The future of tax in the UK, an expert view
This article first appeared in ICAS’ CA magazine.
Young businesses have the potential to drive post-pandemic recovery – but is the UK’s ageing tax system a help or a hindrance to entrepreneurs? Fraser Allen asks four experts to share their thoughts
Earlier this year, the Institute for Fiscal Studies published a blunt assessment of the way the UK levies its taxes. “The tax system discourages employment, investment and risk-taking,” wrote the authors. “It needs reform.” The report proposed improved tax incentives for investors, while increasing taxes on dividends and capital gains to bring them in line with employment tax.
The report’s proposals received a mixed reception from entrepreneurs, but many agree that reform is required. After all, 50 years have passed since the Taxes Management Act was drafted and, while the Office of Tax Simplification has introduced modifications, the Tax Administration Framework launched earlier this year is exploring more sweeping reforms. As hundreds of new businesses continue to be launched every day, we ask four experts whether the UK tax system is fully supporting business growth.
JUSTINE RICCOMINI
Head of Tax (Scottish Taxes, Employment & ICAS Tax Community), ICAS
The Taxes Management Act was written in 1970. We desperately need it to be rewritten
Justine Riccomini is well qualified to discuss the UK government’s tax structure. As well as her role as a tax specialist at ICAS, she has worked as a Treasury Senior Policy Adviser on two Office of Tax Simplification projects.
“Someone starting a business has a lot of tax-related decisions to make,” she says. “Are they going to pay themselves through salary, dividends or a combination of the two? Can they qualify for relief, such as R&D tax credits? Should they register for VAT early on? There’s a lot to think about, on top of everything else that business start-ups have to work on. As a result, opportunities can be overlooked.”
Riccomini cites state aid allowances as an example. “If a business has a national insurance bill of less than £100,000 a year, it can qualify for the employment allowance, saving £4,000 on its NIC bill every year,” she says. “I suspect a lot of small businesses are not aware of that.”
Riccomini is keen to see the UK tax system modernised, and is hopeful that progress will come through HMRC’s ongoing Tax Administration Framework project – ICAS submitted its paper, “The Future of Taxation in the UK”, during the consultation period.
“I’m really hoping this project isn’t just a gimmick that ends up going off the boil,” says Riccomini. “The Taxes Management Act was written in 1970. We desperately need it to be rewritten and brought into line with modern-day business practice. The two tax staples are income tax and VAT. I can’t see them changing in my lifetime, but everything else has the potential to be reviewed and there’s clearly some scope for fresh initiatives, such as environmental and online sales taxes.”
SUZY KERTON CA
CEO, Zyla Accountants
There should be greater incentives for SME business owners
The pandemic had a positive twist for Suzy Kerton CA. Having already established an accountancy practice in London, circumstances led her to expand into the Middle East. “I was visiting my sister in Dubai, when another lockdown was announced in the UK,” she explains. “I stayed on and decided to open Zyla Accountants here too.”
Kerton now shuttles between Dubai and London, continuing a sense of adventure she’s embraced throughout her career. After qualifying as a CA at Baker Tilly, she took a secondment at the company’s Buenos Aires office, with short spells studying in Brazil and Peru.
“I always wanted to start a business,” says Kerton. “At the ICAS conference, one year, I listened to CAs who had launched their own companies and that greatly inspired me.” Kerton founded Zyla in 2015 with Latha Bala, who had been a colleague at Clear Books. “We enjoy helping customers to understand their finances through cloud accounting,” she says. “The technology really appeals to us.”
They started out as a limited company and Kerton advises her clients to do the same: “I think it helps with the mindset of the company being separate from you as an individual, and it allows you to grow at a quicker pace.”
Kerton adds: “The UK is a good place to start a business. I’ve seen the hefty upfront costs required to set one up in Dubai, and the UK definitely wins on that front. R&D tax credits are also a great incentive.”
However, she does believe there is room for improvement: “There should be greater incentives for SME owners who already pay corporation tax on their profits and personal tax on their income, not to mention the VAT they generate.
“Also, the HMRC tax portal needs further improvement. There’s a lot to be grateful for, though. The tax system in Argentina felt like Big Brother, and that experience made me appreciate that UK tax is based on self-assessment and honesty. That creates a good business culture and sets a standard for how businesses operate.”
