Red tape and taxation policy: strangling growth when we need it most

Whilst opinion on government spending and taxation may differ amongst politicians, the ambition to encourage growth in the economy unites them all. Until now the focus has firmly been on how far monetary and fiscal policy should go to support the economy. This has resulted in a number of tweaks to fiscal policy and £75 billion of quantitative easing.

However, there has been a disappointing lack of attention and, more importantly, action on removing the most direct barriers to growth. That is, the unnecessary levels of legislation, red tape and taxation strangling the small businesses of today and the budding entrepreneurs of tomorrow.

David Cameron must do more to nurture entrepreneurial activity

David Cameron must do more to nurture entrepreneurial activity - Picture Telegraph

By looking at the challenges facing an entrepreneur looking to set up a business, it is obvious that there is much room for improvement. Frustratingly, many of these issues could be resolved without reducing tax revenues; indeed, by stimulating growth, they could actually improve them. Walking through an example might perhaps be the best way to bring these challenges to light.

John is an entrepreneur with a good idea and a few savings to his name. He decides to start a business and draws up a business plan to take to his local bank. As a start-up, he is unlikely to obtain any capital without some collateral so is forced to use his home as security for his loans (if he is lucky enough to own one in the first place). With his newly found investment, John invests in the essentials and commences trading.

As business progresses, John decides to take on an employee. Rather than simply budgeting for a wage, John will need to budget for national insurance contributions and tax. This will require significant time in researching tax rules and deadlines, or pay an external professional to do this on his behalf. Failure to do so will result in a knock on the door from HMRC who will present him with a tax bill and a fine.

Having entered into an employment relationship John will now be obliged to pay sick leave and face the prospect of prolonged paid paternity or maternity leave. In contrast to a large multinational, this represents a significant risk to John’s two person business. Moreover, should John’s employee prove to be a persistent underperformer, John will need to follow legislative steps to ensure that he has a waterproof cause for dismissal. The reason must go beyond ensuring that the dismissal is compliant with the ‘spirit’ of employment law, but that it also complies with any minor loopholes and rights. Again, John is not a multinational company with an army of human resource personnel so all this will take time, effort and, almost certainly, costly external advice.

As John’s business expands he considers renting a shop. He decides to set up shop in a city-centre location to give his business the best chance of succeeding. Naturally, his newly found premises will mean that his cost base (in the form of prohibitive rent and council rates) will have risen significantly. However, John expects this and will be hoping that his increased sales will more than make up for it.

What John will not be expecting will be the volume of legislation which his business will be subject to. This will govern everything from equal access to his building, fire safety, cleanliness, noise and ‘sustainability’. In addition, he will need to be careful that he does not fall foul of personal injury lawyers by leaving a ‘hazardous’ bin in the wrong place or forgetting to put out a “wet floor” sign after cleaning. Unfortunately, we all know that the letter of the law can be flexed to go beyond common sense. Hence, John will have no choice but to take out costly insurance policies and to get more external advice to ensure he is protected from bureaucratic legislation and personal injury lawyers. And as a small business without a dedicated legal and health & safety team, this will represent a huge burden.

John’s business may now have succeeded in achieving multi-million pound sales. Now, he will be required to undergo an annual audit. In other words, more time, cost, advice and fees.

After many years of hard work and risking his life savings and home, John’s business may well be making a decent profit. To benefit from this John will need to pay up to 50% income tax. Some of this money will be spent on himself. However, John is a responsible guy and wishes to put some money aside for his children and grandchildren. Should John pass away, the government will expect a further 40% inheritance tax on anything he wishes to pass onto his loved ones. And as we all know, large multinationals will find some clever tax structure to ensure this does not happen to them (and rightfully so).

The challenges facing small, medium and new businesses are great, and the rewards for succeeding are less attractive than they should be. Small businesses are at a huge comparative disadvantage to the multinational corporates who can afford to spend millions on tax structuring, compliance and legal issues.

This does not mean that we should penalise large corporations further to level the playing field. Rather, we should recognise the value business brings in the form of jobs; tax revenues; competition (which benefits the consumer); and, ultimately, growth. We should look to support and encourage new businesses with tax breaks, the removal of legislation and protection from opportunistic legal prosecution. Without the removal of these barriers, we will continue to scare entrepreneurs – and opportunity for growth – overseas.

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About Mark Birri

Corporate finance professional with six years experience in M&A. Interested in the UK economy, the political impacts of monetary and fiscal policy and free market versus interventionist theory.

Posted on October 27, 2011, in General. Bookmark the permalink. 2 Comments.

  1. Regulation does nothing but harm the little guy.
    Indeed, regulation has had the inverse effect of actually benefiting large corporations by allowing them to corner (often monopolise) a market often to the benefit of political interests.

    Case in point are the rating companies in the US, ie the Fitch’s and the Moody’s; The government stops competing rating firms from emerging by restricting licences thus giving the big names free reign. This is despite the fact that they are clearly incapable, completely missing the sub-prime crisis and continually affording the a highly indebted US a AAA rating (with the exception of S&P).

    I won’t even touch on Goldman Sachs…

  1. Pingback: UK Suffers As A Bystander To Europe's Crisis: - Page 3 - Political Forum

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