General Election 2019

IoD Manifesto

Business Environment

IoD Manifesto Business Environment

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Jonathan GeldartDirector General, Institute of Directors

Foreword

This year, the World Bank rated the UK as the eighth best country in the world for doing business. Britain continues to be a haven for start-up founders, while companies across different sectors, sizes, and regions have been creating jobs at record rates.

Unfortunately, this doesn’t tell the whole story. With skills gaps emerging across the country, lagging infrastructure, and investment bottled up amid political uncertainty, the prevailing message from many of our members is one of frustration.

While Brexit may continue to dominate politics in 2020, this can’t just be a Brexit election. There’s no excuse for inaction from Government on the many domestic hurdles impeding the UK’s economic growth – we must seek to future-proof our business environment. From expanding investment reliefs for start-ups and scale-ups, to pressing on with full-fibre broadband and 5G to help kindle regional economies, to widening the Apprenticeship Levy to reflect the needs of firms large and small, there are a whole host of steps Government can and should take to address these hurdles.

Directors want politicians to be clear-sighted about the challenges facing businesses, and to be strategic, realistic, but ambitious in their response. In this manifesto, we have set out some domestic policies that could help to reinvigorate the UK’s business environment.

About the IoD The IoD believes that better directors make for better businesses, which in turn can create a better economy and society. Our Royal Charter sets out a mission to support, develop, and represent our members, while more widely promoting skill and integrity on the part of all directors, and fostering a climate favourable to entrepreneurial activity. Ahead of the 2019 General Election, the IoD will be releasing a set of manifesto papers to outline steps that any party could take forward to further these goals, based on consultation with members and research by the IoD’s policy team.

Founded in 1903, the IoD is the UK’s leading organisation for individual directors. It is an independent, non-party political organisation, with membership drawn from right across the business spectrum, including the public and third sectors, with around 70% consisting of directors from small and medium-sized enterprises.

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Drive productivity gains by incentivizing business investment Political uncertainty has bottled up investment, compounding a decade of anaemic productivity growth, which has in turn put a lid on wage increases. To push firms’ investments over the line, the IoD has called for a blitz of incentives, including boosted reliefs for start-up and scale-up funding and a new ‘Productivity Allowance’ for SMEs.

Develop a tax and regulatory regime conducive to business growth At a tumultuous time, margins are tight for many small firms, and burdensome levies and red tape add to the challenge. The IoD has called for a reform to the business rates system, a simplification of taxes, and a pause to major forthcoming regulatory introductions, including IR35.

Turbocharge regional growth and connectivity The UK’s regional imbalances are holding back its potential. Our road, rail and digital infrastructure need a revamp. Meanwhile, the new government should pilot regional zones with variances in business incentives to stimulate growth in left-behind areas, develop long-term investment pots like ‘urban wealth funds’, conduct ‘regional Cabinet meetings’, develop a regional taskforce to monitor vulnerable areas, and pursue wider decentralisation.

Create a world-class skills and education system Skills gaps are holding back firms across the UK, while the shifting world of work requires a revamped skills system. The IoD has urged parties to incentivise lifelong learning through tax breaks, widen the scope of the Apprenticeship Levy to reflect the needs of businesses, and leverage the UK’s network of world-class universities to drive-up R&D growth across the country.

Executive summary

In the first of a series of Manifesto papers, the IoD sets out a range of proposals to improve the UK’s business environment, including policies any party should take forward to help stimulate investment, promote entrepreneurship, and push forward UK productivity growth and competitiveness.

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Drive productivity gains by incentivizing business investment Businesses have been battered and bruised by uncertainty. On balance, our members are not expecting to increase their investment levels in the year ahead. In the coming year lingering question marks around our trading relationship with the European Union will limit the confidence of firms to grow, take on finance, and spend on machinery, property, and technology. Incentives to help push investment and expansion decisions over the line are crucial to drive up UK Plc’s productivity and competitiveness.

Create a new ‘Productivity Allowance’ tax incentive for SMEs Cashflow challenges in small businesses mean they require additional incentives, above what is already available1, to make investments in technology, training/reskilling, and advisory services. A new signposted tax incentive, with a clear list of qualifying productivity-enhancing expenditures, would overcome the hefty and esoteric rules around existing allowances2, and raise small firms’ engagement with the issue of productivity and with existing government schemes in the field. Indeed, about 1 in 3 of IoD SME members say technology investment incentives would be most likely to help improve productivity in their organisation.

