From 2002 to 2006 the starting rate of Corporation Tax was 0%, meaning that companies making a small amount of profit had what amounted to a tax-free allowance on their profits before they started to pay Corporation Tax.
When the Labour government introduced the 0% rate in 2002 there was a marked increase in the number of company formations as self-employed people and partnerships became limited companies as a means to paying less tax. It also, critically, made setting up as a company an attractive alternative to formal employment, allowing experts to free themselves on employment contracts and work for a multitude of clients.
The 0% rate was abolished in 2006 the rate on the basis of it being too popular and damaging government revenue – it was now seen as a tax avoidance measure and not a policy to stimulate business. The result of scrapping the 0% rate was an immediate increase (running into thousands of Pounds) in tax liabilities for small companies, something the economic boom of the time could absorb without a dramatic increase in company debt.
Jump ahead to 2010 and the UK is suffering from high unemployment and small businesses are fighting for their very existence each day. The government has introduced a Business Payment Support Service to allow small companies to spread tax payments and the return of VAT to 17.5% is providing some relief to the many small businesses on the VAT Flat Rate Scheme, but neither of these measures encourage people to set up businesses, they just make it a little easier once tax payments are due – months after the initial start-up.
So wouldn’t it be smart for the next budget to bring back the 0% starting rate of Corporation Tax, ideally linked to the personal allowance for Income Tax? This would lead to a spike in businesses being formed and would give people tied into employment contracts that extra bit of confidence to go out on their own. Putting aside the obvious moral benefits of such a move, allowing people to take a chance at their own ambitions and sending a message that the government wants people to take a shot at their dreams, it would also make the economy instantly more flexible and would actually increase the likelihood of people making money for themselves and thus, the government may actually increase tax revenue as a result.
Setting up your own business should be easy and you should not be punished for doing so by tax rules dreamt up by people who have never run a small business. Indeed, government tax policy should actively encouraging people to start small businesses, making it more attractive than standard employment.
If the UK is to move away from the play-it-safe mentality of the last few years, where employees understandably forego their own ambitions in favour of security and the government creates vast bureaucracies to stifle enterprise and entrepreneurial spirit, the new government must use its first budget to actively start shifting things the other way.
The trickle-down effect would be back, and our economic recovery would be based on something more than yet further government spending.
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