Monday 28 November 2011

Small business and VAT

24th January 2011 – Progress
Philip Ross takes a look at what the government's 'all in it together' claim means for small business in the light of the VAT rise, arguing that small businesses trading with the public will be inordinately hit.
Of the many things we have been told by the coalition (Tory-led) government the statements I find hardest to believe are that ‘we are all in this together’ and that the ‘least damaging way to handle the deficit’ is to raise VAT. Firstly when they say ‘all’ I think they mean mainly us, not them, and secondly when they say that raising VAT will be the least damaging way – least damaging for who? It certainly won’t benefit families – that has been shown already – but it will also hurt and damage small businesses too, affect their long term competitiveness and in doing so damage the economic revival.

The Chartered Institute of Directors estimate that raising VAT to 20 per cent will result in the loss of a further 250,000 private sector jobs. Also, the Charity Tax Group has estimated that this increase will cost the sector an additional £140 million. The impact of this may harm the capacity and resources needed to address the government’s big society agenda. It does sound like the ‘wrong tax, at the wrong time’.

Introduced in the 1970s, VAT replaced various sales taxes that had existed until then. It started with a lower band of eight per cent and a higher band of 12.5 per cent, Geoffrey Howe’s first budget abolished the upper rate and raised the rate to 15 per cent to pay for income tax reductions and attempts at budget deficit reductions. They then extended it in 1984 to include hot takeaway food and building improvements, then in 1991 raised it to 17.5 per cent to pay for John Major’s cuts in the poll tax. Then in 1994 it was extended to heating fuel which was charged at eight per cent. Labour’s record on VAT is that it reduced the heating tax from eight per cent to five per cent and, last year, introduced a temporary reduction of the rate down to 15 per cent. Now it is up to an all-time high of 20 per cent. It is the tax of choice for the Tories, taxing people not wealth or income. Just like their other cuts and rises we have the same Tories doing the same, as they have always done; all that has changed is the camouflage for its reason.
VAT is a ‘consumption tax’ because it is borne ultimately by the final consumer. It is not a charge on businesses. Businesses can reclaim any VAT that they are charged. So for business-to-business firms it is not such an issue. But for lots of small business that set up to trade with the public whether providing services or goods, then their prices have just gone up. How can small businesses remain competitive in such an environment?

One way is to look the income threshold you must pass after which you must register as a VAT company – before that you can trade without it. The registration limit is £70,000 having gradually risen from £49,000 in 1997. The Federation of Small Businesses is lobbying government to raise this threshold again to take more firms out of VAT, to give them a chance to grow and prosper and spend less time doing stressful paper work. In recognition too that unlike larger businesses they will find it harder to absorb the VAT rise in their prices.

The coalition has laudably set up the Office of Tax Simplification, which, in principle, is a good idea. But that is not just their agenda it is a Labour agenda too. Taking just the example of VAT Labour simplified the Cash Accounting Scheme to let small firms defer paying their VAT until they has received payment from their customers) and more than doubled the threshold for CAS from £660,000 to £1.35 million helping an extra 56,500 business at the time. Labour also introduced the Flat Rate Scheme, which allows businesses to apply a flat rate percentage to their annual turnover – particularly helpful for some smaller retailers.

The Tory-led government has introduced a plethora of small business ‘initiatives’ and we should take each on their merits and I hope to write on these in turn, but, at the end of the day, price of goods and services is what helps make firms competitive, especially small firms. On this the government has got it wrong.

Labour and Small Business - Allies in waiting

20TH September 2010 – Progress Magazine.
How did Labour miss the nearly five million small businesses in the UK? The party must really recognise the existence of these millions of employees and how they live and work in 2010. Small business strengthens communities and individuals.
Description: Description: I read the interview Ed Milliband gave to the Guardian in which he said he wanted Labour to be the party of small business and the self-employed. An admirable aim, one which we put forward some years ago when we started the Labour Small Business Forum, which is a network of Labour party members and supporters who worked or had worked for themselves. We saw that there is a key Labour principle involved from the old Clause IV, which was ‘to secure for [people] by hand or by brain the full fruits of their industry’. Being your own boss in a fair society is a good way of trying to achieve this. It is about empowering people, it is about aspiration and it is about building prosperity.

When out canvassing in 1992, Tony Blair was told by a man cleaning his Sierra that he had always voted Labour in the past, but now he had started his own business he was going to vote Conservative. Blair said afterwards that that was the point at which he realised the election was lost. If Labour wasn’t reaching out to such people then they were doomed to fail. That was nearly 20 years ago. Today more and more people work for themselves as self-employed or freelance or run or have run small business. Has Labour really learned that lesson?

