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Baroness Neville-Rolfe
That this House takes note of the case for creating an environment which encourages (1) business growth, and (2) job creation, especially in relation to the tax system.
Baroness Neville-Rolfe (Con)
My Lords, I am honoured and delighted to be leading this debate at such an important time for our country. Of course, most of our thoughts are on the next 100 days, which will make a huge difference to our future and the 66 million people and 5.7 million businesses on these islands, but whatever happens to Brexit the success of business is important to everyone whether, say, they sit in the NHS in Salisbury or in a retirement home in Scarborough. This is because business produces the wealth on which we all depend.
I would like to reflect more deeply on this point. There are many excellent things about being appointed to the House of Lords, especially the chance to scrutinise legislation in a way that is not practicable in the House of Commons. However, I have to say that I have been disappointed by our failure to understand commercial interests and their importance to wealth creation and to the UK’s position in the world. However, I am comforted by the fact that, although no one is guiltless on this matter, attitudes in the Conservative Party are somewhat better than they are elsewhere. We should not underestimate the significance of a culture where enterprise is valued.
The same attitude seems to permeate society at large where too much attention is given to dividing up the cake and to regulating in ways that reduce it than to ensuring it increases. Growth was only 0.3% in the three months to May, despite annual population growth of 0.6%, and output per hour, the key measure of productivity, is now at best flatlining. Against this challenging background, I will explore some of the drivers of growth and what is getting in the way. A key question is whether our tax system helps the economy to grow in both absolute and relative terms. Does it help with our international competitiveness at a time when we will need to trade more broadly? Are we encouraging the magic of digital growth and taxing it fairly?
Before starting my main themes, I should like to thank the Library staff, who, as always, have been unfailingly helpful in assisting me to prepare for this debate.
I turn, first, to certainty. Businesses need to know where the country is going, and at present capital is being held on balance sheets rather than invested. Ask almost any CEO and they will say that US and other firms are holding back from investment. In March, many sought a delayed Brexit as they did not want a no-deal scenario, but I fear that we are now reaching a stage where delay in reaching a conclusion on Brexit is itself possibly the greatest negative factor affecting the economy. Businesses also fear the chaos and extreme socialism of the present Labour leadership. For all those reasons, the economy, hitherto resilient, particularly on employment, is now slowing.
On fiscal responsibility, there is an arms race of new ideas for taxation among both Conservative leaders and the Labour Party. Unfortunately, the necessary lodestone of fiscal responsibility is missing. We must not now put at risk all the good work that we have done in reducing the deficit created by the financial crisis. The national debt is still far too high, at £1.8 trillion, and it costs us £37.5 billion a year—money that could be put to better use.
The tax system is also creaking under the weight of its own complexity. Because I believe in taxing broadly and thinly, I think that we should keep VAT. However, there are hundreds of complications that have taken the entire tax code up to 10 million words—an estimate from the Institute of Chartered Accountants of Scotland, where I am off to after this debate. That is double what it was in 2009, according to the Telegraph. With a simpler approach, we could have avoided some embarrassments. I refer, for example, to Making Tax Digital, to those trading with the EU finding it so difficult to get the tax codes they need to export post Brexit and to the wretched loan charge fiasco.
On regulatory burdens, the complexity of the tax system, when allied with a confusing and growing regulatory system in sector after sector, leads to the dampening of business growth, whatever the underlying strength of the economy. It is no coincidence that labour productivity has been so poor since the crash in areas such as financial services and energy, where there has been so much new regulation. Noble Lords should beware of new uncosted, complex regulation in new areas if we are to retain international competitiveness.
I turn to education and digital education. Having studied what drives growth for so long, both at Tesco and as a Minister—like my noble friend Lord Henley—at the business department, and later at the Treasury, I am convinced that the most important driver of long-term efficiency and productivity is education. I welcome many of the Government’s reforms, including Teach First, and the improvement in standards, especially, for example, in London primaries. However, the schools are too full because the impact of immigration was not provided for under our short-term accounting system.
We are not preparing properly for the future. The apprenticeship levy was meant to herald the sort of vocational education that I have seen operate well in Germany and Austria. However, as was apparent when reading between the polite lines of last Thursday’s debate—which, sadly, I missed—it is a mess. It is not business led as it should be, and the levy in some cases has become simply yet another tax charge on the medium and large businesses that supply most of our quality jobs. Many fine businesses take the view that they are putting in much more than they gain. The apprenticeship levy needs to be turbocharged and simplified, and I await the Government’s review, which I welcome, with some trepidation.
Even more seriously, we are not preparing properly for the digital revolution, which will destroy some jobs as automation and AI take off. This must be balanced by a vast investment in digital skills in schools, alongside literacy and maths, and in higher education, apprenticeships and on-the-job training; otherwise, growth will bring jobs losses, not the job creation that we all seek.
Infrastructure is not for today’s debate but I support the Government’s infrastructure fund, which is another productivity driver. We just need to get on with building the roads, digital networks, housing and rail facilities in the Government’s plans. More competence is as important as more money.
I must refer to the Taylor review of working practices, to which my noble friend the Minister very helpfully drew my attention when we met earlier in the week. This analyses how to improve working practices to the advantage of all. I was particularly struck by section 4, on management-employee relations, where the objective is that workers are engaged and heard, which I know is so important. On the same theme—I refer to my business interests as listed on the register—I am a director of Capita plc, which has recently appointed two employee directors to the board; having met the individuals concerned, I am very hopeful that they will make a strong contribution to the success of the company.
I now turn explicitly to the tax system and must say how much I look forward to today’s contributions on the specifics. I have already criticised tax complexity—which is possibly top of my list, because it is a slow killer that people do not notice—but I would like to highlight some specific areas where the structure of tax, especially for business, needs to be looked at.
As a former retailer, as everybody knows, I know that retail, the heart of thousands of towns and villages across the country, is disproportionately affected by business rates. According to the British Retail Consortium, the industry constitutes 5% of the economy but pays 10% of business taxes and 25% of business rates. Moreover, the Treasury requires a fixed amount in business rates every year. This is no longer a sensible or viable policy; the take needs to be reduced. Also, the present system of transitional relief is unfair. Month after month, we see the bigger shops failing and taking with them many small shops. This week’s figures bring the problem home: in the three months to June, non-food instore sales fell by 4.1%, like for like, while online retail sales, excluding food, grew by 3.3%
I support the digital services tax in principle, but it should be higher and the proceeds should be used to offset business rates and help the desperate situation on the high street. Rates should be frozen with no upward adjustment until the vibrancy of our towns and cities is restored or the business taxation system reformed.
It is clear that the property market is slowing and that the recent increases in stamp duty have discouraged people from moving whenever it can be avoided—especially at the top end, where the level reaches 12%. This has had a deleterious effect on the movement of labour, which is vital to our growth. Stamp duty must be reformed, especially with a view to encouraging mobility and empty nesters trading down to release family homes. It is not just a matter of concern at the lower end, which leadership candidates have highlighted.
The Government should be congratulated on what they have done for small businesses on rates and their proposals to give the Small Business Commissioner more teeth. They have also established the British Business Bank, which is now five years old and the subject of an inquiry in the other place. My own view is that this bank needs to increase in scale and remit and that it can help smaller businesses enormously, not only in London but especially outside it.
However, the tax environment remains a struggle for millions of small businesses and, as your Lordships’ Economics Affairs Committee report Making Tax Digital for VAT: Treating Small Businesses Fairly highlighted, the change to digital returns has created great difficulties for some small businesses. The work I have done with business across the country also suggests that the complexity of the tax, national insurance and auto-enrolment pension systems—which I support—taken together are made much worse by the inadequacy of free advice from HMRC and others.
If we are to flourish in a world that is growing faster than us, we need to have more regard to international competitiveness. Some of this Government’s reforms to corporation and other taxes have been good and have reduced the incentive for offshoring. The reduction in corporation tax from 28% to 19% was George Osborne’s best move and has even increased revenues thanks to the magic of the Laffer curve. It will fall to 17% in 2020, which is a further boost to responsible, tax-paying businesses. Likewise, there is a good case for increasing thresholds for the higher marginal income tax rates, because it will encourage enterprise.
I am also a fan of a taxation and accounting system which supports our huge service sector, our invisible exports and intellectual property; these are all areas in which Britain is strong. I know how much BEIS has done to increase R&D funding in this country, but the tax system has also been supportive. UK-registered firms have claimed R&D tax credits worth £3.5 billion and 1,025 companies have saved £943 million in corporation tax from the patent box.
