.

Even something like "our long term aim is for a personal tax freedom day before mid may and the lowest corporation tax rates in Europe" would show a real commitment without binding them now or even in the next manifesto.

[Ash Faulkner]

Les 15:02,

Blue Tomorrow is an interesting book, and I'm in two minds about the tax proposal. The idea was to create one sales tax, and shift the burden entirely from direct to indirect taxataion, wasn't it?

It's a very interesting idea - really radical, though I'm not sure if it's too radical. I'm not sure about how it would go down well with tourists, though - assumedly VAT would be somewhere around 50%. Spending would be an issue; what if sales in one year were significantly lower than others? Would that leave services underfunded?

It's an interesting idea - abolish all taxes and simply create a much larger sales tax, though I'm not sure where I stand on it.

Anyway, I of course welcome Osborne's proposal.

[Downsize the NHS]

Lok at the fantastic success of the Channel Islands where tax is fantastically low and its like a everlasting Tory government.

Everybody wants to live ther not like scummy socialist Britian.

We Tories must turn Britain into the new Jersey!

[Tanuki]

Relief of the tax-burden is always good, whether it's at the individual, the small-business or the corporate level.

As a quasi-self-employed individual I'd love an incoming Conservative government to simplify the tax-system. My two tax-accountants, OTOH, might have different feelings.

[TomTom]

Everybody wants to live ther

but it has residence permits and Britain does not

[TomTom]

TomTom: But companies can also use debt to grow effectively (gearing), and, like debt, dividends only becomes taxable when issued,

Yes but if you overload on debt you increase risk of insolvency which is why banks like to see equity, and equity is very hard for smaller companies to obtain.

Dividends, Oberon, are paid from the Shareholder Equity accounts which are on the balance sheet. To get there from the Income Statement they have first to pay Corporation Tax. To avoid this many small businesses inflate their costs in G&A to live on gross incomes but in so doing they stifle growth of the company by having a thin equity base and so lenders regard it as risky.

Gearing is fine if your business is not operationally geared and has stable cashflow - but growing businesses ften do not have stable cashflow and so forego growth because they cannot obtain loans as the equity base is too thin.

If they bring in outside equity they lose control of the business.

[Les]

Adam said

///The reason that flat taxes were so acceptable in eastern Europe was that they had a real problem with being able to collect taxes (people weren't taxed under Communism)///

Well - I never knew that though it has occurred to me that it might be useful to scrap all forms of tax and simply 'create' the money to meet public expenditure.

If the Easter Europeans weren't taxed under communism, they were presumably doing something along these lines.

After all, currency with a face value of £100 subject to a tax deduction of (say) £40 is worth only £60.

It this really any different from currency with a face value of £100 who real value is reduced to £60 worth of 'purchasing power' by the creation of extra currency?

The practical difference is the complete absence of collection/compliance costs and lack of opportunity for tax-avoidance.

Insofar as 'fairness' is always going to be a matter of opinion, this seems as good a way as any to distribute the tax burden throughout society.

[Downsize the NHS]

"Everybody wants to live ther

but it has residence permits and Britain does not"

Channel Islands only allow in success stories and multi-millionaires. They're successful in keeping out unwanted low-earning immigrants who do no good except undercut the locals.

It's time we did the same. Look how the NHS is collapsing under the immigrant baby boom while the British people are not even having enough children to reproduce themselves.

We need to completely imitate the low tax low-immigrant enterprise culture of the highly successful CAPITALIST Channel Isles.

[TomTom]

like debt, dividends only becomes taxable when issued,

That is a confused statement. A company starts life with Debt and Equity on Form 363 I think at Companies House.

Dividends are a partial liquidation of capital returned to investors as a yield on their equity. It is the most expensive form of business finance with the highest risk

Dividends are paid Post-Corporation Tax; Interest Expense is paid Pre-Corporation Tax; and Amortisation is paid Post-Corporation Tax. So the business can grow by piling up debt but may be so illiquid over time it must be sold in order to repay debt. This is the private equity model favoured by Gordon Brown.

It is why so few British startups ever become brand leaders.

