Adam Memon is Head of Economic Research at the Centre for Policy Studies. He was previously at the Conservative Research Department and studied Economics at UCL.
Last week at the Margaret Thatcher Conference on Liberty, the Centre for Policy Studies launched ‘The Policy’, which is our proposal to exempt small companies from Corporation Tax and investors in small companies from Capital Gains Tax (see here for a short cartoon). Our objective is to promote the values of freedom, financial security and self-determination. This is not a state hand-out or a new bureaucracy but a big, bold, self-financing tax cut which will empower small businesses, boost jobs and drive up living standards. What could be more Thatcherite than that?
Small businesses are driving employment growth in the UK. Of those without jobs in 2010, and who have since found private sector jobs, 73 per cent have done so in start-ups or small businesses. Our modelling suggests that the net impact on the Treasury of the policy would be positive within the life of a single Parliament, and that there would be an increase in the underlying GDP growth rate.
However, Matthew Sinclair of Europe Economics has criticised our policy proposal on these pages. His main complaint is that we at the CPS want to use tax as a “weapon” to “hurt big business”. He says that this is “clumsy” and Conservatives should “loathe” such an idea. Instead, he prefers what he calls the “neutrality” of the Thatcherite tax reforms and Nigel Lawson’s budgets.
This is more a criticism of the language used in our report than of the actual policy detail. “Neutrality” is not a word often associated with Thatcherism. There was a distinct philosophy underlying her reforms and a distinct form of behaviour which she wanted to encourage. Private enterprise was a major element and the tax system was one of the “weapons” she used to achieve her objectives. To think of tax as simply a neutral, revenue-raising mechanism is to ignore the fact that different taxes have different effects on growth, jobs and behaviour.
As anyone who reads our report will see, we utterly reject a nonsensical Miliband-style business-bashing crusade and nor do we conflate market share with market power as Matthew suggests. Free market capitalists should not just revert to a defence of the status quo, especially when many markets are neither free nor adequately delivering for consumers. Often, although not always, markets dominated by big businesses are less contestable and we have merely used the striking figures in our report to illustrate that many markets are indeed dominated by a small number of big businesses.
Matthew correctly points out that the businesses with the greatest influence on competition are small firms working to become large ones. That is exactly why we want to let them keep more of their own money to fund their own expansion. Too often, small businesses are not competing on a level playing field on issues ranging from late payments to access to bank lending.
They also tend, disproportionately, to bear the greatest burden of regulation. As Niall Ferguson said at the Conference, “if you are a small business, in all kinds of ways the dice are loaded against you. Not just in terms of tax…but in terms of regulation.” When this inhibits the growth of energetic challengers, we all lose. By letting small businesses keep more of their own money, we can give them greater opportunity to invest in new equipment and take on new staff.
Matthew worries wrongly that employees in large companies will have their take home pay reduced if small companies receive a tax cut. However, this policy does not place a single new tax or regulation on big businesses. It is also important to remember that the average UK company has just five employees and 90 per cent of all companies are small companies.
Matthew also claims that taxing the profits of larger companies will discourage small companies from trying to grow. Again, the detail in our report shows that the exemptions from corporation tax and capital gains tax would depend on meeting two out of three criteria which define a small business: a workforce of not more than 50 employees; turnover of not more than £6.5 million and gross assets of not more than £3 million. There is ample scope for a business to grow before having to pay corporation tax and the loss of the exemption is something that could be built into and accommodated through a long-term business plan.
Furthermore, exemption works on a “prior year qualification” basis, so that there would always be a 12 month grace period for the company to adjust. Since the investor’s exemption from CGT depends on the size of the company when they bought their shares, not when they sell them, they have an ultimate interest in growing the business because it gives them an ever greater tax-free capital gain.
In his article, Matthew suggests reducing business rates instead to ease the burden on small business. This is a good idea, but it is better to deal with business rates as part of a comprehensive reform involving a sensible appraisal of what we expect local authorities to do. Further cuts in the headline corporation tax rate would also have benefits, but would not be as focussed on small businesses as our proposal.
Conservatives have rightly concentrated on the perils of Big Government which reduces liberty and prosperity. However, if we believe in defending individuals and families from vested interests then we should recognise that some small businesses are not faced with a level playing field and must deal with needless barriers to growth. Our policy proposal will free them to invest, compete and expand.