James Sproule is Chief Economist at the Institute of Directors.
Good business strategists know never to waste an opportunity, and irrespective on where one sits on the topic of Brexit, it is without a doubt an opportunity to do things differently. The path recent UK governments have taken cannot be fully attributed to the EU, but it can at least be said they have significant influence our decision-making throughout recent years. Peter Drucker once said that “the entrepreneur always searches for change, responds to it, and exploits it as an opportunity”. Leaving the EU means we have an opportunity to not only review the areas that have been directly influenced by Brussels, but also the areas that have not – this is a time for change and business should see this as a golden opportunity.
Britain has to earn its way in the world. This is not a new concept, but in recent years much of Europe, including the UK, has tested to near-destruction the thesis that governments can run budget deficits indefinitely. The Institute of Directors has always doubted that this approach is possible or even desirable. By opting for Brexit, the UK has given itself no choice but to make its public finances more sustainable, even if not everyone yet realises this.
The negotiation process of leaving the EU will take some time, and businesses hope that the UK will get the best deal it can. One area that is particularly up in the air is financial services, which is a significant chunk of our economy. The future of ‘passporting’ rights throughout the economic bloc will be defined throughout the negotiation process, but only once Article 50 has been triggered. In the meantime, there is much the UK government can do to make the UK a more attractive environment for investment.
Under EU Law, the UK is obliged to cap investment banking bonuses – removing this would be even more of an incentive to keeping financial services based in the UK than reducing corporation tax. The UK has for decades been one of the most attractive places in the world for financial services business. It remains to be seen just how attractive the rest of the EU really wishes to be in accommodating financial services: would they really abandon the Financial Transaction Tax?
The UK has a strong history of being a trading nation. Brexit means this is now more important than ever we look to Europe and beyond. While trade agreements are not necessary to trade, they do make it easier - and while any deals outside the EU will have to wait until we leave to be made official, we should be reaching out to other countries in anticipation. Already it seems that bi-lateral deals may be quicker to conclude than we expect.
Britain was the originator of free trade, we should take the bold unilateral step to remove all import tariffs. This could undoubtedly raise political questions, but on the other hand, it would also reduce prices for consumers and businesses. HMRC collected just over £3 billion in tariffs last year, as part of our contribution to the EU. Eliminating tariffs would send a clear message to businesses around the world that we welcome them.
Regarding internal tax matters, this should too be high on the government’s agenda for change. Never in the course of economic history, has so much been owed by so many to so few; 10 per cent of people pay over 60 per cent of all income taxes. No business would tolerate being so dependent upon such a narrow revenue base. Building a broader, more sustainable, tax base has to be a long term priority. Present Treasury assumptions that historic takes as a percent of economic activity are set for a revival are optimistic at best. Given these principles, there are some immediate to pursue.
Top marginal rates of tax raise little but create lots of disincentives. No one should ever be working more for the State than for themselves. The Government should eliminate the income tax spikes where, as the value of the child benefit and the personal allowance are withdrawn, marginal rates rise above 60 per cent for incomes at £50,000 and £100,000. Although these spikes only affect a few people, it makes no economic sense and certainly distorts work incentives.
The 45 per cent additional rate of income tax, together with the two per cent rate of national insurance contributions, results in almost half of a senior executive’s income being paid in tax above £150,000 per annum. Income tax was set at 40 per cent because that was the optimal revenue point. It is madness to indulge in populism just to send a counterproductive “message”.
Tax on capital an investment is also ripe for reform. Of all the taxes we face, inheritance tax is the most disliked and one which prompts the most avoidance planning. The Conservatives won considerable popularity in proposing to raise the threshold, a promise they have kept after a fashion, with considerable complications. It is time now to abolish inheritance tax and replace it with capital gains tax on death. The tax would be charged on upon any gain arising between acquisition cost and probate value while preserving the existing exemptions. It would be a bold and overdue step in simplification.
There are changes we could make to the tax system to drive forward investment. The Annual Investment Allowance was reduced from £500,000 in 2015 to £200,000 in 2016. This means that where a company is looking to invest more in their businesses they now face higher tax charges. Clearly this is not the message we want to be sending. A reversal to the higher allowance is an immediate priority.
The world is awash with opportunity. We are in the midst of arguably the biggest economic change since the industrial revolution of the 1840s. Our goal has to be building upon the UK’s already impressive record as the centre for entrepreneurism across Europe. This means taking advantage of the emerging intellectual revolution, putting public finances on a sustainable path and providing incentives to invest in our future.