IoD calls for equity economy

Businesses want tax reforms to boost private sector investment

David WattThe Chancellor has been urged to radically simplify the tax system in this week’s “emergency” Budget in order to unleash investment and give more people a stake in the private sector.

While backing George Osborne’s priority of eliminating the annual fiscal deficit by the end of this Parliament, the Institute of Directors wants him to create an “equity economy”.

This would involve “simple and sensible taxes on wealth, and easy-to-understand investment tax breaks encourage more people to buy shares in entrepreneurial businesses.”

David Watt, Executive Director of IoD Scotland, said: “The Chancellor has the opportunity to deliver an investment-boosting Budget, making it easier for businesses to raise capital and promoting investment in the private sector.

“The painfully complex system of unreliable allowances and competing or overlapping schemes makes it harder for businesses to take long-term investment decisions. For individuals, the process of investing is daunting, meaning many do not even consider it an option.

“The IoD is calling on George Osborne to create an ‘equity economy’, by making sure the tax system promotes investment and is easy for both individuals and businesses to understand. The priorities must be a consultation on merging capital taxes, raising the Annual Investment Allowance and creating a single personal tax relief for business investment.

“The Chancellor is right to take seriously his responsibility to consolidate the public finances, but he also has the opportunity to kick-start a big change in behaviour and give more people a stake in the real economy. The focus for the next five years must be on building an entrepreneurial and dynamic economy that not only creates wealth but spreads it as widely as possible.”

However, in a separate report the EY Item Club says the Chancellor’s new fiscal rule, expected to be announced alongside Wednesday’s Budget, could hit economic growth.

Martin Beck, senior economic adviser to the Club, said: “The Chancellor’s new fiscal rule could entail an even tighter fiscal squeeze and even greater departmental cuts may be on the cards if he seeks to achieve his surplus target within the next two years. And with the Bank of England in a limited position to respond with looser monetary policy, the result could be weaker growth.”

The IoD is calling for the Chancellor to:

  • Increase the Annual Investment Allowance by £100,000 (from £500,000 to £600,000) and fix it for the whole Parliament, to help businesses plan longer term investment projects.
  • Consult on merging the UK’s two direct taxes on capital, inheritance tax and capital gains tax, to remove the possibility of double taxation of capital.
  • In the meantime, merge capital gains rates at 20% (but increase the annual exemption) to encourage transactions and thereby increase the tax take.
  • Increase the inheritance tax threshold to £1,000,000, removing the need for either the existing spousal relief or the proposed (and fiscally complex) relief for certain main residences.
  • Begin to align tax reliefs for venture capital trusts, and the Enterprise Investment & Seed Enterprise Investment Schemes, with the goal of creating a single personal relief for business investment.
  • Clamp down on aggressive tax avoidance, with the support of 90% of IoD members, but make sure legitimate tax planning is not penalised.
  • Introduce a ‘triple-lock’ for income tax, like the one that exists for the state pension, so that thresholds rise each year by the highest of consumer prices, earnings growth or 2.5%.
  • Make sure the proposals of the OECD/G20 ‘Base Erosion, Profits Shifting’ initiative, which aims to prevent companies artificially moving profits between countries to reduce their tax bill, are implemented in a way which doesn’t erode our competitiveness.
  • Reject the ill-thought out and dangerous proposals for a European-wide ‘Common Consolidated Corporate Tax Base’.
  • Ensure that any reforms of the business rates system following the recent consultation do not adversely affect microbusinesses, small businesses or medium sized businesses.
  • Consult on giving small businesses the option to be taxed like an individual or a partnership, rather than a corporation. Millions of SMEs (known as ‘S-Corporations’) in the USA use this system, which would be hugely beneficial in promoting business growth and simplifying tax compliance.

 Stephen Herring, Head of Taxation at the Institute of Directors, added: “As the economy continues to recover, both business and individual taxpayers will rightly expect more wide ranging tax reforms and simplification than the previous Government was able or willing to undertake.

“Businesses, especially SMEs, are concerned about high taxes on employment, commercial property occupation and transactions as well as being convinced that government ought to try much harder to deliver authentic, far reaching tax simplification.

“Individual taxpayers are rightly concerned with the impact of fiscal drag upon their marginal tax rates. The Chancellor should also take the opportunity to make it clear the Government is determined to distinguish between authentic tax planning by businesses and individuals and aggressive tax avoidance.”

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