UK tax regime failing entrepreneurs
It’s an emotive subject – tax. Pay too little and accusations fly, yet very few of us (aside George Soros) want to pay more. It is a powerful tool: governments around the world tinker with tax regimes to encourage certain types of commercial activity, whilst making others unattractive.
The UK tax regime is often criticised as favouring ‘big business’ to the detriment of our smaller entrepreneurs. But is that really fair, and what can governments do to encourage entrepreneurs?
In December 2011, MPs in the House of Commons said HMRC appeared to give “favourable” treatment to big business. It was reported over £25 billion was owed to HMRC, equivalent to £1,000 for every British family, or the equivalent of 6p being cut from the basic rate of income tax.
The spotlight has moved from investment banking (Goldman Sachs) to telecoms giant Vodafone, with demonstrators forcing shops to close amid allegations that the company had not paid enough tax.
Clearly there will be occasions when HMRC has cut tax deals which could have been handled differently; but in HMRC’s defence they must sometimes face an uphill struggle. Big businesses often have deep pockets and can engage expensive tax lawyers and accountants to interpret the tax legislation in their favour and argue their case. In addition, over recent years the ‘elephant in the room’ has been the impact of the EU. Individual tax authorities in EU countries, not just the UK, have found that policies put in place to protect their own tax base have been reversed by the European Courts.
Perhaps more crucially however, government policy over the last ten years has been explicitly designed to make the UK tax regime more favourable to big business. If big business is paying less tax some of this must at least be in part due to deliberate policy changes.
Attracting large international technology businesses to the UK and keeping UK grown technology here is crucial to the UK economy. It creates UK jobs, encourages spin-off companies and adds to the UK skills base. There must however, be a level playing field.
I choose to practice tax with smaller businesses, the majority of which operate in the technology space. They are generally innovative businesses run by ambitious entrepreneurs, the very essence of what the UK is good at and they need and deserve to be recognised. Tax policy should help to aid their growth.
Of course, some of the more recent changes in tax policy favour smaller businesses as well as the larger ones; but this is not always the case. Take for example the recent falls in corporation tax rates; whilst the main rate is planned to fall incrementally from 28% in 2010 to 23% in 2014, the planned fall in the small profits rate, payable by many smaller businesses, has been a more modest 1% from 21% to 20%. Why should this be the case?
Obtaining funding is of critical importance to the technology sector and can take up a significant part of any CEOs or CFOs time. Tax policy has tried to play a role in bridging the funding gap between the initial investment from friends, family and close contacts to being able to attract more conventional investment. There are generous tax breaks for individuals investing in smaller companies using the ‘Enterprise Investment Scheme (EIS)’ and the shortly to be introduced ‘SEED EIS’ and UK VCTs operate in a tax favoured environment. The rules for EIS however, are mind-bogglingly complex and can make it difficult for smaller firms to comply; especially given most do not have the in-house skills to deal with the problem themselves. There is an urgent need for simplification, as these businesses cannot generally avoid the expensive tax lawyers used by their larger counterparts.
Similarly, there is a real need to simplify the rules allowing employees to invest in their employers. Nick Clegg has recently called for wider employee participation, a practice which has already been embraced by many technology companies. So why do the tax rules make this so difficult to achieve? One simple step for example, would be to defer the tax charge made on employees receiving shares to the time the shares are sold.
In both science and technology the UK certainly has a plethora of expertise and skills; we can generate the ideas and technology of tomorrow. To be competitive however, these ideas need to be spun-out into successful entrepreneurial businesses. The success or failure of these businesses will depend upon a whole spectrum of factors, from the skills of the people involved to the availability of finance. The tax environment also plays its part. Tax policies and practices need to be focussed on the needs of both fledgling and hi-growth smaller technology businesses. We all need to play a part in getting the government to listen and act.
Sharon Bedford is a partner in James Cowper’s Oxford office. She can be reached by email: SBedford@jamescowper.co.uk.