Improve reliefs for investing in scale- and start-ups Closing the ‘scale-up gap’ between the UK and its competitors would help drive productivity improvements, and the EIS, SEIS, and VCT investment reliefs are crucial to enable businesses to secure the equity capital they need to grow. They should be made more generous, accessible, and simple so they are more attractive for investors to apply for and easier for businesses to use3. For example, the SEIS company investment threshold could be doubled to £300,000 to turbo-charge our start-ups, while the qualification criteria to make, and accept, investments should be expanded.

Build the capacity of the British Business Bank (BBB) to raise access to finance across the country Any EU originated funding for the BBB should at the very least be replaced, and greater support ought to be given to bolster access to finance, including equity, angel and loan finance, for small businesses outside London and the Southeast. One approach would be to expand the BBB’s Northern Powerhouse and Midlands Engine Investment Fund model – where fund managers work alongside LEPs (and equivalents in the devolved administrations) to allocate spending – to other regions.

Extend the £1million Annual Investment Allowance (AIA) beyond 2020 The higher AIA cap ought to be extended beyond end-2020 – and even increased – to support business investment plans through ongoing negotiations with the EU. More broadly, the Government should review the effectiveness of the capital allowance system given that it is one of the least competitive in the G74. One area to explore would be increases to the overall write-down allowance rate for plant and machinery.

1 For example via tax credits, or an Enhanced Capital Allowance (ECA), as recommended in the Made Smarter Review, in addition to the AIA, and above the 100% upfront allowance available. A new ECA for this purpose, for example, will need to consider the optimal write down rates for capital expenditures (e.g. on IT equipment) and ‘on-going’ operational expenditures (e.g. software licenses), alongside the dynamic nature of what ‘best practice’ encompasses.

2 Lifting the Long Tail, IoD, October 2018, Page 21-22; Lifting the Long Tail: The productivity challenge through the eyes of small business leaders

3 A Tax Code for Global Ambition, Prelude Group, Institute of Directors, and Grant Thornton, Page 62, 2016

4 OUCBT tax database

1 in 3IoD SME members say

technology investment incentives would be

most likely to help improve productivity

in their organisation

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Develop a tax and regulatory regime conducive to business growth The sheer mass, complexity, and regular chopping and changing of regulation poses a significant burden on businesses. Red tape is one of the most significant challenges for IoD members. Indeed, small businesses are estimated to spend over 30 hours a month on form-filling5. A pause, simplification, and more structured approach to domestic regulation would provide a notable boost for firms of all sizes, particularly while many are attempting to manage broader uncertainty. Meanwhile, the tax burden on corporates is a significant concern at a time of elevated costs, and the system as a whole has not kept pace with the changing world of work.

5 Federation of Small Businesses, Regulation Returned, July 2017

6 IoD Policy Voice Survey, February 2019

7 The impact of business rates on business, Treasury Committee inquiry, Institute of Directors http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/impact-of-business-rates-on-business/written/98750.html

Fix the broken business rates system Over 1 in 3 of our members agree that business rates are a disincentive to invest and grow their organisations6. UK firms face among the highest property taxes in Europe, which acts as a check on their growth and productivity. While longer-term reform options to the business rates system ought to be assessed in further consultation, businesses – particularly SMEs – are also in need of near-term relief as they navigate elevated costs and an uncertain investment climate7.

Reduce the impact of business investment and expansion on rates bills Businesses should not be discouraged from investing in or growing their organisations through rising business rates liabilities. Rates ‘holidays’ for firms expanding or improving their property, or moving into newly built ones, like Scotland’s Business Growth Accelerator relief, would be welcome (i.e. for 12 months). More broadly, exempting the valuation effects of new plant, digital, machinery, and ‘green’ investments from business rates calculations would be a sensible move.

Abolish ‘downward transition’ and endeavour for more frequent valuations in business rates Firms should not be disadvantaged by paying rates that are out of sync with the economic cycle and ought to benefit from immediate reductions to their rateable value. Meanwhile business rates ideally should be calculated on an annual basis, and firms should have access to a speedier appeals process.

Provide a one-off business rates relief to small businesses Pending a wider review of alternatives to the business rates system, the overall burden of the tax should be lowered to help support growth in SMEs, given that they one of the most significant fixed costs for small firms. This could be achieved by expanding the Small Business Rates Relief to include more SMEs or extending the Retail Discount to non-retail SMEs, or by simply providing a one-off discount to the multiplier for these firms. A wider exploration of the best long-term suite of alternatives to business rates, such as land value taxation, an online sales levy, and single consolidated taxes also need to be explored.

