Many of the decisions emerging from Westminster still tend to ignore or actively harm the micro-business sector, argues Jason Kitcat.
The growth of micro-businesses is a great British success story, unmatched by nations in Europe or North America. Since the year 2000 there has been a 55 per cent growth in the number of UK micro-businesses – firms of zero to nine employees.
Why has this happened? The digital age has made it easier than ever to start and run a business, leading many to make the leap into business for a variety of reasons. Some do it to spend more quality time with their families, or at least be able to do the school run some days. Others are keen to take charge of their careers, bringing their skills and experiences directly to market instead of depending on a boss. And there’s always the ‘classic’ business tale of a new product idea which a creative entrepreneur wants to bring to consumers.
Whatever the reasons, we’re seeing a huge shift in the British workforce. The UK’s 5.2 million micro-businesses now employ 8.4 million people, an employment segment second only to the corporates of 250+ employees. However so much of the policy around tax and benefits still assumes people work as employees on a steady monthly wage. Unfortunately many of the decisions emerging from Westminster still tend to ignore or actively harm the micro-business sector.
For example earlier this year the government announced plans to increase taxes on dividends from April 2016. This sudden decision, without consultation, is aimed at increasing government tax revenue and closing the gap in how much more tax a waged employee pays versus a small business owner. While perhaps the gap should have been narrowed somewhat, it has to be recognised that unlike waged employees the self-employed don’t have sick pay, paid holiday and other benefits of a more traditional ‘steady job’. This was part of the reason why the self-employed have historically benefited from lower tax rates in return for the greater risks they carry.
Unfortunately the dividend tax changes planned will hit the smallest businesses hardest; a director earning £48,000 pre-tax profits will pay over £1,500 more tax in 2016/17 compared to this year. By comparison, a director earning £58,000 pre-tax profits would only be paying £143 more tax next financial year. Our analysis shows that the transition to the new dividend tax regime hurts the viability of the smallest, least financially resilient businesses. We believe government should introduce a three-year transitional period, protecting those businesses with pre-tax profits under £50,000 from the tax hike.
This change in dividend taxes is an example of how the needs of micro-businesses got lost in pursuit of a wider policy objective. In this case narrowing the tax gap between waged workers and company directors was announced without apparent thought for how the very smallest businesses would cope with such a transition. But there is hope, change is possible.
We welcome the government’s renaming the Minister for Business and Enterprise role to be Minister for Small Business, Industry and Enterprise and congratulate Anna Soubry MP on her appointment. This change is recognition of the importance of smaller businesses, yet there is still much work to be done in raising awareness in Westminster of quite how significant micro-businesses now are to the UK economy.
On behalf of the sector and the 45,000 businesses in Crunch’s community I’m working hard to make the case for our sector. One of my openers, which almost never fails to surprise an audience, is that there are only 7,000 UK businesses employing more than 250 people. Yet so much debate, media coverage and policy ends up focussing on those few huge businesses. Of course they are important, and we should certainly ensure that they pay their fair share of taxes, but we cannot continue to have policy ignore the millions of micro-businesses that represent the future of our economy.
Part of the challenge is that big firms often have nationally recognisable names which makes them easier to write stories about. They also have deep pockets and so can afford to spend significantly on influencing decisionmakers in Westminster. There’s nothing wrong with them trying to make their case but we need to balance the corporate arguments with the voice of micro-business. And that’s what we’re doing by speaking to parliamentarians from all parties and building alliances with others who understand micro-businesses. With 8.4 million people (cough, voters) working for micro-businesses, our sector has never been stronger. By working together we will make our voice heard and influence decision-makers to ensure our needs are recognised.
Jason Kitcat is micro-business ambassador for Crunch Accounting.
Further reading on micro-businesses
See also: Tax help for new businesses