With such a myriad of taxes and so much complexity, I have barely scraped the surface of this important subject. However, I hope I have helped to make the case for a more informed and supportive attitude to business. While I know it is not my noble friend’s direct responsibility, I hope he agrees that the structure of business taxes needs to be looked at by the new leadership and that there is a case for change.
The Chancellor has already announced a welcome digital services tax on the larger digital players to help redress the unfairness of the current system, but it needs to increase quickly and be used to ease the burden of rates on the high street. It cannot be right that Amazon paid £4.6 million in UK tax in 2017 and the beloved Marks & Spencer paid £98.3 million.
Finally, we must support a culture of enterprise. If we do this, we are not only taking the right moral stance but we are bound to boost the economy further. The choice is not between lower taxes for business and more wealth for the public. Lower taxes, carefully crafted, will encourage growth to the benefit of all.
Lord Haskel (Lab)
My Lords, my experience is of building up a business from small beginnings. That was some time ago, and the business environment was very much as the noble Baroness described it. But things are changing.
This was brought home to me when, early in January this year, I was shown a letter from the chief executive of BlackRock, perhaps the world’s largest investor. It was a letter addressed to chief executives saying that companies needed to do more than make profits. He said that they must make a positive contribution to society and he planned to hold them to account. Companies needed to show that they had a purpose, not just high-minded mission statements. How do we achieve these social ends, as well as being efficient, productive, progressive and technologically advanced? We achieve this by government and business working together to move in this direction.
For instance, we played an important part in preparing the UN agenda for sustainable development and we are committed to achieving its goals, which include a commitment to tackling injustice and inequality, particularly in employment. We have declared a climate emergency and signed up to environmental standards. The noble Baroness mentioned education. Several universities have now opened business and society departments. The Government have committed themselves to a civil society programme, using public procurement to create social value and public good. This is our modern business environment and it will become even more so as the next generation takes over.
However, it is still widely accepted by some that tax discourages economic activity, and that tax cuts will raise revenue. There is absolutely no empirical evidence for this. Indeed, recent analysis of business growth and investment in the UK economy seems to show that, as a result of tax cuts, large corporations are investing more money in dividends and share buy-backs than in sustainable business growth. This is reflected in our stagnant productivity.
It has been widely reported that, as the noble Baroness mentioned, the large digital companies pay a pittance in UK tax because they profit from favourable cross-border tax arrangements. I am grateful to UKCloud, a cloud-hosting company, for its briefing. It says that by 2020, Amazon Web Services will have captured some three-quarters of the total public sector cloud market. It has the advantage of paying significantly less tax as a percentage of its revenue than UK-based companies. UKCloud also tells me that the forthcoming digital service tax will not go far enough to combat this tax advantage. By awarding contracts to such companies, the Government give tacit approval to such tax practices and, by consolidating the market power in the hands of a small number of large providers, reduce the opportunity for others to enter the market. We all know the dangers of that; we have seen them over the last year.
This overall reliance by the Government on big suppliers helps explain the reported rise in business becoming concentrated in fewer, larger hands. It is much easier to scale up an intangible digital business, because once you have written the software, there is little more direct investment or employment as required. This is opposite to most other businesses, and part of the digital effect which the noble Baroness spoke of. This concentration is certainly not the kind of business environment that we should be seeking. It is to help deal with this, and to introduce a fairer form of bidding for government contracts, that the British Standards Institution has now introduced BS 95009. I make no apology for raising this once again in your Lordships’ House.
I remind the Minister again that with this standard, firms of all sizes can demonstrate their competence and suitability. It simplifies the process because, by achieving this standard, firms will have demonstrated their credentials across a whole range of criteria and their ability to carry out good practice. As well as reducing concentration, it is entirely in keeping with the Government’s stated civil society programme and the UN sustainable development goals target, to both of which the Government are committed. Will the Government now support this initiative?
To borrow a phrase from Tomorrow’s Company, the economy requires stewardship. That is the kind of environment that we must see—a way of doing business with a focus on human purposes; to see things long term, and to look after the wealth creation system, so that we can pass it on to our successors in better condition—an environment that rewards everybody fairly, proportionately and sustainably. The Government can have an immediate effect by influencing the rules and incentives that they lay down and the behaviour they encourage. This is the kind of business environment that we are now seeking, and which the next generation wants to see. Will the Government help create it?
Lord St John of Bletso (CB)
My Lords, I join in thanking the noble Baroness, Lady Neville-Rolfe, for introducing this topical and timely debate. I shall focus my comments on promoting job creation and business growth in the digital ecosystem. The industrial strategy made provision for substantial investment in digital infrastructure, as well as investment in talent and skills. My observations are less about the tax system, save for the tax incentives to invest in digital entrepreneurship through EIS and SEIS.
Last year I was fortunate to be a member of the ad hoc Select Committee on AI, ably chaired by the noble Lord, Lord Clement-Jones, in which we did a deep dive into both the benefits and the threats of AI. I am tempted to talk more about medtech, infotech, proptech and digitech, but in my limited time I will focus on the importance to our economy of fintech, a sector where the UK is arguably the global leader. Fintech is essentially a combination of financial services with innovation, with a multitude of benefits and savings. The UK fintech ecosystem has all the key elements for a world-leading environment where the industry can thrive with start-ups, entrepreneurs and technological innovation in abundance.
However, I must stress that this is not a time for complacency. As the noble Baroness mentioned in her introductory comments, the digital revolution has provided disruptive technology solutions to age-old as well as brand new problems, from efficiency and reliability to transparency and usability. It also poses a potential threat of massive job losses.
It is a sobering reality that there are currently 1.3 million unbanked working adults in the United Kingdom. Moreover, 16 million people in the UK have less than £100 in their savings account. Some 10% of households are still without access to the internet, and 30% of people over 65 have never used a computer. Fintech holds the key to unlocking and tackling financial inclusion, and it is a sector that places entrepreneurship at its heart. I entirely agree with the noble Baroness that we need to establish a culture of enterprise.
Start-ups are the lifeblood of the sector and are driving the digital economy forward. Banking the unbanked, highlighting affordable credit solutions and providing SME loans all combine to deliver the future that we all deserve. At a time when investors have less appetite for high risk, the tax incentives of EIS and SEIS for start-ups have been essential to the sustainability of many fintech businesses. Last year the United Kingdom had its best year ever in terms of fintech investment, with over £3 billion invested from private equity and VC investments alone. This puts the UK third in the sector, behind only China and the US. London has the world’s highest concentration of 64,000 financial and professional services firms. There are just over 1,600 fintech firms in the UK—a figure that is destined to double by 2030.
Key to the success of fintech in the UK are our progressive regulatory frameworks, enabling challenger banks, remittance providers and fintech pioneers to lay their foundations and rapidly scale up. There have as a result been several unicorns such as Revolut, Monzo and GoCardless. While there is a lot to be positive about in the fintech ecosystem, the future of Brexit will invariably pose a major threat to open borders and the international talent pool that is vital to the success of fintech in the UK. Immigration policy questions will continue to loom large in the light of Brexit uncertainty, and it is thus all the more important to grow the talent pipeline with a greater range of diverse talent at home. Can the Minister give assurances that there will be more provision for tier 1 exceptional talent visas to help retain and fill the demand for skilled labour?
I mention the challenge of diversity because at present, only 12% of senior executives in the UK fintech sector are female. We need policies that drive the recruitment of diverse talent, both to tackle the gender imbalance and to have a workforce with other skills backgrounds. I entirely agree with the noble Baroness, Lady Neville-Rolfe, that education is pivotal. I welcome the introduction of fintech courses, apprenticeships and sponsored work placements to strengthen the fintech talent pool, as well as the Fintech for Schools campaign, which educates young people in how to use fintech.
In conclusion, the UK, and particularly London, has built an incredible financial services community that, positioned correctly, can withstand techno-economic headwinds. But this is not a time for complacency; we need to focus our energies on collaboration rather than competition.
Lord Leigh of Hurley (Con)
My Lords, I too congratulate my noble friend Lady Neville-Rolfe on securing this debate. As President Ronald Reagan once said, you cannot be for big government, big taxes and big bureaucracy and still be for the little guy. It is exactly because we on this side of the House are for the little guy that our approach to business growth and tax is what it is.