Over 1 in 3of our members agree

that business rates are a disincentive to

invest and grow their organisations

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Provide funding for HMRC to support regulatory simplification and awareness Ample support for HMRC to improve the effectiveness, and lessen the burden, of UK regulation is important. This includes ongoing efforts around ‘Making Tax Digital’ to help simplify—and where desirable automate—business compliance, payments, and relief applications, while improving HMRC’s targeted outreach to small firms on business incentives and guidance.

Commit to ensuring the UK has the most competitive corporation tax rate in the G20 The UK’s relatively low corporation tax rate is a major draw for international firms and investment. Maintaining its competitiveness and continuing its ongoing reduction to 17%, is important to support businesses and ensure the country’s attractiveness in global terms.

Consult on a simplification of corporation tax on SMEs The ‘one-size-fits-all’ approach to corporate taxation can impose a high administrative and tax burden on small enterprises. Lowering and consolidating the existing tax and regulatory burden upon SMEs would help them to grow faster and could support a greater revenue take for the Treasury in the long run8. This could include initiatives such as a Simple Consolidated Tax9 or even an increase in the threshold for quarterly tax payments.

8 For example, increasing the threshold from £1.5million profit to £5million, for example. would help firms to better manage their cash flow and avoid making significant advance payments to HMRC at a time when they need funds to support their business

9 Centre for Policy Studies cited in https://smallbusiness.co.uk/call-for-treasury-to-simplify-small-business-tax-regime-2547623/

10 The Low Pay Commission should also proceed cautiously with further minimum wage increases. (Of the IoD’s national living wage paying members, 13% have reduced their workforce, 17% have put off hiring new staff and 19% have reduced working hours, as a result of increasing rates.)

11 IoD Policy Voice Survey June 2019, 950 respondents

Create an independent ‘future of tax’ commission The UK tax system is often outpaced by technology and the changing world of work, which can impact the fairness, efficiency, and revenue of existing tax sources. Longer-term improvements to the system, in light of new and digital economies, should not be cannibalised by near-term interests.

Bring in a moratorium on major new tax and regulatory introductions To support businesses and the economy to adjust to whatever the UK’s new relationship with the EU is, there should be a delay on tax and regulatory introductions that many businesses may not be prepared for, and which are also expected to impose significant costs10:

Extend the ‘light touch’ approach to enforcing Making Tax Digital (MTD) for VAT The decision not to extend MTD in 2020 will give businesses some reprieve. A further extension to the one-year amnesty on penalties for non-compliance with MTD for VAT would also be welcome, with a significant number of businesses still struggling to prepare for the changes.

Push back the introduction of off-payroll working rules (IR35) in the private sector Around 40% of IoD members that hire contractors expect the new changes to lead to higher business costs. Meanwhile, just 15% of our members considered themselves very prepared for what IR35 requires of them11. Avoiding the disruption would provide added support to the private sector in a challenging period.

Delay the implementation of the ‘digital services tax’ The proposed 2% levy on multinational social network, search engine, and online marketplace firms risks damaging the UK’s international reputation as a digital investment hub and will exacerbate international trade tensions, during an already testing period. It ought to be delayed and reviewed, and a new implementation plan should be developed in collaboration with the OECD. Further consultation across industry, and other stakeholders, is required on its design.

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Turbocharge regional growth and connectivity The UK’s wide differences in regional productivity limits its growth potential and international competitiveness. Businesses outside London and the Southeast need greater support so that they can drive wage growth, job creation, and innovation in ‘left-behind’ parts of the country. Meanwhile localities also need greater resources and control to deliver policy solutions tailored to local economic needs. Our recent paper, Connected Economies, People and Places: A Blueprint for local growth in post-Brexit Britain, provides further detail on this topic.

12 IoD Policy Voice Survey, February 2019

13 Ibid

14 Heriot-Watt University, National Housing Federation, Crisis, 2018

Improve existing road and rail routes while building to enhance regional connectivity New infrastructure investments should focus on ‘quick wins’ by developing local road and rail routes, especially where there are bottlenecks, alongside major projects already in the pipeline such as HS2, Crossrail, and the Heathrow Expansion. Over 1 in 2 of our members say improvements in existing infrastructure would be a priority for their local industrial strategy. Meanwhile, larger investments should focus on accelerating projects that improve east-west connections between major cities in the Midlands and North12.

Invest in a strategy for the accelerated delivery of full-fibre broadband Local connectivity and business environments would be significantly bolstered by the delivery of full fibre broadband/5G nationwide. Over 1 in 3 IoD members consider faster internet and mobile connectivity a key priority for their local industrial strategy13. Further commitment for an accelerated delivery, over and above recent investments, will be important to turbocharge UK productivity. Ideally, this would extend to mandating full fibre access for new build homes and supporting Local Enterprise Partnerships (LEPs) to disseminate best practice on high speed internet adoption for businesses.