Why is it no British publisher ever thought to create Amazon ? Because it made losses for years before its infrastructure was in place

Why is it that Starbucks has reimported to Britain what was essentially the Lyons Coffee House of the past ?

Why do companies like Filtronic Plc sell out to Powerwave of the USA when investors like Prudential refuse to fund growth and want cash ?

The British tax system approximates to a tax on cashflow rather than profits leading to stunts like share buybacks funded through debt and penalising high-growth companies in favour of cash-rich mature businesses which private equity favours.

They then pay over the odds with bank debt, re-engineer the business so it pays no Corporation Tax through a leveraged re-cap, and the insurance companies have debt-funded cash for their shares - the debt itself being held by the insurance company which funded the private equity fund manager.

Thus the Insurance Company creates an intermediary - private equity - to restructure its own balance sheet and to gain returns in a speculative area which it is not allowed to do itself.

Private equity is simply a fund manager which repackages debt as equity, and then exchanges equity for debt.

[TomTom]

They're successful in keeping out unwanted low-earning immigrants

Is that why it has so many Portuguese there ?

[Downsize the NHS]

Theyr'e only guestworkers for the hotels and potatoe digging etc.

I forgot to say that also theres no VAT in Jersey which means you can get some fantastic bargains although you have to be careful not to declare them for customs.

Thats another tax we should remove. Jersey and Guernsey, are forward looking low tax economies not like the overtaxed socialist mess we have got here.

Does anybody know how much you have to earn before its not all paid in tax?

[TomTom]

Jersey and Guernsey, are forward looking low tax economies not like the overtaxed socialist mess we have got here.

They are not in the EU

[Opinicus]

@Charles Elphicke

And for all the political reasons you give you are looking at the wrong sort of flat tax, which is why you have problems

Apply the flat tax without any tax allowances and you get a much lower headline flat tax rate. Dukes and dustmen pay the same percentage of tax but Dukes obviously pay much more tax and this is much easier to sell. The people who squeal are the poor and they vote Labour anyway. Initially you just up benefits by the new tax rate so those on benefit have no loss of earnings but if they vote for higher taxes they lose too. Middle britain probably pays about the same and the rich pay a lot less so you can probably tax them on worldwide earnings as they won't mind (so much) paying the massively lower rate and the tax take from them will go up.

Flat tax is much easier to sell politically with no allowances and a lower rate. It also allows the introduction of a local income tax and a Citizens Wage reform of the benefits system.

[Charlie Elphicke]

Jonathan at 10:34

I cannot agree with your comments. You propose reducing taxes on the richest, paid for by the least well off. That is precisely the Sherriff of Nottingham politics that Gordon Brown has been guilty of over the last ten years - never more so than in the last Budget.

One of the most disgraceful things about the Labour Government is that the poorest are paying proportionately more in tax than 10 years ago and the wealth gap has grown. Worse still, the least well off actually have a higher effective tax rate than everyone else.

It is because I feel this is wrong that I put the case in my latest platform article for change. Not by bashing the richest, but by bringing more opportunity and chances in life to those who have least. And yes, tax cuts for the least well off too.

[Evan Price]

"Dividends are a partial liquidation of capital returned to investors as a yield on their equity. It is the most expensive form of business finance with the highest risk"

Dividends cannot be paid out of capital ... to return capital to as a dividend would amount to an return of capital which is an offence under the Companies Act and an unlawful distribution of the company's assets. There are methods for returning capital to members of the company, but that is done with permission of the court or after a winding up and dissolution of the company.

Distributions in the form of dividends must be made out of profits and not out of capital.

[Opinicus]

@Charles
What flat tax with no allowances does is put everyone in the same boat and makes everyone responsible for Society and public spending. It reduces tax *rates* on the rich but removes all their exemptions and loopholes so that they end up paying more. The poor pay some tax but at least intially their benefits are adjusted so that they receive the same in their hand. The flat tax is about 23% so is neutral for most people. The poverty trap is very much lessened, encouraging people to work.
Everyone uses public services, everyone should pay something but unlike a poll tax they should pay the same proportion of their income.
Flat tax over 10000 hurts middle Britain whilst helping the feckless, hardly a Conservative policy or a recipe for Conservative electoral success.