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Simplify tax to turn start-ups into scale-ups

Comprehensive new report tracks lifecycle of entrepreneurs and urges changes to taxes on employment, premises, investment and research

A major shake-up of the tax system is needed to turn the UK’s army of small companies into job-creating machines, a new report from the Prelude Group, the Institute of Directors and Grant Thornton UK LLP argues today. 

Britain is very good at producing new businesses, with over 600,000 started in the last year, but is failing to help enough grow into firms with large turnovers and workforces. Part of the reason for this, the report suggests, is the UK’s punishingly complex tax system.

Britain Unlocked: A Tax Code for Global Ambition examines the lifecycle of an entrepreneur, from start-up to eventual exit, and finds the pinch points in the tax system that prevent firms from taking on more staff, moving into larger offices or pitching for bigger contracts. While each individual tax and relief may have logic behind it, the authors argue that they add up to a daunting labyrinth that many sole traders are too scared to enter or lack the resources and time to effectively navigate.

Drawing on the experience of successful entrepreneurs, the paper suggests wide-ranging tax simplification:

  • Expand the use of reliefs which encourage investment in entrepreneurial companies by raising the cap on the Seed Enterprise Investment Scheme to £300,000, allowing the Enterprise Investment Scheme to be used for longer. In addition, lift the bar on investments by partners and family.
  • Merge Income tax and National insurance for under 60s, and show employers’ NI on pay slips
  • Raise the small business rate relief cut-off point from £15,000 to £25,000, with tapering relief on properties with a rateable value up to £50,000
  • Communicate the availability of Research and Development tax relief to more SMEs. HMRC should send one-page information sheets to be included with their other communications
  • Restore the Annual Investment Allowance to £500,000 a year. It was cut to £200,000 in January this year.
  • Allow companies to pay Corporation Tax annually rather than quarterly until their profits reach £5m, up from the current £1.5m threshold
  • Consolidate the various complex employee share schemes into one share allocation scheme. The design should be simple and easy to self-certificate.
  • Increase the annual Capital Gains Tax exemption to £50,000 to encourage entrepreneurs, with necessary anti-avoidance measures.

The paper contains case studies from entrepreneurs which illustrate the challenges faced at different stages of a company’s development. Often the problems are connected to timing or administration, rather than the tax bill itself.

Duncan Cheatle, Chairman of Prelude Group, said:

“Depending on sector, structure, size, and many other factors, the combined effect of taxes and reliefs can have a wildly varying impact upon risk, growth and employment in different businesses. This report aims to join the dots, drawing on the experiences of 15 successful growth entrepreneurs from The Supper Club to provide a more comprehensive understanding of how the tax system influences or inhibits growth and investment, and how we can improve it.”

Stephen Herring, Head of Taxation at the Institute of Directors, said:

“Companies have a responsibility to pay into the system on which they depend for their success. At the same time, the Government should focus on creating simple and fair taxes that boost innovation and business creation. There is no such thing as a perfect system, but in this report we put forward measures which will help a wide variety of entrepreneurial businesses become job-creating machines, increasing economic growth and revenues for the Treasury.”

Jonathan Riley, Head of Tax at Grant Thornton UK LLP, said:

"A vibrant economy is one which promotes trust and integrity in markets, that unlocks sustainable growth in dynamic businesses and where people and businesses can thrive. The tax regime is very much a central component of all three of these areas. An effective and efficient system which makes it easier to pay – and collect – the appropriate levels of tax from companies of all sizes would free up resources to enable growth across the economy. This is even more important for entrepreneurial start-ups now, as we start to redesign our economy for a post-EU world."