As your Lordships discussed recently in an employment debate that I had the honour to lead, we know that the current low levels of tax are effective. Since 2010 our economy has grown by 18% and there are 1.2 million more businesses, with unemployment down by over 1 million in the same period. In fact, the UK unemployment rate is, at 3.8%, at its lowest since October 1974. We have 32.7 million people aged over 16 in employment, which again is a record since records began in 1971. As there are more people in work today than ever before and unemployment is at a record low, this means fewer workless households. Worklessness is the number one cause of poverty. No, it is not austerity or Brexit; it is households where there are no earners. That is what jobs do for households and why these numbers, as a direct result of the economic policies of this Government, should give us cheer.
We know that every Labour Government have left office with worse employment figures than they inherited from their Conservative predecessor; one has to ask why. Other than perhaps simple competence, one answer must be the levels of taxation. Let us look closely at some impacts of taxation. Our starting point should be that this is not the Government’s money, so it is not a question of tax giveaways; it is the people’s money. When a Government taxes they should tread extremely carefully; if we damage job creation, the bill comes right back to us through the benefits system.
This Government have been trending in the low-tax direction for some time now and the job statistics back this up. Labour has gone on record as wanting to increase taxation, not least by withdrawing what it calls loopholes and which everyone else sees as highly successful incentives to encourage new businesses to start and entrepreneurs to succeed. One jests but, to take a good example, entrepreneur’s relief has been specifically targeted by Labour. The latest HMRC figures show that it had 40,000 claimants last year, costing some £2.4 billion. I say “costing”, but that is to completely misunderstand the purpose and nature of this and other reliefs. Labour and others will claim that it is simply to benefit the rich, but it is of course available only to entrepreneurs such as me and the noble Lord, Lord Haskel.
To fully declare my interests, I started a business employing one person with my own money; eventually, when we had 45 employees, I took advantage of that relief. Like other entrepreneurs, I would like to do that again some day as I am prepared to take that risk, but not if my capital gain would be taxed at the same level as the salary I could otherwise obtain. Take that relief away and entrepreneurs like me will choose to start businesses in other jurisdictions more favourable to entrepreneurs.
Likewise, as we have heard, starting up businesses is central to our long-term success. The current EIS and SEIS schemes are excellent but too restrictive. Those restrictions come mainly from the EU, which regards these schemes as state aid. Can my noble friend the Minister assure the House that once we are out of the EU, he and his colleagues will look at these restrictions to streamline them, as this will lead to a dramatic uptick in new businesses?
As tax rates have been kept to modest rates, the total tax take has gone up from just over £400 billion in 2010 to £623 billion last year, so the economy flourishes in such circumstances.
I shall pick up the point of my noble friend Lady Neville-Rolfe about the high street, which we all know has been hard hit. Retail has changed beyond recognition. Many online platforms, such as Amazon, eBay and, more recently, Alibaba have facilitated an avalanche of low-cost, often dangerous, non-compliant imports and, more concerningly for us, wide abuse of the VAT system. Welcome measures have been adopted to date, but they do not go far enough. Despite the powers given to HMRC to take action, there are platforms such as Amazon where Chinese sellers with no VAT number sell products. Earlier this week, I was given the details of a Chinese company with no VAT number, despite HMRC saying that is not possible. This company was reported to Amazon in early June, yet is still openly trading with no VAT number. There are many others I could cite, so the current measures are not working.
This is obviously why the US, Australia, India and some European countries are now imposing the duty of collecting VAT on those platforms, correctly labelling them facilitators. Every month, a US state introduces a new marketplace facilitator tax, and the tax take goes up because Amazon and eBay are in the best place to collect that tax. This approach should be adopted in the UK if UK online retailers, let alone the high street, are to survive the huge and rapid changes in the retail landscape that would otherwise lead to massive job losses. Only the introduction of new, specific, targeted legislation will create an environment in which this new retail model allows the high street to survive.
But this criticism pales in comparison to that which I level at some commentators and some members of the party opposite, whose entire approach to taxation would do nothing to encourage either business growth or job creation. It would achieve the reverse. As we know, the shadow Chancellor described corporations as the real enemy. “Corporation” is a convenient pejorative; he is really describing employers and job creators. It is now Labour Party policy to raise corporation tax by seven percentage points. Economic commentators reckon that will cost 160,000 jobs. I ask: if these taxes hurt the little guy—and they will—whose side is Labour really on? The Opposition are fond of saying that they are for the many and not the few but, as far as I can see, unless they are referring to the many government quangos they want to start, the beneficiaries of these disastrous policies would not be UK jobs.
Frankly, I find some of the ideas emanating from the left petrifying. In the recent book People Get Ready! Preparing for a Corbyn Government, Christine Berry and Joe Guinan, who are well known to be close to Mr McDonnell, advocate capital controls, the nationalisation of private pensions and the banks, and the replacement of the Governor of the Bank of England and his senior staff, together with some Permanent Secretaries, with people more sympathetic to the current Labour leader’s views. There is a real risk that the Labour Party will be run by those who do not believe in a capitalist system. They believe that businesses and the economy should be run purely to maximise jobs, and that the return on capital should not be the determiner of the investment.
Fortunately, all Members of this House, I hope, know that this will lead to fewer jobs, more poverty, less tax revenue and poor infrastructure. Thankfully, this Government have remembered another of President Reagan’s mantras,
“whenever we lower the tax rates, our entire nation is better off”.
This is truly a policy for the many and not the few, and one to which I am glad the Government continue to subscribe.
Viscount Chandos (Lab)
My Lords, I am full of admiration for the noble Baroness, Lady Neville-Rolfe, for her bravery in introducing this subject at this point in the Government’s management of the Brexit process and the ingenuity of her remarks in attempting to draw the House’s attention away from it. I draw the attention of the House to my entry in the register of interests, in particular my involvement in a number of small companies. This debate cannot be Brexit-free, but at least should be Brexit-lite.
The noble Baroness referred to the inevitable focus on Brexit over the next 100 days. Whether we leave the EU on 31 October or not, it is not 100 days. It may be 1,000 days, or 10,000, while the future trading arrangements with the EU are agreed. The uncertainty and confusion over Brexit overshadows everything. It has united the CBI and the TUC; it is to be welcomed in some ways but regretted in others.
The Government were unprepared for a no vote in the referendum and for the triggering of Article 50. We are now faced with the leadership contenders in a race to the bottom, competing to establish their macho credentials for contemplating leaving without a deal. As the noble Baroness, Lady Neville-Rolfe, acknowledged, even when Brexit is resolved, other issues are as important as tax if not more so. The more vibrant and vigorous a market is, the firmer regulation needs to be to address monopolistic and oligopolistic tendencies and to protect competition and the consumer. Other issues are education and training, migration and visa policy, and infrastructure.
Tax policy to encourage business growth and job creation is therefore a necessary but not a sufficient condition for a successful economy. As with regulation, a balance has to be struck between supporting business and fairness for all taxpayers and individuals. As the leadership race for the Conservative Party unfolds, I guess it is between the entrepreneur and the other candidate—I am not sure what he is; a comedian, a chameleon? One advocates a cut in corporation tax to 12.5%, even though, despite what other noble Lords have suggested, there is no firm evidence that the reduction from 28% to 19% has been beneficial to the economy. The other candidate advocates raising the threshold for higher rate income tax from £50,000 to £80,000. Whoever becomes leader of the party will perhaps, or presumably, become Prime Minister. Should the unwritten constitution not require that when the leader of the governing party changes, there is a vote of confidence—another confirmatory vote—in the House as a matter of course?
In contrast to the Conservative Party leadership candidates, in this debate I will concentrate my remarks about tax on the position of small businesses. The noble Lord, Lord Leigh, said that these Benches are not interested in, or supportive of, “the little guy”. When this House debated the report on RBS’s treatment of small businesses through the Global Restructuring Group, a couple of weeks ago, I was struck that there was no speaker from the Back Benches opposite. I love small businesses and start-ups and have worked with them for many years, as my entry in the register shows. I have worked with many different entrepreneurs, some of them even more successful than the Foreign Secretary, and some unsuccessful. I disagree with the noble Lord, Lord Leigh: the one common theme in my dealings with those entrepreneurs is that I have never seen any sign that tax ranks in the first five, or 10, considerations in their decision to start a business, to build it, and to do so in this country.