Boost the stock of affordable housing The Government must ensure efforts to boost local connectivity works in parallel with improvements in the availability of affordable housing. Talent and businesses will continue to gravitate toward traditional centres of activity, unless the access to homes across the country improves alongside infrastructure. One estimate suggests England alone will need to build 340,000 homes per year until 2031, with 145,000 of these being affordable homes in particular14.

Pilot regional variances in business reliefs and incentives While nationwide cost reliefs and investment incentives are most desirable, temporary regional variances—in, for example, business rates, SEIS/EIS reliefs, and investment allowances/credit—ought to be evaluated as a potential route to help stimulate activity in disadvantaged areas (e.g. the loss of a major employer). This can be explored as part of an improvement to existing Enterprise Zones to stimulate new business activity in left-behind parts of the country.

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Plug gaps in LEP resources and performance across the country Local Enterprise Partnerships (and similar initiatives in the devolved administrations) can become regional ‘one-stop-shops’ for the delivery of business productivity support—in collaboration with local authorities, social enterprises and universities, for example—if they are adequately staffed, better funded, made more accountable to local growth outcomes, and more effectively marketed. Currently, around 30% of our members in England feel LEPs are ineffective at supporting regional business growth15.

Explore the creation of new, decentralized, long-term economic investment funds With growing strains on the public purse, long-term investment vehicles could be a valuable source of funding for UK economic growth. This includes potentially developing independently administered economic investment funds, at a regional or national level, drawing on, for example, retained revenues, public sector pension funds, or income from commercial public assets (like an ‘urban wealth fund’ (UWF) which pools property/ non-property income streams to reinvest in local communities). More generally, the Government ought to evaluate how its existing funding streams can be professionally managed and reinvested effectively, and expand financing options for local authorities, including via: further business rates, and other tax, retention; loans and bond issuance; and local investment as potential sources.

15 See Lifting the Long Tail, IoD, October 2018; Lifting the Long Tail: The productivity challenge through the eyes of small business leaders

16 Ibid

Develop a long-term agenda for devolution and decentralization Further devolution deals ought to be explored to help drive regional growth outside London, particularly to help support local-areas develop responsive local skills strategies. Likewise, developing new funding streams for local areas—via investment funds, further revenue retention, and debt issuance, for example—can help drive greater local accountability for growth. This must take place alongside a broader strengthening of the UK’s regional growth architecture:

Develop an independent regional taskforce to monitor vulnerable areas A new body, alongside the ongoing support for the National Retraining Scheme and Skills Advisory Panels, can help improve oversight and policy responses in localities where growth and jobs may be negatively impacted by global and technological change.

Develop a regular schedule of ‘regional Cabinet’ meetings Improving collaboration between key Government ministers and regional authorities can ensure better integration between national and local growth missions.

Make the Industrial Strategy Council a statutory body An OBR-type institution to monitor, develop success metrics, and provide recommendations for the UK’s growth and productivity strategy, could help engender greater continuity and long-termism in the Industrial Strategy.

Consult soon on the design for the proposed Shared Prosperity Fund Developing a new and improved funding program for regions, devolved administrations and institutions, like the British Business Bank, is crucial to leveling-up business environments across the country after the UK leaves some EU funding mechanisms.

Increase funding for R&D-led regional growth The geographical dimension of the Government’s long-term ambition to raise R&D spending to 3% of GDP is important, both to spur productivity growth across the country and to draw upon local specialisms. Further support and funding commitments for UK Research and Innovation’s Strength in Places Fund and the Industrial Strategy Challenge fund, alongside efforts to increase the scale and scope of Catapult Funds ought to be explored16. With world-class universities well distributed across all regions, higher education institutions can also play a stronger role as regional hubs for growth, business innovation, and talent retention.

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Create a world-class skills and education systemSkills shortages are regularly one of the top three concerns for our members. While the unemployment rate is near 45-year lows, vacancies remain high across sectors. There is both an absolute shortage of workers, and a relative dearth in skillsets from construction to the STEM fields. The changing world of work is also putting additional pressure on our skills pipeline to deliver. In this light, it is imperative that the UK’s training and education system works for businesses.

Invest in reforming the Apprenticeship Levy More work needs to be done to make the Apprenticeship Levy work better for businesses seeking to hire apprentices. That said, questions regarding the Levy’s broader purpose also need answering. While apprenticeships are useful for some firms, other organisations require access to a wider range of non-apprenticeship style courses. Meanwhile, issues with access to training across the country also need addressing.

