Nadhim Zahawi MP is Conservative MP for Stratford on Avon. Follow Nadhim on Twitter.
Before the Budget has even been announced, one of the criticisms being levied at the Government is that there is not enough in it to create growth.
This criticism is in part unjust. I have seen first-hand the commitment of everyone from the Prime Minister down to ensuring that generating growth is the number one task of each government department.
Yet global economic circumstances continue to be against us, which means we must continue to strain every sinew to increase growth and continue to rebalance our economy.
When talking about rebalancing to date the focus has been primarily on a shift back towards manufacturing and away form the south. Both incredibly important, but there is another area that we have to look at if we are to support high growth businesses, namely the UK economy's residual overreliance on bank debt and lack of support for alternative ways of financing our small and medium size businesses.
In 2000, I co-founded YouGov, and learned how hard it is to grow a business from scratch in the UK. From humble beginnings in a shed YouGov is now rated as one of the world’s top research companies, and employs almost 500 people. But it didn't become the company it is today through bank loans. It became the company it is today through equity finance – by initially enabling people to invest in the business through equity stakes and then through the UK’s public markets.
If our economy is going to continue to grow then this is an option I strongly feel must be made more available to UK entrepreneurs.
There is a huge gap between the expectations politicians and indeed many business people place on banks to lend more to SMEs, and the ability of the banks to do so. This expectations gap is only set to grow with new EU risk capital requirements coming in, further limiting the ability of banks to lend to riskier propositions, which all too often include high growth SMEs. Increasingly, fledgling businesses will need to look beyond the banks to finance their growth.
Unlike bank debt, which is tax deductible, equity is taxed four times over in the UK, making it much harder for businesses to access. This tax imbalance, which has been criticised by the IMF, OECD, CBI, IFS, KPMG, and the QCA, is unnecessary, and compounds the forced reliance of UK businesses on bank loans.
To support the UK’s SMEs, I suggest two, revenue neutral policies that could be announced in the Budget and would send a strong message about the importance of equity finance to the British economy. By making these two changes, that have been independently proven to pay for themselves we can boost investment in high growth SMEs and as a result boost jobs and growth.
First, abolish stamp duty – one of the four ways equity is taxed – on shares in companies quoted on the UK’s growth market AIM. The UK has one of the highest rates of Stamp Duty in the world. Many of our competitor economies, including Germany, abolished it completely years ago. For small companies, such as those listed on AIM in particular, stamp duty is especially damaging to the level of investment they receive.
Second, cut Capital Gains Tax rates on investments in high-growth companies to 10 per cent. This cut would remove a tax which deters people from investing in smaller companies.
Deloitte has just done the maths on these policies and the results are clearly positive.
Stamp Duty from shares in companies quoted on AIM accounts for just 3 per cent of the overall revenue generated by the tax. Over the medium term, the measure would be revenue neutral due to stimulated economic activity and the future taxes generated from high-growth companies.
Similarly, lowering CGT and the resulting increase in investor interest would also, according to Deloitte’s findings, be tax neutral.
But tax neutrality is only half the story.
Deloitte’s figures also shows that these two changes would create 38,000 new jobs – more than the number of people claiming unemployment benefits in Manchester and Sheffield put together.
The proposed changes have now gained widespread support from investor organisations and companies alike. The City of London, the ABI, the London Stock Exchange Group, the British Venture Capital Association – and a wide range of small companies quoted on AIM, have all given their public support for the two changes.
In his speech to Conservative Party conference, the Chancellor said ‘our entire economic strategy is an enterprise strategy. We will be the government for people who aspire’.
By announcing these two targeted and tax neutral measures – abolishing stamp duty and lowering the rate of CGT for smaller companies – in the Budget, the Chancellor has a huge opportunity to show that our economic strategy really is an enterprise strategy. It's an opportunity to show the UK’s entrepreneurs that listing a business should once again be an aspiration, that they are central to economic growth, and most importantly, that the UK is the best place in the world for them to start and then grow their businesses.