I finish by urging, as I have in previous speeches in this House, that the Government—the next Government or maybe the one after; it is too late for this Government—conduct a thorough review of the cost benefit of the myriad tax breaks for small businesses. I am hugely supportive of small businesses, as I have said, but if you aggregate the tax breaks of business property relief under inheritance tax, EIS, VCT and entrepreneurs’ relief, it is running at £10 billion of transactions per year, at a cost to the Exchequer of around £3 billion per annum. Do we get value, do small businesses even get value, from those reliefs?
Lord Cavendish of Furness (Con)
My Lords, it is a pleasure to follow the noble Viscount, and I may comment on some of his remarks in due course. We are indebted to my noble friend for securing this debate and for the compelling speech with which she introduced it. She covered much of what I might have wanted to say with greater insights than I can offer.
I have two matters by way of introduction: since I intend to identify what I regard as the obstacles to business growth, and in doing so venture some criticism of the Government, I say to my noble friend the Minister, who is also a fellow Cumbrian, that I acknowledge the many good things that the Government have done. Not least, they have gone a long way to bringing under control the public finances, which had reached such a terrifyingly bad state of affairs. I echo other noble Lords in congratulating them on their moves in regard to education. Secondly, in the matter of declaring a personal interest, I refer noble Lords to my entry in the register of interests. However, having checked with the Companion, I think that on this occasion I am required to be more a little specific. Accordingly, I declare personal interests through my family’s business in south Cumbria, consisting of farming, forestry, mineral extraction, aggregates, housebuilding, leisure and National Hunt horseracing.
My noble friend Lady Neville-Rolfe has great experience and standing in the business world, whereas the cohort to which I belong is the SME sector. I also talk regularly with SME friends and neighbours, especially where they are engaged in the field of high-tech. There is strong evidence of a worrying decline in business confidence, and I think it is widespread. Not only has investment in small firms fallen for four consecutive quarters, but 72% of businesses in the sector have no plans for capital investment in the months ahead. I do not think the prospect of leaving the EU in itself is the cause of these trends; in fact, many seem to welcome it. Innovative entrepreneurs tell me that they are not even greatly exercised by the thought of leaving on WTO terms. There are, however, two Brexit-related issues that do have a bearing, in addition to the one mentioned by the noble Lord, Lord St John. First, there can be no doubt that the interminable process has inflicted serious damage on business prospects. Secondly, the avoidable collapse of net migration from the EU from 189,000 to 74,000 has resulted in difficulties in accessing suitably skilled staff in certain parts of the country. The figures speak for themselves—one in five small employers rely on staff from the EU.
There are in this country 5.7 million small businesses; that is over 96% of the total. Between them, they generate £2 trillion, or 52% of all private sector turnover. I am led to believe that they contribute handsomely to the Exchequer, but I have been unable to locate the figure—perhaps the Minister might help me when he comes to reply. The sector employs 16.3 million people, or 60% of all private sector employment. About 5% of them export to the EU; many of them do not export at all. Some 96% of businesses employ fewer than 10 people.
The SME sector is in trouble, and the Government appear to be blind to its problems and deaf to its appeals. The obstacles to success encountered by this sector are numerous, but I am especially struck by three figures: between 2016 and 2017, the proportion of SMEs that found the burden of rates and taxation was a barrier to success rose from 36% to 41%—the noble Viscount, Lord Chandos, and I might have a discussion about that, because it seems to conflict with his view; in the case of skills shortages, the proportion rose from 30% to 37%; and regulation and red tape as a serious inhibitor of growth went from 42% to 46% in the same period.
On this last point, it is complete nonsense for noble Lords on the Benches opposite to suggest, as they often do, that we want a bonfire of regulations. We want to keep regulation to a reasonable minimum; we want it to be simple and proportionate. To that extent, we are probably in agreement with the noble Viscount. I would welcome recognition from the Government that the imposition of regulation always falls disproportionately on the SME sector, a fact that large companies exploit when lobbying in Brussels so as to disadvantage their smaller competitors.
I appreciate that, taken individually, the enterprises we run are utterly insignificant. However, collectively, it is surely the case that the sector as a whole is by magnitudes the most important in the country, outside perhaps that of financial services. It should hardly need saying that among those in this group are literally all the big players of the future. The Minister will rightly point to small business relief and rural rates relief. However, qualification for those depends more on property values and service provision—for example, a rural post office—than actually providing sustainable employment in the rural community.
In our family business, we find that the margins are generally squeezed to the point that we are postponing and cancelling agreed investment. This is for the first time in half a century. This little incident illustrates my point: as a consequence of one of our recent mineral activities, we inadvertently created a new environment for the great crested newt, which lost no time in adopting it. We then proposed to undertake additional works, to the detriment of the newt’s habitat, and were quite rightly and by law required to rehouse this charming amphibian and do so under expert supervision. The newt was duly found an alternative home. I tell this story to point out that the cost of this came to £150,000 and led directly to the abandonment of a very substantial investment and the creation of about 15 permanent jobs. It is a question of proportionality.
The problem is largely cultural; by degrees, an official class has developed a hostility to those it is meant to serve. This is particularly in evidence among planners, quangos and various agencies possessed of doubtful lines of accountability. The Government can and should do more to address the problems of productivity, public sector procurement—where SMEs are still very largely excluded—technical training and of course business rates.
Those who nourish our nation’s prosperity and on such a scale, as do a number of my neighbours in Cumbria, deserve better. I ask the Government to rethink their attitude to the sector, renew their efforts to understand its troubles and cherish a little all those millions of men and women on whom our future and prosperity depend.
Baroness Fairhead (Con)
My Lords, I congratulate my noble friend Lady Neville-Rolfe on raising this important issue and thank her for her many contributions to UK business over her impressive career.
In terms of being a good place for business, we perform well internationally. We are number 9 out of 190 countries and, as my noble friend Lord Leigh of Hurley said, our unemployment rate is at its lowest since 1974, and employment is increasing. A lot of this success is due to initiatives by government, and by government and businesses together, of which we should all be proud. Just recently, the industrial strategy, with its £37 billion for productivity investment, support for R&D and sector deals, is creating real excitement. It is now supported by the export strategy and the productivity plan led by Sir Charlie Mayfield, which is giving practical checklists to SMEs.
We need to be balanced in our criticism, but that is not to say that there is not more to be done. I will concentrate on access to finance, with a particular focus on SMEs and scale-ups, because they are most keenly affected. It is worth calling out the success of two government schemes: the enterprise investment scheme and the seed enterprise investment scheme, which were begun a couple of decades ago. My noble friend Lord Flight, through his chairmanship of the association, has helped to ensure the strong and continued government commitment, including its endorsement as part of the patient capital review. As regards enhancement, SMEs want to applaud the continuity but also welcome ongoing efforts to simplify the process.
The British Business Bank has been another important addition. It now has a range of programmes, including the Start Up Loans Company, having backed over 50,000 companies, with an average loan size of £6,500. In fact, HMT has just boosted its funding by an extra £2.5 billion as a result of the patient capital review, and that is to be welcomed.
Yet challenges remain. They are particularly acute for high-growth, innovative companies that are seeking to gain access to long-term financing. While the UK has a lot of sources of financing, we are still some way behind the US in terms of the depth of our markets. First, therefore, it is important that, as we leave the EU, we replace the European Investment fund post EU exit—I will return to that message.
Secondly, there is a need to spread access to growth capital across all regions of the UK. As my noble friend Lady Neville-Rolfe referred to, London and the south-east receive the lion’s share of equity investment in SMEs, despite high-growth companies being much more broadly spread across the country. The British Business Bank has established regional funds with the northern powerhouse, the Midlands Engine, and with the Cornwall & Isles of Scilly Investment Fund, but they too rely on European funding. It is therefore important to understand how the proposed UK shared prosperity fund would replace this European funding to allow further regional access to finance funding in the future.
Thirdly, we need to improve access to information for growing companies so that they can better negotiate what remains a complex landscape of financial choices. Again, the British Business Bank launched a national finance hub with online information, better signposting and better referral processes. However, it is important that this is co-ordinated nationally and controlled through the LEPs and growth hubs.
A final area of access to finance that I would like to highlight is our export credit agency, UK Export Finance. That is a key pillar of our UK export strategy from last year. Evidence shows that companies which export are statistically more profitable, employ more people with higher skills levels, are more innovative and endure longer. UKEF is 100 years old, but it is considered today as the best in its class by its export finance agency credit agency peers. During my time as a Minister, it was described to me as, variously, “the game-changer in exporting”, as well as “our best kept secret”. The DIT and UKEF have clearly embraced this challenge to improve awareness, partnering with high-street banks to make access easier, but the success of this agency means that competitors are chasing at our heels. In particular, a number of countries, such as France and Malaysia are providing support in that critical early stage of exporting where you are exploring and investigating and beginning opportunities. One suggestion, therefore, is to look at our programme, to build on the trade access programme, which is currently relatively small, and both increase the funding available and extend the range of areas that can be covered.
