Insight

Party conference review: how growth can be less taxing

Jonathan Riley Jonathan Riley

With barely six months until the General Election, this year's party conferences took on a greater significance than usual. But the parties missed a trick by concentrating on prophets and not profits, argues Jonathan Riley.

Autumn is all around us with both temperatures and leaves dropping.  And in the recent party conferences it has been heavy hints that have been dropped as to the priorities of all parties in the run up to the next General Election in May 2015.

The parties have been keen to focus on what a vote for them will mean in terms of protection of core public services, the environment, localisations, reduction of the state, reductions in tax, and of spend.  Some forgot about the deficit and others overlooked  contradictions between nationalism, localism and independence (so, an independent UK within Europe is ok, but an independent Scotland in the UK isn't?!).

So, we are surrounded with prophecy about how the economic world might look for those living and working in the UK from next May. However, there seemed to be one point overlooked at every conference: the fact that all these things can only be achieved with profit. Unless the UK wants to max out its credit card (again) then we need vibrant, growth orientated businesses generating profits that can be fairly taxed and provide the means by which the good social stuff can be delivered.

Tackling tax avoidance

From a business perspective, the major focus of the senior politicians' speeches in all parties was on their plans to tackle tax avoidance. There is on-going widespread confusion between evasion and avoidance which is unhelpful.

Evasion is illegal and should rightly be litigated against with all vigour. Avoidance, meanwhile, is the utilisation of legitimate and legal tax legislation to minimise tax liabilities. If you generate economic activity in the UK you should pay UK tax on the profits generated.

And it must also be recognised that the process of generating the profits in the first place contributes significant value to the UK. Worryingly, and in contrast to the rhetoric around tax avoidance, there was little from any party on measures to stimulate economic growth through dynamic businesses.

Importance of dynamic mid-sized businesses

Parties overlook the need for dynamic organisations at their peril, and this is especially important for the often forgotten mid-sized businesses – those with up to 500 employees, that are highly innovative and have the agility that many larger corporates lack.

They already contribute significantly to UK GDP, £305 billion alone in  in 2013, according to our Agents of Growth research. Of this, £270 billion is estimated to be value added (the sum of wages, profits and taxes on production), roughly equivalent to the combined size of the UK real estate and financial services sectors and worth £160 billion directly into the pockets of UK households through wages and salaries.

But there is more they can do, and this needs to be encouraged by politicians. Businesses shouldn't be made to feel guilty for using the legitimate and legislated tax assistance that is available for them to grow even further. They need help in accessing the right finance, at the right time and on the right terms.

Why the UK needs a tax credit for exporting businesses

They need to build on the existing skills their people possess and be encouraged to export, sometimes often for the first time, and certainly to new and emerging economies.  That's why on this latter point we argue that the government should actively consider the introduction of a tax credit scheme similar to that for research and development for those exporting to new or emerging territories.

From an individual tax perspective all three main parties highlighted the desire to take those on lower levels of pay out of tax altogether. The intention is laudable, but all three miss tricks that would really make a difference to those on low pay. 

A threshold of either the minimum wage or the £12,500 tax free amount is fine, but all the parties consistently overlook the cost of National insurance Contributions (NIC).  Someone earning £12,500 by the end of the next Parliament will, at current rates, still be paying £520 a year in NIC and is one of the reasons that the sums add up – you give with one hand and take with the other. 

Whilst the increase in personal allowance is welcome, we believe that if you really want to help the low paid you must look at NIC too. This means those on middle incomes will not benefit as much, but it's more important for the economy to get people into work, with the resulting reduced reliance on benefits being in the interests of everyone.

Using apprenticeships to plug the skills gap

Taking the NIC issue further, the availability of the right talent has become a familiar concern across all sectors and business size, and our recent research, undertaken with the CBI – Stuck in the Middle – addressing the tax burden for medium sized businesses [ 4291 kb ] – revealed that 60% of MSBs cite employers' NIC as the largest tax burden they faced, with nearly half (47%) saying that their top priority for reducing the burden of tax would be to reduce this cost.

We believe that an exemption of NIC for those undertaking apprenticeships, especially within an MSB, would both reward those who want to learn in work, driving up the number of apprenticeships offered and taken up, and go some way towards addressing this skills gap.

It is inevitable that there is focus on the needs of citizens at this point in the electoral cycle.  But politicians should not overlook the needs of those who take risk, build businesses and in doing so, profits.  Because profit provides the means by which all of their other political ambitions can be paid for. 

Let us hope that the forthcoming Autumn Statement in early December will reflect a better focus on realities, not the prophecies, of the real economy – the wealth and employment creation that will make this economic upturn sustainable and provide protection to those genuinely in need.