17 53% of IoD members expect their demand for management/leadership skills to increase in the coming 3-5 years, Policy Voice, April 2019 992 respondents

18 Above the current 25% allowance

Widen the scope of courses available under the Levy Raising access to digital, management, and leadership training17 is needed to support productivity in time-constrained SMEs. Lengthy courses pose a significant opportunity cost for small firms, and so access to online, peer-to-peer, mentoring, and coaching style programs would be beneficial. Generally, there should be a vision to extend and fund the scheme to a broader “training levy”, to allow it to be spent on developing in-demand skills.

Drive up the provision of apprenticeships across the country The availability of high-quality apprenticeships remains very patchy. The flexibility of the Levy ought to be increased so that businesses can transfer even more of their funds to small firms in their supply chain18. Likewise, employers and local stakeholders would benefit from being able to work together to decide how to use any unspent Levy contributions. This would also involve efforts to improve transparency around levy receipts and expenditure.

Improve the resourcing of the apprenticeship system The existing system of administering courses can be improved in several ways. In particular, the Institute for Apprenticeships and Technical Education needs greater resources to support the development of standards. Support for firms to cover the backfill costs associated with the off-the-job requirement would also be welcome to support take up.

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Introduce new ways to incentivize lifelong learning through the tax system On-the-job training and e-learning offer part of the solution to reskilling, but finance is also key. For example, a tax deduction to support employers to invest in staff training, particularly when costs are already elevated, ought to be explored – this could extend to sole traders wanting to self-fund their own training. (This can also be achieved via the wider proposed tax incentive for SME productivity investment.). Meanwhile, for those without access to employer support, a personal income tax allowance increase might for instance assist those undertaking further training independently.

Make a long-term commitment to the roll-out of T-Levels after the 2020 pilot T-levels are an important vehicle in boosting young people’s technical skills, and in providing an alternative to A-Levels. Around 50% of our members would be prepared to provide an industry placement as part of the scheme. That said, businesses, students and guardians need to see long-term funding commitments and a widening of the program, beyond the pilot year, for it to gain more traction and become a valuable and viable part of our skills system.

Invest in supporting knowledge transfer between universities and businesses The UK excels at the ‘R’ part of R&D, but struggles when it comes to development and commercialization. Raising funding for initiatives such as University Enterprise Zones, Innovation and Knowledge Centres, and the Knowledge Exchange Funding pot20, will help to expand the collaborative innovation workspaces and knowledge transfer between businesses and Higher Education Institutions21. Meanwhile expanding Innovate UK’s Knowledge Transfer Network and investing in initiatives like UKRI’s ‘Konfer’— a digital innovation brokerage – can help better match businesses with research partners and graduate skills.

Increase financial support for Ed/WorkerTech providers Computer-based, blended and flexible learning opportunities enhance access to education and training, and reduce the cost of provision. A scheme to seed, fund, and back start-ups, social enterprises and other organisations with emerging platforms for digital learning, with scope for scaling, should be explored.

19 Careers Hub Prospectus, The Careers & Enterprise Company, January 2019

20 Higher Education Innovation Fund

21 Around 50% of IoD members say that a mismatch between education offerings and business needs is a key labour market challenge

22 See Lifting the Long Tail, IoD, October 2018; Lifting the Long Tail: The productivity challenge through the eyes of small business leaders

Speed up the implementation of careers support in schools Improving access to qualified careers coaches and work experience in secondary education will play a key role in embedding the mindsets and skillsets young people need to enter the workforce. Business leaders are willing to offer placements while over half of schools in England are without the support of a careers hub and many head teachers are unaware of the current schools’ Career Strategy19.

Commit to implementing the findings of the Business Productivity Review The announcements to create a Small Business Leadership Programme, expand Knowledge Transfer Partnerships (KTPs), build peer-to-peer networks and develop digital tools for small business were welcome, albeit small, announcements in the Autumn 2018 Budget. The Government must build on this by expanding these initiatives to support the uptake of management and technological best practice in SMEs22.

The Institute of Directors

The IoD has been supporting businesses and the people who run them since 1903. As the UK’s longest running and leading business organisation, the IoD is dedicated to supporting its members, encouraging entrepreneurial activity and promoting responsible business practice for the benefit of the business community and society as a whole.

iod.com

For further information on this report, please contact:

Tej Parikh Chief Economist +44 (0)20 7451 3263 tej.parikh@iod.com

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