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Nick King is Head of Business for the CPS and an independent strategic consultant.

The 2017 Conservative Party manifesto proudly proclaimed that ‘the Conservative Party is the party of enterprise and the entrepreneur’. Sadly for the Party, this is not a view shared by those the people who run small businesses. Or by members of the British public.

For a new report, published today by the Centre for Policy Studies, we spoke to more than 2,000 owners and managers of small businesses, and more than 1,500 members of the public. Asked if the Government was on their side, 62 per cent of those involved in running in small businesses, and a near-identical proportion of the wider public, said no.

For a party which considers itself to be the party of business, this is sobering stuff.

Small businesses are the backbone of the British economy. There are more than 5.6 million of them, employing almost 13 million people and with a collective turnover of over £1.4 trillion. More than three quarters of new jobs are created by SMEs.

The reasons why these entrepreneurs feel that the Government is not on their side are hardly shrouded in mystery. They are perfectly open about it: three quarters of those we surveyed said that the current system of tax and administration is too complicated. Reports suggest that the average small business loses three working weeks a year to the demands of tax compliance alone.

The principal reason small businesses are made to struggle so is because the UK system works according to a ‘one size fits all’ model. That means your local newsagent is subject to pretty much the same tax rules as WH Smith, and the local hardware shop to the same rules as Ikea. That simply cannot be right.

Having spent over five years in Government as a special adviser, including more than a year at the Department for Business, I know how well-intentioned most civil servants and politicians are. But far too often the policies they come up are not rooted in the experiences of those who actually have to live with them.

Economically and politically, it is vital that the Conservative Party tries to put this right. As Jeremy Corbyn and John McDonnell continue to rail against capitalism and free enterprise, small business owners should feel naturally sympathetic to the Conservatives. Those 5.6 million small businesses represent more than 5.6 million small business owners, up and down the country, who should feel like the Tories speak for them. Indeed, they should be natural Conservative Party members.

But, as our polling suggests, they don’t even think the Government is on their side. On small business, as in many other areas, the Conservatives appear to have lost their way. If the Conservatives are going to win elections in the future they need to address this as a matter of priority. The men and women who run their own businesses need to feel like the Conservative Party understands them, values them and will champion them. So what should the Government do?

My central proposal is simple, but radical.

Let’s give every company with a turnover of less than £1 million – in other words, the vast majority – the chance to opt out of the four biggest and most administratively burdensome taxes they pay: Corporation Tax, business rates, VAT, and Employer’s National Insurance. Instead, they could choose to pay a new Simple Consolidated Tax (or SCT): a simple levy on their turnover. Our modelling work with Capital Economics, the respected consultancy, suggests this would be revenue-neutral for the Treasury at a level of 12.5 per cent.

The most important aspect of the SCT is that it would be offered on a voluntary basis – as the flat rate VAT scheme already is – so that those companies who think it would work for them can opt in. Because the SCT would be voluntary, no firm would have to lose out – those which would be worse off under the new system could simply keep to the old.

This would have a transformative effect on small businesses – and would therefore be wildly popular. Of the small business owners and managers we surveyed who expressed a preference, 72 per cent said they’d rather operate within the SCT than the current system if it meant paying the same amount of tax. Indeed, over a quarter of the same survey sample said they would rather use the SCT even if it meant paying more tax.

This may sound radical. But when similar schemes have been tried in other countries, on a more modest scale, they’ve spurred eye-watering growth for small companies.

Striving for simplicity is not a new suggestion. Margaret Thatcher’s 1979 manifesto said that she would reduce the number of official forms for small businesses and make them simpler. It promised to ‘introduce an easier regime for small firms in respect of… the disclosure of their affairs.’

The voters agree. Of those we surveyed, via YouGov, the overwhelming majority said that the tax system should be simpler for small businesses than big businesses – and almost everyone wanted it to be easier to understand. But when we polled small businesses themselves on whether the current system was too simple or too complicated, just one per cent said that it was too simple.

One of the best statistics about the British economy is its hugely impressive rate of business creation. Yet when it comes to scaling those companies up, we lag well behind the pack. Founding a company has never been easier. But running and growing one is much harder than it should be.

Britain’s small and family businesses don’t want to wrestle with endless admin. They don’t want to get to grips with the ins and outs of the VAT system, or face separate deadlines for Companies House and HMRC, or to know that if they expand their business beyond a certain size they will have to take a hit on VAT, or pay higher business rates. They want to focus on running their companies, creating new jobs and generating the growth that drives the economy, by providing the goods and services their customers want.

The failure of the current Government to understand this, and seek to correct it, is a failure of imagination. If the Conservative Party doesn’t stand for those owning, running and creating small businesses, who does it stand for?

39 comments for: Nick King: Let’s have a tax opt-out to help boost small businesses

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