Scale-ups is an area of rich opportunity. Although the UK comes third in the OECD rankings as a great place to start a business, when it comes to growing a business we fall to 13th, and these scale-ups really matter. According to the ScaleUp Institute, these 37,000 companies generated £1.3 trillion of turnover to the UK economy. They create three times as many jobs per week as the FTSE 100, they are 42% more productive than their sector peers and they are more likely to export. The challenges that they have faced for many years are well articulated. These challenges predate Brexit and within our power as a country to solve. We have a Scale-Up Taskforce and a Minister to champion them. However, the tax landscape and finding the right finance are important factors, and this is where outstanding questions remain about post-EU exit funding. Notably, of the 219 programmes mapped by the institute, one in three is currently co-funded by the ERDF and scale-up initiatives have substantial support from the EU. We need to avoid a scale-up void when we leave the EU.
Finally, I shall touch on the annual investment allowance. In its 2019 survey, the British Chambers of Commerce found that more than a third of its companies are planning to use the allowance in the next two years. The allowance is valued, but the BCC suggests two improvements: expanding it to include investment in people and removing disincentives.
I ask my noble friend for reassurance on these matters regarding funding to ensure that we build on the progress that we have made in recent years.
Lord Popat (Con)
My Lords, I must start by drawing attention to my entry in the register of interests, as I provide advisory services to a business, and to my role as the Prime Minister’s trade envoy to Uganda and Rwanda. I also thank my noble friend Lady Neville-Rolfe for introducing this debate. Many years ago, I made my maiden speech in a debate about the economy and the need to be more business-friendly. We have come a long way from where we were, but there is still more that we can and should do.
We should start by putting Britain’s economic performance in context. For three years, Britain has become synonymous with one word and one event: Brexit. Our departure has played out like a soap opera that the whole world has watched with increasing despair. Almost every day, news bulletins have been filled with Brexit updates, to the exclusion of almost every other event. This has resulted in one of the most important national stories flying under the radar: that the British economy continues to outperform all expectation.
At a time of considerable global uncertainty, with a potential US-China trade war, many leading economies slowing and protectionism rearing its ugly head again, Britain has continued to grow above expectation. The UK economy grew by 0.3% in the three months leading up to May. The economy has now grown by more than 17% since 2010.
Nowhere is this underreported miracle more obvious than in the UK labour market. At 3.9%, unemployment is down to the lowest level the UK has seen since the 1970s, with a record high of 32.7 million people in employment—up by nearly half a million in the past year and by 3.67 million since 2010. This has worked across the board, with a record high number of women in employment, 1 million more disabled people in work since 2013 and nearly half a million fewer young people out of work.
This is a great triumph for this Government, who reformed the welfare system and created a friendly environment for businesses when taking office in 2010. What is striking is that 80% of the 3 million or so new jobs are full-time and wages are rising at a higher rate.
Investment in the UK is also booming. Recent OECD figures revealed that Britain was the most popular country in Europe for foreign direct investment, with almost double the amount invested in Germany. Ernst & Young recently revealed that Britain was now the world’s most attractive economy for mergers and acquisitions, with £305 billion-worth of transactions in 2018.
The Government can also be proud of their decisions on tax and spending matters. Government borrowing is now down to its lowest level in 17 years and is currently at about £24.7 billion. That is a long way down from the £150 billion it reached in 2010. In part, borrowing is coming down because tax receipts are going up. Last year saw a record amount paid by individuals to the Exchequer, with nearly £623 billion paid in personal taxes—up £29 billion on the year before. This proves that good, old-fashioned Conservative policies work: being business-friendly and keeping taxes low has helped to power our economy.
Yet major areas still cry out for reform. Our planning system remains a significant barrier to businesses looking to invest and grow. Britain also has a considerable problem with productivity. An often-stated statistic is that it takes French and German workers four days to produce what Brits do in five. We need more investment in new machinery to improve productivity; too often, firms are totally reliant on cheap labour to do the work, rather than investing in technology, which is expensive in the beginning but more than pays for itself in the long run.
My noble friend Lady Neville-Rolfe mentioned infrastructure, which includes road, rail and, perhaps most important of all, our aviation capacity. I can think of no other leading country in the world that would take so long to build one extra runway in its capital city; we are decades behind where we need to be when it comes to our airports. When I compare us to Asian and African economies, I am embarrassed by how slowly Heathrow’s additional runway is going. Flights are our bridge to other countries. If we are to be an outward-looking nation post Brexit, speeding that up would help.
Of course, our economy faces many other challenges, including the time it takes to do CRB checks or open a bank account, which can be as long as six weeks. Then, there is the problem of VAT registration, despite the fact that the UK is ranked about ninth for ease of doing business. We need to improve in all these areas to encourage inward investment.
I want to focus on the tax system for a moment. We should be looking to make our tax system as appealing and competitive as possible, particularly for small businesses. Britain is one of the only countries in the world where companies have to pay a tax to employ people. I understand the logic behind employees paying tax, but an employer having to pay national insurance contributions to employ them is too much. There is also a strong argument for scrapping corporation tax and replacing it with a 1% tax on turnover, with the first £250,000 exempt. This would be a massive boost to small businesses and would make Britain one of the most competitive places in the world to do business. It would also help to solve the conundrum that the Treasury faces of how to capture large organisations such as Amazon and Google that have a high turnover in the UK but pay very little tax. What those companies do is not illegal, but it is unfair to many of their competitors; this would help to level the playing field.
Baroness O’Cathain (Con)
My Lords, I was delighted to see my noble friend Lady Neville-Rolfe’s name on the Order Paper. I knew that I would learn so much from her, as I did for many years when we were both at Tesco—although she was working hard and I was only on the board.
I was looking forward to the debate; I certainly have not been disappointed. Of course, we need to be aware that not everything is as we want it to be; in certain areas of taxation, it takes an awful lot of time to find out the right way to go. I am the daughter of a Revenue commissioner, so I should know something about it; it is probably the worst thing I deal with in business. Above all, we need to pull together on this particularly tricky aspect of our business and political lives.
I fear that we work in a rarefied atmosphere and are very much out of touch with certain groups of people in diverse areas. We tend to think the legislation we produce is flawless. We certainly need to do an awful lot more post-legislative scrutiny, and I hope that will happen in the next few months.
We have had an excellent debate, and the only thing I add to all that has been said is that we need to have much more confidence in ourselves. We are reading awful headlines in every newspaper, even those we think we can rely on—including the Financial Times.
Baroness Falkner of Margravine (LD)
Given the House’s keenness to hear the important things that the noble Baroness, Lady O’Cathain, is saying, I wonder whether she might actually address the House. It is very hard to pick up her voice when she is looking backwards.
Baroness O'Cathain
I am really very sorry and contrite. The fact is that I tend to face that way; do not forget that there are quite a lot of Members behind me too.
Right, where was I? I was saying that we needed to be confident. I recommend that people really take a grip of the terrific opportunity we have now, with great education and universities, huge investment in R&D and—I hear on Radio 4—apparently new medical developments every week. The people who can help us drive this are those graduating now. There should be some way of garnering together these people—the 18, 19 and 20 year-olds—and saying, “Be here; here is the best place to be. Give us the benefit of your investigations and studies”.
I do not want to say much else. I finish with a saying from Warren Buffett: “When everyone is buying, I am selling”. I am buying Britain at the moment.
Lord Suri (Con)
My Lords, I start by thanking my noble friend for securing the time for this debate. The tax system is a tricky thing. A former Chancellor of the Exchequer once described changing tax rates or introducing new taxes as pulling a piece of string tied on to five levers, with no guarantee of which would move or at what time. But we can look at the picture as a whole and note some long-term trends that point to where we could do better.
When I first came to this country, the tax burden ran at close to 40%. Lady Thatcher, formerly of this and the other place, got that down to 32%. But since that excellent progress was first made, the burden has been allowed to creep up, quietly but consistently. The TaxPayers’ Alliance has calculated that the tax burden is as high this fiscal year as in 1969-70. Put bluntly, we are paying more than ever in tax and struggling to eke enough out of existing taxes to reach our goals in matters such as infrastructure, the health service or social care.
