Small Businesses: Tax Reporting

Debate between Peter Kyle and Rupa Huq

Monday 25th January 2016 Westminster Hall

[Peter Kyle]

I am extremely grateful for that thoughtful intervention, and I have some sympathy with the hon. Gentleman’s points. However, when policies are thoughtful, intuitive and in the interests of business, businesses usually flock to take them up. In this case something has clearly gone wrong in one of two ways: either it is being communicated in the wrong way, but it is a great policy; or it is a poor policy that is being communicated in the right way but is not managing to hit home. The purpose of the debate is to decide which it is.

The policy needs to be tested and communicated better. We need to ensure that people who run businesses—smart people who want to do the right thing by paying their taxes and ensuring that their businesses are not disproportionately burdened—are fully involved as the policy is implemented in the long run. In my view it certainly should happen in the long run, because at the moment, people are being put off going into self-employment or setting up their own business.

Interestingly, on the train up here today, when I was speaking to my brother, who works as a postman in the Brighton, Pavilion constituency, he told me that one of his colleagues had seen on the news that this debate was coming up and had talked about self-employment. His colleague was self-employed for a number of years—more than a decade—but moved away from it because of the fear of the accounting, bureaucracy and regulation that was being heaped on to self-employed people.

The freedom that is associated with self-employment has diminished. As well as the burden of regulation, people fear not having the skills that they need, and they fear the unknown. Because they are not a trained accountant or an experienced administrator—rather, they are a skilled labourer—they fear that they might step outside regulatory measures without being aware of it. That was enough to drive my brother’s colleague away from self-employment and back into paid employment. We should be wary of that, because it would be a huge shame if entrepreneurship were to become the preserve of the middle classes. I do not believe that entrepreneurial spirit is class-based or education-based; it is evenly distributed, even though it is not evenly expressed in our economy.

Public policy on the self-employed needs to be got right, particularly for people who run small businesses or microbusinesses. At the moment, I do not believe that Government policy across the board is on their side. Let us take one example—the much vaunted, much hyped productivity plan, which I know the Minister is keen to refer to often in the Chamber and in the media. It is interesting that in the Government’s flagship productivity plan there is not one single mention of the self-employed, who make up 15% of the workforce and number 4.5 million people. The fastest-growing employment trend in our country does not warrant a single mention in the productivity plan.

In my constituency there is a fantastic business called Crunch, which has been set up specifically to supply accountancy services to people who are self-employed or running microbusinesses. I know that the hon. Member for Brighton, Pavilion, went to visit a couple of weeks ago, which was absolutely fantastic. It now provides services not only right across our city but right across the south of England, and it is great that people are starting to notice just how fantastic the business is and how important its services are. It provides light-touch, fast, responsive support to people setting up businesses. The great thing about being able to visit it is that because it has thousands of customers, it can harness insight into real-time trends in self-employment and see the impact of public policy on the small business and self-employed sector. I know that quite often, HMRC and Government Departments struggle to get real-time data on the impact of Government policy.

One prediction that Crunch makes about the negative impacts of policy is that the leap from 0% to 7.5% in basic rate dividend tax will hit lower-earning company directors the hardest. Those are probably self-employed people who are moving their company to limited status, have a very small number of employees and pay themselves through dividends. Everyone wants to make sure that the right people are paying tax, but the proposal could have the most negative impact on people on lower incomes who run microbusinesses. For example, a limited company director paying themselves primarily through dividends would pay £1,528 more tax a year on pre-tax profits of £48,000, whereas a director with £78,000 of pre-tax profits would pay only £1,343 more.

We can also see from the statistics that the change in income tax for a microbusiness from 2015-16 to 2016-17 will have a negative impact of 21% on somebody earning about £40,000. The equivalent impact on somebody earning £58,000 will be minus 1%. There is something regressive, not progressive, about the changes to dividend tax, and we need to shift the tax burden so that it is progressive, not regressive. If the Minister does so, I know that he will be met with support from both sides of the House. I would very much welcome his comments on that point.

[Dr Huq]

My hon. Friend’s point reminds me of something that Andrew Dakers, who is from West London Business in my constituency, has said:

“One can only assume the measure is being planned to speed up tax receipts, which is a duff basis for policy-making in this area.”

Will my hon. Friend comment on that?

[Peter Kyle]

I am extremely grateful for that intervention, and I have a lot of sympathy with my hon. Friend’s comments and the example that she has given. It is definitely worth mentioning that, and I am sure the Minister will respond to it.

Crunch, the company in my constituency that I mentioned, has a proposal for the Minister. I hope he will take it away with him, because Crunch represents a large number of self-employed people and microbusinesses. It says that the transition will be most challenging for microbusiness owners,

“as it leads to a steep hike in tax overnight.”

It proposes

“either deferring the introduction of these changes for at least 2 years”,

which would enable businesses to have time to adapt,

“or introducing a 3 year credit to keep dividend taxes at 0% for those business owners on the basic rate.”

I support those proposals, and I hope that the Minister will consider them in the same spirit.

It is difficult to devise policies that support self-employed people, because many people go into self-employment because they enjoy the freedom. Increasingly, however, we see a trend whereby larger employers are restructuring and people are being forced into becoming self-employed at a time when they would otherwise not have done so. This area of policy is not dissimilar to youth unemployment in the challenges it provides for policy makers. Self-employed people, like young unemployed people, are hidden away behind front doors in neighbourhoods and communities. They often work from home, so there are problems of connectivity and how they network as a group. It is certainly easy to overlook them. The fact that they are hidden and dispersed in neighbourhoods makes it difficult to target them as one group.

It would be welcome if the Government examined professional development, which would not be burdensome and would link directly with the policy that the Minister is considering. Self-employed people as a sector underinvest in their own professional development, and other spending trends among self-employed people include a fall in pension contributions every year for the past five years. The key measures of their long-term strategic thinking about their own professional development show that there are challenges that are intrinsic to the self-employed.

Anyone who goes into full-time employment with a company looks at the professional development that it offers. That is a key magnet for talent. Self-employed people are so worried about month-to-month living that they do not invest as they should. We must tackle the productivity challenge among the self-employed and microbusinesses. The Government should launch a consultation into that so that we can work cross-party to get deep into what trends are emerging and how we can support the sector. The challenge of professional development would then be won.