In a speech on business growth and tax, she revealed that the addition of “hundreds of complications” over the past 10 years had doubled the number of words in the tax code. Estimates put its length now at up to 10 million words. Factor in “a confusing and growing regulatory system in sector after sector” and you have a recipe for dampening business growth, whatever the strength of the underlying economy.
“With a simpler approach, we could have avoided some embarrassment,” she said. “I refer, for example, to Making Tax Digital, to those trading with the EU who are finding it so difficult to get the tax codes they need to export post Brexit, and to the wretched loan charge fiasco.”
Tax complexity, she said, is a “slow killer”. First on her attack list are business rates, which disproportionately affect small businesses – especially retail which is in a desperate situation. She called on government to increase the proposed rate of digital services tax and use the proceeds to offset business rates, which in turn should be frozen “until the vibrancy of our towns and cities is restored or the business taxation system reformed”.
“The chancellor has already announced a welcome digital services tax on the larger digital players to help redress the unfairness of the current system,” she said. “But it needs to increase quickly and be used to ease the burden of rates on the high street.
“It cannot be right that Amazon paid £4.6m in UK tax in 2017 and the beloved Marks & Spencer paid £98.3m.”
Stamp duty is another target. The recent hike in the rates, up to 12% in some cases, has put the brakes on the housing market and had a “deleterious effect” on the movement of labour, “which is vital to our growth”.
Despite all the changes the government has made to improve the lot of small businesses, the tax environment – and in particular the administration of PAYE, national insurance contributions and auto enrolment pension systems – still leaves millions of them struggling to cope. More help is needed.
“We must support a culture of enterprise,” she urged. “If we do this, we are not only taking the right moral stance but we are bound to boost the economy further.
“The choice is not between lower taxes for business and more wealth for the public. Lower taxes, carefully crafted, will encourage growth for the benefit of all.”
From the ensuing debate, it was clear that tax was not the only reason for the problems facing the small business sector. As the Lords’ deputy speaker, Lord Haskel (Conservative), pointed out, there is no empirical evidence for the belief that tax discourages economic activity and tax cuts raise revenue.
“Recent analysis of business growth and investment in the UK economy seems to show that, as a result of tax cuts, large corporations are investing more money in dividends and share buy-backs than in sustainable growth,” he said. “This is reflected in our stagnant productivity.”
Viscount Chandos (Labour) said tax policy to encourage business growth and job creation was a “necessary but not a sufficient condition for a successful economy”. He called on the Treasury to conduct a review of the cost benefit of all the tax breaks available to small business.
“I am hugely supportive of small businesses,” he said, “but if you aggregate the tax breaks of business property relief under inheritance tax, EIS, VCT and entrepreneurs’ relief, it is running at £10bn of transactions per year, at a cost to the exchequer of around £3bn per annum. Do we get value, do small businesses get value, from those reliefs?”
Drawing on his experience in the family business, Lord Cavendish (Conservative) said that the government appeared to be blind to the problems of the SME sector and deaf to its appeals. “The obstacles to success encountered by this sector are numerous, but I am especially struck by three figures: between 2016 and 2017, the proportion of SMEs that found the burden of rates and taxation was a barrier to success rose from 36% to 41%; in the case of skills shortages, the proportion rose from 30% to 37%; and regulation and red tape as a serious inhibitor of growth went from 42% to 46% in the same period.
“I ask the government to rethink their attitude to the sector, renew their efforts to understand its troubles and cherish a little all those millions of men and women on whom our future and prosperity depend.”
Summing up for the government, Lord Henley, currently a junior minister in the Department for Business, Energy and Industrial Strategy, said that the tax framework could be a powerful enabler for business in the growth and creation of good jobs. But it was just one element.
“Businesses are the engine of our economy. The industrial strategy is precisely about backing businesses so that they can help to boost productivity and create high-quality, well-paid jobs throughout the UK, with appropriate investment in skills, industries and infrastructure.”
He accepted the criticisms of the tax framework and business rates and said the government was working on the problem. “We are committed to seeking a balance between a tax system that is easy to comply with and one that prevents avoidance and evasion.
“Since 2010, we have established the Office of Tax Simplification, as well as an independent advisory office in the Treasury. It offers valuable advice on ways of simplifying the tax system, which the chancellor takes into account.”
The government, he added, was looking carefully at levels of taxation, how they worked and how to get it right to ensure a degree of fairness between different businesses.
While it was true the business community was living through a moment of uncertainty, he continued, it should be aware of the opportunities ahead. “The business environment frameworks developed through the industrial strategy will put us in a good position to continue to support business growth and job creation, supported by our fair, predictable and stable tax system.”