But we can fix these issues by taking a proactive approach to reordering taxation. Take corporation tax, which is charged on profits. Out of profits, we pay workers for their labour and suppliers for their goods. Out of profits comes the reinvestment that drives productivity. Even if profits are put away in a bank, they are recirculated by lending. Profits drive growth, investment and lending. I am of course glad that corporation taxes have dropped steadily under this Government, but I would like to see them fall far more steeply. Lower corporation tax has actually boosted the tax take considerably. Will the Minister reiterate the Government’s commitment to further lower corporation tax and keep our rate at the lowest in the G7?
We should not shy away from radical solutions, either. The UK has struggled with weak productivity growth over the past decade, and the key to boosting productivity is boosting investment. It has long been recognised as a matter of sound accountancy that ongoing expenses should be deductible. But for investments that run through the long term, such as new plants, buildings or machines, companies can only deduct on a fractional basis. Because investments run down over the years, and inflation and interest charges reduce the value of assets, companies can recover at best a fraction of their investment, and almost never all of it. This matters, since investment in the long term is discouraged, as companies see it as a long-term cost. Full expensing is a tweak to the system. It allows companies to deduct those investments straightaway. This matters a great deal, as it provides a substantial incentive to invest, rather than hold back and spend one’s money or available loans elsewhere.
A 2017 study by Eric Ohrn looked at the difference between states in the USA that allowed full expensing and those that did not. Those that did increased investment by 17.5% and grew wages by 2.5%. Five years thereafter, the states that allowed full expensing had 10.5% higher productivity than those that did not. Full expensing would also allow the Government to pick asset classes to encourage, which may be useful as part of the industrial strategy. Will the Minister consider reviewing the evidence in favour of full expensing?
Baroness Kramer (LD)
My Lords, I begin by picking up the issues raised by the noble Viscount, Lord Chandos, who made it clear that we cannot talk about anything to do with the economy without a real awareness of Brexit. It sets the framework; I know we do not want to focus on it today, but it is worth a comment or two here. Many people are acting as though uncertainty is something that exists until we decide to leave, and at that point uncertainty ends. As the noble Viscount said, we are then locked into five to seven years of future uncertainty. It becomes the fundamental of the British economy, and all we can be sure of in leaving is that British businesses will have less access to EU markets; the complex supply networks that are the foundation of the British economy will gradually erode, because that is the logic of the disengagement and separation; and British businesses will have to build their future from economies of scale in a domestic market of 65 million people, not 500 million. I could go on, but that is the context.
The noble Lord, Lord Popat, the noble Baroness, Lady O’Cathain, and others said that we are looking at a robust and healthy economy. Public services in this country are desperately underfunded. Many, particularly at local government level, are in crisis. This is repeated in almost every sector, including the police, prisons, schools, the health service and social care.
There are more than 14 million people still in poverty, with inequality at its widest since the 1980s. We talk about full employment, but real wages are still 3% below those in 2008. We have now normalised in-work poverty, a serious feature that we have to tackle. For many people, their employment feels precarious as they know that their employers are trying to work out what the future of their business will be.
Growth is geographically unbalanced. In recent years, foreign direct investment in the UK has plummeted. In 2018 it was one-third of what it was in 2016. When people talk about us receiving more foreign investment than any other area, I wonder whether they have looked at the value of the pound. Assets in the UK are at fire-sale value and, even with that, there is a decline in foreign investment.
I share the concerns of the noble Baroness, Lady Neville-Rolfe, about productivity. Our recent growth numbers are, frankly, awful. It is a not a situation in which we can be complacent because we risk being ineffective in driving the economy forward.
The issue raised by the noble Lord, Lord Haskel, goes to the heart of economic growth for the future. Times have changed. Big businesses, good businesses and the smaller entrepreneurial businesses no longer take a traditional view of their role in society. Many recognise that it is now time for a new social contract between business and society; that social justice matters; that their relationship with their customers, workforce and communities must be a positive and different one; and the necessity of tackling climate change. We are entering a different and new world, which has to be redefined and can no longer be classified in terms of profitability. This will lead to a different notion of what is a successful business and how it grows. Fairness becomes a fundamental and underlying principle. I use the word “fairness” because I am shall move on to address some of the issues raised.
Before I do so, however, I must step back and say that businesses also recognise both the opportunities and dangers of the fourth industrial revolution. The noble Lord, Lord St John of Bletso, referred to this. If we are to continue with research and development and science, and if we are to develop the skilled workforce we need, it will mean a revolution in how our businesses operate.
We have in place many of the right things to drive the economy forward, but we have them in miniature. I join others in praising the British Business Bank—it is perfect, but so small when compared with the challenge it is trying to deal with that it cannot make material change. It will take a change in thinking in this country to put into the British Business Bank the scale of resource and finance it will need for the future, especially as it will have to replace both the European Investment Bank and the European Investment Fund if we decide to leave.
Again, the industrial strategy has good policies, but in limited areas and on a limited scale. We are not undertaking the infrastructure challenge; we are not delivering the broadband we need; and we are not making the necessary changes in the rail and transport infrastructures. These are massive projects and will need substantial amounts of money behind them and a real drive to make them effective. It is the same with skills. Surely we all recognise now that life-long learning will be essential but comes with a heavy bill attached.
When I hear people talking about tax cutting as the key mechanism for driving the economy forward, I realise that we have to put a cross through virtually all the measures that we need to sustain and take forward our economy. I can think of nothing worse than tax cutting at this point in time. I ask those who think that cutting taxes will lead to a huge increase in the tax yield to go back and look in detail at the past few years. The rise in the tax yield has come because business has rebounded from a severe financial crash in 2007-08, not because taxes have been cut.
Unfortunately, part of the money has come in because business has been holding back on investment, as we have discussed. The work done by the IFS in looking at Jeremy Hunt’s proposal that we should cut corporation tax to 12.5% makes a nonsense of any suggestion that that kind of tax cut repays itself. If we are to repair public services and drive the economy forward, we certainly cannot afford to do any of that.
I have listened to many noble Lords who talk regularly to businesses. I do not find businesses asking for tax cuts. They ask for all kinds of long-term support, but I have never heard a request for tax cuts from any major business.
Baroness Kramer
The noble Baroness, Lady Neville-Rolfe, is being kind to me in raising the issue of business rates because, as she knows, my party supports a policy of abolishing them—they are part of a Victorian past—and replacing them with a commercial landowner levy. I do not want to try the patience of the House in the time allocated by taking noble Lords through the details, but it is one of the crucial ways forward. It gives businesses every incentive to grow because the tax is on the underlying land value, not on the additional value that they create by future investment. It also helps the regional distribution of businesses. I suspect we have found another supporter for that policy in the noble Baroness, Lady Neville-Rolfe, and I appreciate that.
I agree with the noble Baroness that we have to tackle the issue of digital taxes. I am not sure whether I support the French proposal, announced today, of a 3% tax on digital revenues but it would be interesting to look at that issue because something has to be done, rather than just talking about it. I am concerned that the US is now considering that this would be an opportunity to retaliate against any European country that sought to tax digital companies more seriously. I hope any future Administration here would have the backbone to stand up to the Trumpian “America first”, which would make fair taxes impossible.
I believe in fiscal responsibility and investment. The old notion that you either support business or the ordinary people in the workforce is nonsensical. We are in a modern era where everyone must pull together. That is accentuated further by the fourth industrial revolution, and I hope we will begin to think about that new era rather than lock ourselves into the past.
Lord Stevenson of Balmacara (Lab)
My Lords, I declare an interest that my wife is a senior construction lawyer working on large infrastructure projects and my three children are, amazingly, involved in financial engineering, especially SME work; that may have an impact on this debate.
I thank the noble Baroness, Lady Neville-Rolfe, for securing this interesting debate. I agree with her that it is refreshing to have an opportunity to stand back from the day-to-day cut and thrust—or, at least, it should be—and talk about deeper policies and issues in principle, but somehow we have missed the opportunity of the slacker time we have in Parliament at the moment to do that. She has stepped up to the plate and I respect her for that. I also echo what the noble Baroness, Lady Fairhead, said about her contribution to British business and the way in which it has informed her debate and the discussion today.
