The government needs to revisit its tax strategy

Data released by the Bank of England last month revealed a contraction of some £4bn in lending to UK businesses in the three months up to November 2012. According to the bank, businesses were continuing to pay down debt as quickly as possible.

While this is positive in one way since over-indebtedness lies at the root of the world’s current economic problems, it is worrying in another. If businesses aren’t borrowing, then they’re probably not investing. And if they’re not investing, they’re probably not growing and creating jobs.

These findings are backed up by recent research from PwC, which revealed that only 22% of UK CEOs were “very confident” about their company’s growth prospects over the next 12 months while an alarming 83% cited cost cutting as their focus for the year ahead.

As we’re all painfully aware, the government is running out of options to kick-start the economy (and, possibly, time given that the next election is scheduled for May 2015). Despite departmental budgets supposedly being slashed, the government is set to borrow more money in 2012 than it did in 2011, not less.

With bigger companies seemingly reluctant to fork out on generating growth, the government is relying on the public at large to find our ‘inner entrepreneurs’. Hence the raft of incentives that exists to stimulate start-ups including venture capital trusts, R&D credits and the enterprise investment scheme. Indeed, many more of us have actually had to become more entrepreneurial in recent times – through circumstance as well as by choice. Over the past four years, the number of self-employed people has risen by around 10% as a result of people striking out on their own after losing their jobs.

As accountants know, both because they are often self-employed themselves and they work with the self-employed, being your own boss is by no means the easy option. Sure, the rewards are there. But so are the hours, the paperwork, the lack of pension provision and the uncertainty. And although a recession is actually as good a time as any to start a business – fortunes were still made during the Great Depression – our human instinct for self-preservation means that in troubled times, we tend to shy away from taking unnecessary risks.

Given the government’s apparent fondness for entrepreneurs, it is somewhat surprising that it hasn’t worked out that the present tax system is not particularly motivational. A top rate of 50%, or even 45%, when you have national insurance contributions as well, does not send the message that this is a country that supports people who want to get ahead. Neither does a higher rate that kicks in at relatively modest earnings of £34,371.

So far, the government has channelled its tax incentive strategy firmly in the direction of bigger businesses. It has brought the corporation tax rate down from 28% to 24% and it will reach 21% by 2014. But these moves do not appear to have done anything to stimulate growth. On the contrary, to return to the Bank of England’s findings, it appears that companies are using their profits to repay their debts instead of make investments. Meanwhile, some businesses, particularly in the extractive industries, are building up substantial cash piles.

The government surely never intended that the outcome of its generous tax break would be that companies would hoard their wealth. So perhaps it’s time that it revisited its strategy and thought about taxing big business more and individuals less? Who knows, that might be enough to coax a few reluctant entrepreneurs out of hiding.

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