Jimmy McLoughlin is Deputy Head of Policy at the Institute of Directors.
On 25th November, in this year’s Autumn Statement, George Osborne will unveil the latest proposals for one of the biggest shake-ups to local government in recent memory. For cities and regions which want them, the Chancellor has promised to devolve a host of new powers and let local politicians make more decisions. As a Chancellor who makes much of representing a constituency in the north of England, he wants to reduce the power of the men and women of Whitehall over the lives of those in the Wirral, Walsall, Wigan and beyond.
Businesses across the country are excited about this opportunity. They see it as a chance to spur growth, promote regional competition and deliver the much-talked-about “rebalancing” of the economy away from the capital. In a recent survey of IoD members, typically those in charge of small and medium-sized businesses, two thirds said they supported the Chancellor’s plans.
But the proof will be in the delivery. If devolution means regional specialisation, local employers having a clearer say over education and skills, quicker delivery of local infrastructure and competition on public services and taxes, it will win the support of businesses and populations. If, however, politicians try to milk businesses to fill their coffers, the great opportunities will be lost.
Therefore, putting the businesses that drive growth and create jobs at the heart of devolution settlements must be the priority both for the chancellor and local politicians. In the long-term the success of devolution will be measured by how successful it is at driving up investment, productivity, living standards and employment prospects. This means making cities and regions more attractive to new businesses moving within and to the UK, and creating an entrepreneurial infrastructure which means businesses started in the region can scale up there, without succumbing to the pull of London.
On this point, there is reason for enthusiasm. The twin entrepreneurial and digital revolutions are at their peak across Britain. A Tech City UK report showed that 74 per cent of tech companies were based outside London, and more than 170,000 people were employed in digital businesses in cities across Northern England. Half of all those had been started in the years since 2008, with Bournemouth, Liverpool, London, Brighton and South Wales the fastest growing areas for digital start-ups.
Outside of London, however, access to finance remains a missing link for many businesses. The IoD’s recent report, Opening the Equity Economy, outlines some steps which can change this. There are great tools at the disposal of both businesses hoping to raise funding and investors looking to buy a stake in the start-up revolution. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), for instance, allow investors to claim tax relief on investments in qualifying companies. They bridge the gap between a natural fear of investing in early-stage, higher-risk businesses and the fact that these companies are often the ones with the most potential for growth, and in the most urgent need of capital.
In the North West this problem is particularly acute, and it threatens the success of the Chancellor’s pet Northern Powerhouse project. The Regional Entrepreneurship and Development Institute rank 125 regions around Europe on 14 different factors seen as crucial to entrepreneurialism. On the availability of finance, the North West ranks 94th. Encouragingly, the region is eighth on risk acceptance, ninth on competition and 14th on the potential for high-growth. Making finance easier to get hold of and, fundamentally, making sure it is the kind of finance which supports growth and risk-taking, could transform the region.
That’s why this week the IoD have called for the government to help unleash the equity economy and help to realise the potential of investment tax reliefs. At the moment, the Seed Enterprise Investment Scheme gives investors 50 per cent tax relief on the value of their investment as long as the company meets certain criteria like being younger than 2 years old, and the investments aren’t coming from close family members. We’d like to see those restrictions loosened and the tax relief boosted in a pilot scheme for the North West, with a view to a higher regional rate across the UK.
Nearly £7 in every £10 invested through EIS and SEIS goes to companies in London and the South East. If investors could claim 60 per cent – rather than 50 per cent – relief when they invest in a company in the North West, however, you can be confident that a chunk of that money would be redirected to the region. Extending the qualifying period so that companies up to four years old can claim relief through SEIS would also help.
With so many new businesses taking off at the moment, 24 months is a very short period of time to be limiting the higher 50 per cent rate of tax relief to. In the earliest days, many entrepreneurs will simply be testing out new ideas and will probably be working only part-time or evenings and weekends in their own business. Two years, therefore, is not enough time for them to even realise their finance needs, let along begin the lengthy process of tracking down and securing investors.
Finally, we also want to scrap the restrictions on parents and family members claiming tax relief for investments. With the proper protections in place, lifting this ban would help more young entrepreneurs realise their dreams of running a business. Instead, the current model induces parents to help their children buy a house, rather than take an idea to market. This may have made sense a generation ago, but the dreams and aspirations of millennials are quite different from their parents, and the investment tax relief system should realise this.
With a little tinkering and some big promotion, the government can make sure the benefits of EIS and SEIS are spread as far around the country as possible. With finance one of only a few weaknesses in Britain’s otherwise stellar reputation for entrepreneurship, unleashing the potential of the tools already at our disposal could have a huge impact on the success of the devolution experiment.