It has been a high-quality debate but it has done more to reveal the complexity of the issues that we are trying to address—the interrelation between growth, productivity, investment and taxation, on the one hand, and, on the other, the unsatisfactory position in which we find ourselves in approaching, taxing and regulating the new digital economy and the fourth industrial revolution. It would take more than just a two-hour debate to get us further down this track, but we should start somewhere. We always need to take a first step in every journey, and we have covered a lot of ground here, which could provide some information for further work.
The context we should deal with was raised by the noble Baroness, Lady Kramer, in relation to the economy. Although it may, on a superficial level, look good, with lots of people in employment and a lot of the indicators going up, that was from a very low base and the reality is that at the lower end of the income spectrum many people are struggling to make ends meet and are not doing well out of the growth in the economy that there is.
Like my noble friends Lord Haskel and Lord Chandos, both of whose speeches opened up new light on these issues, I want to press the Minister on matters which are currently under consideration, and I hope to get some responses from him. I shall make five points. First, there should be no doubt that my party supports a market economy. We were the party that brought in the strong competition environment in the early 2000s which was the basis of much of the growth in the economy that we enjoy today. The Government have a duty to act in the stewardship role referred to by my noble friend Lord Haskel, and where there are asymmetries of information, monopolies, oligopolies or public interest concern—whether that is defence, security or the media—there is a need to create fair markets. For example, payday lenders is an area where the Government had to act because of pressure by politicians.
We need to see the Government take a position which is based on principle and reflects forward what we are trying to achieve as a country. We have before us two good opportunities for this. There is a proposal from the noble Lord, Lord Tyrie, to reform the CMA in favour of a stronger balance towards consumer interest. His recent letter to the Secretary of State was interesting as it posed this not simply as a consumer interest matter but as a way in which the CMA could modernise its activities, sharpen its approach to the imbalances and injustices it sees in the market and work forward in a way which would allow it to pack a much bigger punch in terms of the penalties it could apply. I am a little unclear about where that has got to in government circles and I would be grateful if the Minister could give us some information about that when he responds.
It seems to me that a lot of the issues we have raised today need a strong regulatory component. I am not arguing that regulation is good in itself. Indeed, rather like the noble Lord, Lord Cavendish, I am not in favour of a bonfire of regulations but of good regulation and better regulation—a phrase often used by the noble Baroness when she was a Minister. It is that regulation that has to be enforced, or it is worth nothing. The CMA is a key element of that. A shift away from a fair market model to a consumer interest model should set in train considerable changes to the way in which we operate. I would be grateful if the Minister could bring some information to us on this.
The second piece of work that is also the subject of discussions and debate between the reviewer—in this case, Sir John Kingman—and the Government is how we might reform statutory audits, particularly for public interest entities, or PIEs. That may not seem entirely relevant, but stronger identification of for whom audits are carried out and the responsibilities that will fall from a new regulator, which is likely to have higher standards and enforce bigger changes in the regulatory environment, will have an impact on business and the future of our economy. I would be grateful if the Minister could confirm where we are on that.
That leads into another, slightly smaller point, but one I shall inject into this debate. There is a focus in a lot of regulatory work in government on PIEs and less interest in how SMEs do. This point was raised by the noble Baroness, Lady Fairhead. We need to think very carefully about the role of SMEs in our economy, and I do not think overreliance on Stock Exchange rules and the way in which mergers and acquisitions and other forms of change of ownership take place through the Stock Exchange is of much benefit of SMEs. Indeed, it might be at the expense of SMEs. Much more work about the Small Business Commissioner and attempts to make sure that SMEs get a greater amount of procurement would do more in this area than any amount of regulatory activity. I hope the Government will have some plans for that that they can share with us.
The points made by noble Lords during the debate about the wider context of infrastructure work and the need for more focus on education and better educational standards, particularly in technical areas and apprenticeships, are vital to this, but the point made by noble Lord, Lord St John of Bletso, about visas and the need to make sure that we get a flow of good-quality people who can take forward investment opportunities and work in new companies is important, particularly in the context of Brexit.
We need to think again about the way tax impacts, particularly on the SME sector. This is a theme running through what I am saying. Business rates were mentioned by several noble Lords. I think the time has come for them to be an issue. The important point that has not been made is that it is interesting that the business rate element is now one of the biggest features of local government financing. That has a danger of steering the way in which we think about rates in relation to the original purpose, which was to make sure that businesses contributed to local services. If rates are being used because other money is not available, that may lead to a suboptimal solution. I would be grateful if the Minister could respond on this.
Stamp duty and VAT are also issues which need to be thought about more in the context of SMEs. I was particularly interested in the question about investment reliefs. I spent a lot of time in an earlier career trying to get EIS and VCT to work for the area I was working in, which was the film industry. I was constantly frustrated by the very narrow rules and the difficulty of trying to make anybody in the Inland Revenue realise that investment in film was not just a lovey-dovey thing but was a real thing with real returns, if you get it right, but they would not change the system, and I sympathise entirely with the points made there.
In the time we have left before Brexit, we should think a little more about the impact that tariffs and duties might have on our economy. They have virtually gone from discussions about tax-raising issues because they are no longer part of our everyday experience, but if we are to leave without a Brexit deal—or even with a deal that will involve, at some stage, responsibility for our own trade—we will have to raise the question of what tariffs and duties we will set. That is not to say that they will be good, because to a large extent they may involve extra costs for consumers who are already hard pressed, but they are a source of interesting revenue. Even on the Government’s current interim proposal, which would need to change after consultation, there are substantial tariffs in certain areas where the Government have seen fit to protect certain industries. If that is the model, it opens the door for further consideration. Will the Minister explain what work is being done on that?
This has been a good debate. I have resisted the temptation to do knockabout on politics, but I am happy to talk about that later outside the Chamber if the noble Lord wishes to do so. I have strong views on this. A lot of these issues are to do with what we as a society think about fair tax. What is a fair tax? That is a question I tried to raise when I was working in a think tank a few years ago. I got some interesting responses when I did some detailed work on this. Indeed, we summarised it in a pamphlet which was subsequently published. The first instinct is always to think about income tax, not the wider tax base. For those on the right, it is a relatively straightforward question. They broadly say that taxes should always be proportionate. There is no debate about that; that is what they come up with. Those on the left tend towards an acceptance that that is the right approach, but they would like to see redistribution as part of it. I wonder whether taxation needs a bit more thinking about in terms of that element. Redistributive taxation is always aggressively attacked by the right. That is not necessary if it is done properly and fairly. The most interesting response—I will end with this—was from the Inland Revenue. When asked a direct question, a senior official, who will not be named, said to me that a fair tax was two things at the same time. First, it was invisible—in other words, people paid it without knowing they were paying it—and, secondly, it was hugely proportionate in terms of bringing cash in. The two examples he gave were insurance premium tax—everybody has to have insurance and therefore if you charge them a little bit more on the top they do not really notice it and it brings in loads of money—and air passenger duty. Again, people who have to fly will pay it; it is a relatively small proportion but it brings in lots of money. Those are fair taxes. I leave noble Lords to think about that.
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)
My Lords, I will not follow the noble Lord on that point but I will pick up on his opening remarks, in which, in paying tribute to my noble friend for getting this debate together, he said that it reveals the complexity of the issues. I make that point because it would be rash of me to try to answer every single point that has been made. On some of the more detailed points, it might be helpful if I write to noble Lords. However, the idea that a subject of this sort could be wound up in a 20-minute speech defies belief.
Having said that, like the noble Lord, Lord Stevenson, I offer my congratulations to my noble friend Lady Neville-Rolfe on bringing forward this debate. It has been a very useful process to go through. She has attracted a very distinguished cast of speakers, all of whom have a great deal of experience in the world of business and beyond. One is my noble friend Lady O’Cathain, a fellow director of Tesco. I do not know whether we now refer to “buy one, get one free” but to have two in this debate is a great success.
I was deeply heartened by the comments of my noble friend Lady O’Cathain about the need for, and importance of, confidence in this field. I echo what she said and remind the House and the country about our successes in education. She mentioned the successes of our universities and the number of top, world-class universities in this country. The part of the industrial strategy with which I am most familiar is the one that deals with life sciences, and I look at the expertise in our universities up and down the country and at the small start-ups in science and technology that spin out from them. I appreciate that concerns have been expressed about those start-ups scaling up to big businesses, but that is happening in some cases. However, that area has had enormous success, as we constantly need to be reminded.