The traditional view was that the Conservatives were the party of capital and Labour the party of the workers. In the early 1990s at one of the first Labour party meetings I ever attended the selection process was under way to choose a councillor for a safe Labour seat. One of the candidates stood up and spoke and explained that while he was a postman, he also ran the local fish and chip shop. He said, ‘people say to me: How can you be in the Labour party and also run your own business?’ To a lot of tutting, he said, ‘well I say that my children have got to eat’. It didn’t go down very well and he got zero votes.

I hope things have changed since in the Labour party, but one of the inherent problems with new Labour was that the public perception was that it was pro-business, and as far as many grassroots members were concerned, too pro-business. Though that perception wasn’t true among the small business committee even in the Labour party, despite its best efforts the perception was that it was pro big-business not small business.


Hopefully Ed and the other candidates along with many MPs have realised that small business is a key constituent in our community. But this constituency is changing. It includes not just the traditional array of tradesman, small firms making and selling items in our high street and in the industrial estates, but also an army of professional freelance workers working in the knowledge-based economy in areas such as IT, engineering and the creative industries including the media.

According to the Federation of Small Business there are 4.8 million small businesses in the UK (up from four million in 2003), of these three million businesses are sole proprietors and 1.3 million are companies and 462,000 are partnerships. Overall 97 per cent of firms employ fewer than 20 people 95 per cent employ fewer than five people. Over 500,000 people start up their own business every year and small firms contribute more than 50.1 per cent of the UK turnover. How did we miss this?

Maybe Ed thinks that the small business people and self-employed are a lost constituency and seeks to win them back, and hopefully the other candidates do too. But to do so will require them not just talking and saying nice things about small business but to embrace it and understand it and make a cultural and mind shift in considering it.
Firstly, helping small business isn’t just about providing extra help so that they can pay their taxes on time. It is about recognising that not every small business aspires to grow and develop. 

The lady running my corner shop doesn’t aspire to become the next Tesco’s. They are happy with just being a small business and earning a living for themselves and their family. Government support shouldn’t be there just to help them grow bigger but there to help them survive and sustain themselves. Ask any small businessman what changes they would like the government to make and they would say bring in legislation to force firms (usually larger firms) to pay their debts on time. The worst offenders, sadly, are often councils, government departments and the police. (As the Forum for Private Business recently discovered).

Secondly, they need to understand that small businesses often carry huge burdens. For instance maternity benefits. It was suggested in the past that government set up a fund to equalise the cost of between small and large firms. This idea – which came from Labour members who ran their own businesses – is exactly the outside of the box thinking that is needed. Indeed Labour has never quite understood that small business was within its own ranks, I think it always thought of it as something external to itself.

Thirdly, they need to understand the difference between freelance workers and temporary workers. The knowledge-based economy in IT and the creative industries are driven by armies of freelance workers. These workers are often engaged on short-term contracts for work on projects and to bring in expertise. If this is the employment and work pattern for the 21st century Labour needs to understand the needs and aspirations of these workers. They need to understand that many freelancers in the industries described above work this way not because they can’t get a permanent job but because they choose to. Freelancers don’t need employment rights; temporary and agency workers do. Freelance workers are often competing directly against large corporations in the same market, yet Labour’s IR35 policy treated them as employees for tax purposes and denied them the capital to allow them to invest in training and development or even any other business development. It didn’t allow them to draw a dividend on their profits they had made, the work they had done. But allowed it shareholders in bigger firms to draw dividends off the work that other people had done. That can’t be right.

I could requote the old clause IV – ‘to secure for [people] by hand or by brain the full fruits of their labour’. Indeed if I really wanted to I could quote Marx and mention ‘surplus labour’ and explain that exploitation occurs when those appropriating surplus labour – whether in the form of surplus value, surplus product or direct surplus labour – are different to those performing surplus labour. But that wouldn’t be a very New Labour thing to say.


But a New Labour word to use, is ‘modernise’ – Labour needs to modernise its view and understanding of the labour market itself and that people will not only have several jobs in their lifetime, will have possibly different careers and will often pass through periods of working freelance and running their own business. More people than ever before are now working as freelancers or running small businesses and they are key to our future prosperity.

If Labour wants to succeed in the future then it needs to think about how regulations benefit, harm or bypass freelancers, temporary workers and small firms. Acknowledging that IR35 was a mistake would be a good start. It needs to think about small business and the self-employed just not as being vehicles through which taxes can be collected, but as drivers of our future prosperity and key components in building a sustainable and empowered community. To do so Ed, David, Diane, Ed and Andy need to understand how all these modes of work operate and there are many of us in the party who will help them, because today’s Mondeo man and Clio woman have in the past and will in the future vote accordingly.