Growth plan

Reeves’ in-tray: VAT, business rates and red tape

Rachel Reeves
Rachel Reeves: growth is our central mission (pic: Terry Murden / DB Media Services)

With routine predictability there was a round of calls from business groups for the new Labour government to focus on “economic growth” and creating jobs, though it has already claimed this to be its top priority.

It was duly repeated as the “central mission” in the sixth line of new Chancellor Rachel Reeves’ first address to the Treasury on Friday.

It will not be any old growth but “growth for a purpose. To make every part of our country better off,” she said.

Ms Reeves said the Treasury “will play its full part in a new era of industrial strategy, working hand-in-glove with business, to make sure Britain is truly open to business once again.”

Business analysts are now asking just where the growth will come from and how it will be achieved, given the more immediate challenges facing the new administration.

Resolving the junior doctors’ pay dispute (talks are due next week), a possible collapse of Thames Water, and saving the Port Talbot steelworks, are among the pressing issues demanding swift resolution.

A range of organisations, including the CBI, software group Sage, investment platform Hargreaves Lansdown, and the Association of Chartered Certified Accountants, have called for action in the “first 100 days”. This rather arbitrary figure seems to have become shorthand for wanting the new government not to waste time getting down to work.

So what action might Ms Reeves take?

Business Rates

The “commercial property tax” has been a target for just about every business group, particularly those in the retail and hospitality sectors who see it as punitive and no longer fit for purpose. It is seen as a key culprit in the decline of high streets and the closures of small businesses.

There have been reforms, not least the Barclay review in Scotland and various promises to go further. But despite the promises, rates are still with us and apart from a few reliefs and exemptions the system remains a cost burden. The problem for the authorities, and for Rachel Reeves, is that it still accounts for a big slug of revenue and no one has come up with a suitable replacement.

Labour has added its support to levelling the playing field for high street firms against online rivals who do not pay property taxes (except on warehouses). But this is opposed even by retailers who say it would penalise their own online operations.

A further confusion is that because business rates are devolved, it is in the gift of the Scottish Government to devise its own scheme and this is already contentious as businesses say the differential cost base can affect competitiveness.

Cutting regulation and red tape

Top of the list is planning reform, intended to accelerate housing and energy infrastructure, rewriting rules and reclassifying green belt to deliver homes.

Barriers to onshore wind, a no-go area under the Conservatives, as well as solar energy, will be removed, and the national grid will expanded and upgraded.

Ms Reeves said she wants to tackle tax avoidance in order to maximise revenue and she has been urged to hire more people at HMRC to address the backlog of tax investigations.

On the downside, Labour may just add to the regulatory burden by introducing more laws on the rights of workers and pay, including new parental rights and sickness pay.

VAT

Value Added Tax (VAT) has been the most discussed tax during the campaign for two reasons. Ms Reeves intends to impose it on private schools, with the money raised passed to the state school system. There is also pressure for a cut to help small businesses.

The temporary reduction of VAT from 20% to 5% introduced in July 2020 gave support to around 150,000 businesses in the UK and protected over 2.4 million jobs in the overall hospitality and tourism sectors and saved many businesses from going under during a very difficult trading period.

The Scottish Licensed Trade Association says that for many businesses, a cut in VAT would have an immediate, positive impact on sustaining business viability, maintain job security for over 228,000 people who work in the hospitality sector, and provide new jobs in a sector which is a key driver of Scotland’s economy, supporting £1.6 billion of economic activity.

Transport and infrastructure

Labour is promising to nationalise the railways as franchises expire, but if the Treasury is stretched by these other demands it would no surprise if this was one policy pushed into the next parliament.

However, transport will be a key feature of the new administration, with promises to fix potholed roads and ensure the country can move without disruption. This is another devolved area, and Scotland has taken a lead on nationalising ScotRail, though with mixed results. Its failure to mend the roads and dual the A9 contrast with the billions spent (arguably with little benefit) on HS2 in the south of England. Labour will be pressured to develop a more coherent transport policy and give all infrastructure projects long term certainty.

Investment in skills

Improving skills is key to boosting productivity and business growth. Entrepreneur Sherry Coutu points out that there are over a million people who are unemployed and unemployable because they don’t have the right skills.

Expect a slew of measures to reform the apprenticeship levy, tweaking of immigration rules to attract talent from overseas, help to get women back into the workplace, and better links between business, schools and colleges. There is likely to be a big focus on investing in digital technology, particularly AI.

Taxing the oil and gas companies

While the oil and gas industry objects to an increase to the windfall tax and a ban on new North Sea licences, there are those who believe that if Britain is serious about the transition to clean energy it must tax the fossil fuel companies and force them to accelerate the required changes.

Labour is putting its faith in GB Energy, a new investment vehicle that will benefit from £8bn of windfall tax, but GB Energy itself remains something of an enigma with no guarantees that it will achieve the rapid change promised, nor the cuts in household bills.

Improving EU trade

Sir Keir has ruled out a return to the single market and free movement “in his lifetime”, even though it may provide a shortcut to growth. The Labour leader says he is looking to renegotiate some aspects of the trade deal and it is possible that the EU may develop a warmer relationship with the UK under a new government that was not the original architect of Brexit, even though many Labour supporters were among those who voted to leave.

Business groups and critics of Brexit say it has harmed trade and hindered recruitment and that changes must be introduced. If Labour can pull this off it could prove to be a big win.

The work can begin later this month when Sir Keir attends the European Political Community meeting.

Leaders across Europe gave enouraging noises on Friday. European Council President Charles Michel said: “I look forward to working with you and your government in this new cycle for the UK.

“See you soon in the European Political Community meeting on July 18 in the UK where we will discuss common challenges, including stability, security, energy and migration.”

Bank share sale

A quick revenue earner would be to kickstart the sale of the taxpayers’ remaining holding in NatWest, a legacy from the RBS rescue deal. Former Chancellor Jeremy Hunt planned this for June, but it was suspended because of the election campaign. Ms Reeves indicated during a visit to the bank’s Edinburgh head office that she would pick up on the plan. Analysts believe it could raise in excess of £5bn.



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