I am constrained in what I can say to my noble friends and others in this debate. The obvious constraints have been referred to, including that of timing, in that it looks as though we will have a new Prime Minister and possibly a new Chancellor and other new Ministers in the next few weeks. There is obviously also the constraint on a House of Lords Minister in BEIS when it comes to suggestions about reducing taxes. My noble friends Lord Popat and Lord Suri both said that they would like to see a major reduction in corporation tax. My noble friend Lord Popat looked at the removal of employers’ national insurance contributions—a tax on employing people. I would love to stand here as Chancellor, possibly sipping my whisky, and say, “That will be done”, but noble Lords know that that is not possible. However, I assure both my noble friends and others who made remarks of that sort that these matters will be passed on to the appropriate Ministers at the appropriate time.
The noble Lord, Lord Stevenson, emphasised the wide-ranging nature of this debate and the fact that we have covered issues relating to immigration and visas, Treasury matters, BEIS matters and the importance of education and training, planning and infrastructure. We have ranged wide, but it is important to go back to the fundamentals as set out by my noble friend. She said that businesses produce the wealth on which we depend. They are fundamental to our prosperity and to the industrial strategy, and I am very grateful for everything that my noble friend Lady Fairhead said about that. It prioritises facilitating the conditions for businesses to flourish. The tax framework can also be a powerful enabler for business in the growth and creation of good jobs.
A point made again and again—I will repeat it to remind the noble Baroness, Lady Kramer, although she accepted it—was that businesses pay the taxes that fund our public services. Public services are important but they need funding. Businesses also create the solutions to meet consumer needs. They bring prosperity and livelihoods to local communities up and down the country. I am grateful to my noble friend Lord Popat for emphasising that unemployment is at a record low in the UK. That is down to businesses doing what they do best: creating jobs and bringing prosperity to our country. I remind the House that not only is unemployment at a record low but employment among men and women, disabled people and others—the figures were quoted by my noble friend Lord Popat—is at a record high.
Businesses are the engine of our economy. The industrial strategy is precisely about backing businesses so that they can help to boost productivity—I will have a little more to say about productivity problems later—and create high-quality, well-paid jobs throughout the United Kingdom, with appropriate investment in skills, industries and infrastructure. To put it another way, the industrial strategy is how we are creating an economy that works for everyone: businesses and people who are highly innovative, highly skilled and of high quality, supported by low and stable taxation and smart regulation.
Our aim, as has been made clear by my right honourable friend the Secretary of State, is to make the United Kingdom the best place to start and grow a business. A number of noble Lords quoted the figures to show how we are rated in that respect. We are starting from a good base. Our business environment is internationally recognised as first class, robust and reliable. The World Bank and the OECD consistently rate the UK as being among the best places in the world for business.
Our stable, predictable and competitive tax regime and the strength of our legal, competition and regulatory systems have made the United Kingdom one of the world’s foremost financial centres and the home to some of the biggest and most respected businesses. International investors choose the UK because they know that our business environment is a fair and dependable foundation for growth and prosperity.
However, I understand that there are concerns about the tax framework, and my noble friend Lady Neville-Rolfe focused on that. As she put it, it is creaking under the weight of its complexity, with a doubling of the size of the tax code since 2009. We are committed to seeking a balance between a tax system that is easy to comply with and one that prevents avoidance and evasion. Since 2010, we have established the Office of Tax Simplification, as well as an independent advisory office in the Treasury. It offers valuable advice on ways of simplifying the tax system, which the Chancellor takes into account.
The framework is an important lever in any economic strategy. Our low-tax system, I believe, generates the incentive for firms to invest, start up, grow, hire new employees and provide benefits to their community and shareholders. I believe also that low corporation tax increases the returns that companies receive on their investments, allowing them to increase investment, lower prices, hire staff and increase wages. I say to the noble Viscount, Lord Chandos, and the noble Baroness, Lady Kramer, that reducing corporation tax has—as my noble friend Lady Neville-Rolfe made clear—increased the take. She cited the Laffer curve. Where the curve ends is a matter for judgment, but certainly that has had an effect. We believe that getting tax right is very important. It is about creating wealth across the country while striking the right balance. It is not about big or small businesses paying nothing and reaping rewards. I say to my noble friend Lord Leigh at this point that, when we leave the EU, we will obviously have even greater freedom to look at things as he suggested, and those opportunities should be taken up.
I accept all the points made by my noble friend Lord Cavendish about small businesses, and by all noble Lords about rates; we have to look very carefully at levels of taxation, how they work and how we get it right to ensure a degree of fairness between different businesses. A number of noble Lords talked about competition between the high street retail sector and the online sector and the need to make this fair. We want a system that provides funding and allows businesses to flourish. Businesses will then benefit from the Government’s investments in infrastructure and the standards of education to which I referred. We need to ensure that businesses are paying their fair share, helping to improve the wider public perception of tax equity and building a sense that we are all contributing to our shared prosperity.
I will say a little about innovation and regulation, which were rightly raised by the noble Viscount, Lord Chandos, my noble friend Lord Cavendish, the noble Lord, Lord Stevenson, and the noble Baroness, Lady Kramer. We are in a changing world. When I speak outside the House on the subject of regulation, I often start with the example of how we got it wrong 150 years or so ago with the introduction of the automobile, when we put a man with a red flag in front of the car. It was obviously not the brightest way of getting the automobile working and did not help particularly with safety—it may be that the Liberal Democrats have a new policy and would like to have a man walking in front of a car with a red flag to reduce emissions, but that is another matter.
Getting regulation right for the new world that we live in—for the fourth industrial revolution—will be crucial. That is why we launched our White Paper on regulation for the fourth industrial revolution—I hope that noble Lords will read it—which sets out the reforms needed to ensure an agile and flexible approach to regulation to embrace the technological changes that we face. The changes are moving very fast and will be difficult to predict. Our new approach to regulation will, I hope, support business to innovate and invest in the UK and give people faster access to new products and services that can transform their lives.
I always wish to give an optimistic, positive view of the state of the economy, but it is also right, as my right honourable friend made clear when he introduced the industrial strategy some 18 months ago, that we “fess up”, as it were, to the weaknesses as we see them. I am grateful to my noble friend Lady Neville-Rolfe for underlining the fact that we have a problem with low business productivity. We have some of the most productive businesses in the world—we do have successes—but we also have a long tail of less productive businesses across a broad range of sectors, all over the United Kingdom. Our review of business productivity showed that firm management matters enormously and that, on average, our managers are less proficient than those in comparable economies. United Kingdom businesses do not always adopt best-practice management techniques and technologies. The reasons are as varied as our businesses, but there is strong evidence that businesses do not always know what is possible, how to find help, or how new technology can benefit them. Again, we believe that the industrial strategy has addressed this and will continue to do so as we work through it.
As I said at the beginning, I want to cover a number of other issues, but I am not sure that I will be able to deal with all of them. However, I will say a quick word about the apprenticeship levy, which was raised by my noble friend Lady Neville-Rolfe. We need, now and in the future, to ensure that we have the right skills in the system. Our ambition is to increase the quantity and quality of apprenticeships to enable businesses to meet their skills need. We are monitoring the impact of the levy and will continue to work with employers on how it can be spent effectively and flexibly. In the last Budget, as noble Lords will remember, the Chancellor announced changes to ensure that it works for business, and we will continue to keep that under review.
Finally, I turn quickly to a point made by the noble Lord, Lord St. John of Bletso, about the need for diversity in entrepreneurship. I refer him to the recent review conducted by Alison Rose, who shed renewed light on the barriers faced by women starting and growing a business and identified ways to unblock untapped talent. We are committed to increasing the number of female entrepreneurs by 50% by 2030. We also want to foster that spirit of entrepreneurship; we have launched a young entrepreneurs review led by the Prince’s Trust, which will continue into the autumn of 2019.
I believe that we are at a crucial point in our history. It is true that our business community is living through a moment of uncertainty—but all eras are uncertain. We should be aware that there are opportunities ahead; the business environment frameworks developed through the industrial strategy will put us in a good position to continue to support business growth and job creation, supported by our fair, predictable and stable tax system.
Once again, I thank my noble friend for offering the House the chance to debate this matter.
Baroness Neville-Rolfe
My Lords, this has been an excellent and good-humoured debate, which is frankly long overdue. I thank all noble Lords from across the House for their thoughtful contributions at this critical time. I will send them, elegantly edited by our friends in Hansard, to the two aspirant Prime Ministers, with one of my beautiful blue ribbons. As my noble friend the Minister said, business pays the taxes that pay for the public services we all value—a key insight for the next 100 days.