Written evidence submitted by Institute of Directors

Inquiry: Tax after Covid

We appreciate the opportunity to participate in this inquiry. We are constantly receiving feedback from our members on the priorities for business and the economy after Covid. As this is an evolving issue, where we have not directly responded to a question in your terms of reference we will provide further updates in due course.

About the IoD

The IoD was founded in 1903 and obtained a Royal Charter in 1906. It is an independent, non-party political organisation of approximately 25,000 members. Its aim is to serve, support, represent and set standards for directors to enable them to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. The membership is drawn from right across the business spectrum, with 70% consisting of directors from small and medium-sized enterprises (SMEs).

Inquiry Terms of Reference

What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?

While healthy public finances are important in the long-term, the Government needs to ensure that it does not choke off the economic recovery before it has gained steam by raising taxes or cutting spending.

More generally, the UK’s relatively low corporation tax rate is a major draw for international firms, investment and growth. Though the Government has held off further cuts to corporation tax, it should commit to ensuring it remains the most competitive rate in the G20. That said, boosting the UK’s attractiveness as a global business destination should not be limited to tax cuts but can also be achieved by improvements/simplification to the overall design of the tax system and incentives.

Which areas of the tax system are most in need of reform, and which are best left alone?/What reforms should be considered in response to the pressures on the tax system?

Reforms should focus on improving investment incentives, lowering costs for SMEs and simplifying the tax system, particularly as the UK aims to turbocharge its recovery. Over one-third of our members believe tax and regulatory reform should focus on improving productivity-related investments for SMEs, and boosting start-up and scale-up investment reliefs. The business rates system more broadly should also be reformed to support growth and investment in firms with property (for example by removing the uprating effect of property investment). Meanwhile, around 60% of our members would support a wider simplification of the tax system. A reduction in complexity, improvement in ease of making payments, and consolidation of tax is likely to support productivity gains in smaller firms.

Right now, a major issue for our members, with the furlough scheme winding down, are overall employment costs. A temporary reduction in NICS would certainly support many SMEs in their ability to retain and hire staff.

Lastly the Digital Service Tax risks damaging the UK’s international reputation as a digital investment hub and could exacerbate international trade tensions, during an already testing period. It ought to be reviewed and developed multilaterally, as should broader cross-border taxation issues. The Government should also proceed with extreme caution with regard to the IR-35 changes it postponed to next year. Given the significant additional disruption it could cause at a time when workers and businesses are already facing numerous challenges, there may be a case to keep further delays on the table.

What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?

There is significant scope to improve tax reliefs to support business investment, innovation and growth.

Firstly, many SMEs would support the creation of a new tax incentive to invest in productivity-enhancing technology. Cashflow challenges in small businesses mean they require additional incentives, above what is already available, to make investments in existing technology (potentially extending to green technology), such as cloud computing and data tools. Around 1 in 3 of IoD SME members say technology investment incentives would be most likely to improve productivity in their organisation. Indeed, the UK’s small businesses tend to lag peer nations when it comes to adopting existing best practice. There are several ways this may be achieved. The IoD have long pushed for a new signposted tax incentive, with a clear list of qualifying productivity-enhancing expenditures, to help overcome the hefty and esoteric rules on existing allowances. Alternatively, the SME R&D tax relief might be widened to include investments in existing technology, as suggested in the Conservative Party’s 2019 manifesto.

Secondly, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are crucial to allow businesses to secure the equity capital they need to grow. These reliefs should be made more generous, accessible, and simple so they are more attractive for investors to apply for and easier for businesses to use. With bank lending to SMEs restrained by uncertainty, improved EIS and SEIS packages could be rebadged as an opportunity to turbocharge growth in the post-pandemic economy and to help ‘level up’ the regions where funding opportunities are particularly weaker.

Potential changes could include:

 

What are the areas for simplification?

The current approach, which treats firms of all sizes similarly for taxation purposes, can impose a high administrative and tax burden on small enterprises (many businesses also find the existing tax regime too difficult to understand). A reduction and consolidation of the existing tax and regulatory burden upon SMEs would help them to grow faster and would support a greater revenue take for the Treasury in the long run (e.g. via a Simple Consolidated Tax). A consultation addressing how various pinch points in the tax system may interact with the growth of UK businesses would be a welcome starting point.

Ample support for HMRC to improve the effectiveness, and lessen the burden, of UK regulation is important. This includes ongoing efforts around ‘Making Tax Digital’ to help simplify—and where desirable automate—business compliance, payments, and relief applications, while improving HMRC’s targeted outreach to small firms on business incentives and guidance.

 

August 2020
 

 

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