Advertising chief Maurice Saatchi, a former chairman of the Conservative party, is calling on the government to abolish corporation tax (CT) for all small firms and capital gains tax (CGT) for their investors, in a bid to stimulate economic growth and reduce the government’s deficit faster over the next four years.
Lord Saatchi has developed the policy in his role as chairman of the Centre for Policy Studies (CPS) and the details are to be launched at a conference later today organised by the thinktank.
The policy is ‘designed to empower and liberate Britons, crushed by big corporations on the one hand and by the state on the other,' said Saatchi. 'The answer is not more regulation but to increase competition, to challenge cartel capitalism and to change the culture of Britain.’
The report claims that abolishing CGT for investors in small firms would release an additional £3bn into the economy, while getting rid of CT for companies with fewer than 50 staff would make another £8bn available. It argues that since smaller companies have been the engines of the economic recovery, this would then be spent on activities which would increase jobs and stimulate the economy, thereby cutting the welfare bill and increasing tax receipts.
The CPS calculates the initial static cost of the policy at around £10.5bn, made up of the £8bn lost in CT receipts and the £3.5bn reduction in CGT receipts, and taking into account compensating revenue gains of abolished income tax relief on EIS/VCTs of £0.5bn and extra income tax on dividends of £0.5bn. However, the think tank argues that these costs are recouped relatively quickly, saying the net impact on the Exchequer is positive within the life of a single parliament, while the positive impact on the deficit is significant from year four onwards.
However, the last Labour government operated a low corporation tax threshold for small business for a while but it was viewed as a tax loophole as sole traders could set up as limited companies and effectively avoid paying tax. There would also be potential tax avoidance issues around using small company directors using dividends to avoid taxation.
The thinktank argues that its policy would be more successful than the earlier cut in CT as it covers far more substantial businesses, with turnover of up to £6.5m, which will release more money to be invested in the economy. It also says changes to the regime for taxing dividends will be required to prevent manipulation of the new CT scheme.
Using analysis of how small companies used their profits in the period 2009 to 2013, the CPS says 17% of the £11bn made available will be paid out as windfall dividends to owner-managers; 31% will be paid out as additional compensation to employees and 51% will be paid out as extra investment.
According to the CPS analysis, 90% of all UK companies have fewer than 50 employees, and the average firm has just five. CT raised £43.8bn in 2011-12, but firms on the small profits rate, estimated by the CPS to make up 91.3%, brought in just £8bn.
The report claims that abolishing these taxes would push GDP growth to 3.1% by 2018-19, compared to official forecasts of 2.4% expansion. Meanwhile, public sector net borrowing would fall by £2.8bn in that year, compared to the Office for Budget Responsibility’s (OBR’s) prediction of a £1.1bn decline. It also expects job creation to accelerate, reaching 920,000 new jobs by 2018/19 compared to the OBR forecast of 270,000.
The CPS accepts that because small companies would now be exempt from tax on their profits, there would be an incentive for unincorporated traders and partnerships to turn themselves into companies in order to exploit the new tax system. It acknowledges that in this respect the impact could be similar to the reaction which occurred over the period 2000/1 to 2005/6 when Gordon Brown experimented with low or zero starting rates of corporation tax.