DOUGLAS LAWSON CA
CEO & Co-Founder, MarktoMarket
It’s amazing that we have the Enterprise Investment Scheme in the UK
Douglas Lawson CA has an unusual confession for an accountant. “I was always interested in business but felt I wasn’t that competent with numbers,” he says. “I decided that the best way to tackle that would be to train as a CA.”
Lawson joined EY in London and, as he got to grips with the maths, he realised that his true interest lay in the investment world. That led to a four-year spell as a fund manager with Noble Group in Edinburgh and a growing ambition to follow in the footsteps of his father and grandfather by starting his own business.
Together with his colleague Paul Jourdan, he established Amati Global Investors in 2010, but, after eight successful years, found himself itching for a new challenge. As a fund manager, he was always interested in software businesses and data companies.
That led to MarktoMarket, co-founded with fintech developer Martin Clarke. “There are plenty of vendors who can sell you data on large corporations, but gathering similar insights into smaller businesses is much more difficult,” says Lawson. “We realised that if we could build a platform that gathered and cleansed that data, there would be significant demand.”
Lawson is positive about the tax environment for UK start-ups. “At Amati we ran a venture capital trust, which provides generous tax relief to investors because the trust itself is investing in young, high-growth companies,” he says. “So I was familiar with the 30% tax relief available through EIS [Enterprise Investment Scheme]. It’s amazing that we have this in the UK. If you can’t persuade people to invest in your business with a ‘gimme’ of that magnitude, you probably don’t have a very investable business.”
But while Lawson also praises R&D tax credits, he’s keeping a critical eye out for potential changes to Business Asset Disposal Relief: “For people contributing so much to the economy, clamping down on those deserved gains would be a huge disincentive and send out a terrible message,” he says.
CRAIG STRACHAN CA
Director, FOAL Drinks, The Start-Up Drinks Lab and The Alcoholic Water Company
R&D tax credits incentivise us to spend money on innovation while getting a little cash back
Food and drink companies often get their initial push from people driven by their passion for the product rather than the lure of building a business. But while Craig Strachan CA has launched three drinks companies, it’s the business angle that excites him.
Having already launched a soft drink brand called FOAL, he and fellow drinks entrepreneur Hannah Fisher identified a gap in the market. “Businesses like ours were struggling to find places where we could get small batch manufacturing for our drinks,” says Strachan. “It was clear to us that there was a demand, so we decided to meet it.”
They launched the Start-Up Drinks Lab in 2018. “If you have a drinks idea, we can help with the product development, branding, bottling and back-end operations,” he says. And there’s more – Strachan and Fisher are also part of a team launching the Alcoholic Water Company, designed to benefit from the growing trend for hard seltzers.
After specialising in tax at PwC and qualifying as a CA, Strachan joined the motor retail group Arnold Clark. “The management team there gave me a taste for entrepreneurship,” he says. “It’s a privately owned business that makes quick decisions. I’ve always had an entrepreneurial mindset and that experience encouraged me to do something on my own.”
Strachan’s portfolio has been shaped by his perspective on several tax-related issues. “Take the EMI [Enterprise Management Incentive] scheme,” he says. “We were really keen for all the team to have a sense of ownership through shares in the business and it’s obviously very tax-efficient. Secondly, VAT was at the forefront of my mind when we were getting started. We were nowhere near the turnover threshold but it made sense for us to be VAT-registered so that we could reclaim it and improve cashflow. We’ve also taken advantage of R&D tax credits – incentivising us to spend money on innovation while getting a little cash back has been a benefit for us.”
Almost a third of business start-ups fail because they run out of money, according to CB Insights, and Strachan believes more could be done to help in this area. “Perhaps there could be cash repayments similar to the way that the R&D tax credits work,” he says. “Cashflow is so important for early-stage businesses.”
Thanks to his CA training, Strachan has been able to save considerable fees by managing his own company taxes. “Talking with colleagues and business partners, I realise that I sometimes take my CA training for granted,” he says. “It has proved to be a great grounding for starting a business.”
Find out more by reading “The Future of Taxation in the UK” in full.