We must change Britain's tax structure to support small businesses

Britain's tax system is stunting SMEs' ability to grow. The rules must be changed, argues David Richards, co-founder of tech company WANdisco.

by David Richards
Last Updated: 28 May 2013
As the UK’s economy shuffles towards its third recession in five years, it’s safe to say that the ongoing financial crisis has been hell for many British businesses.  

Not a week seems to go by without some report announcing that life is going to get tougher for SME owners, whether that’s in terms of securing investment or making sure their voices are heard.

With the coalition government’s fourth Budget set to be unveiled in a matter of days, it is vital that the Chancellor is reminded of the government’s responsibility to do all it can to boost investment in Britain’s SMEs.

If the government is committed to supporting sustainable long-term recovery, it needs to make sure it is backing British industry by ensuring SMEs receive as much support as possible.

Changing the tax and regulatory codes to improve access to equity funding is vital to creating an environment that allows businesses to flourish. By diversifying and widening the pool investors backing AIM companies, for example, the government would kickstart the equity markets for small and medium businesses.

The London Stock Exchange Group (LSEG) recently submitted a series of recommendations to the Treasury designed to increase levels of investment in British SMEs. If implemented, these measures would send a strong message that the UK equity markets are open for business.

One of the key proposals set out by LSEG calls for a significant reduction in the taxes on those who invest in young businesses, something which must happen to safeguard Britain’s future as a land of enterprise.

By abolishing the stamp duty investors pay, the cost of investing in small businesses would be reduced significantly making it a much more attractive option than it is currently. As well as increasing levels of investment, this move would maximise the net-amount SMEs receive, with more going to the entrepreneur and less in the taxman’s pocket.

A lower Capital Gains Tax on those who invest in AIM companies would also lead to SMEs seeing more financial support, with potential backers likely to be attracted by greater levels of return on their outlay.

The UK’s regulatory approach to small and mid cap securities is in urgent need of modernising, with the FSA’s rigid enforcement of business standards doing little more than reinforce the stereotype that investing in growing businesses is risky.

More needs to be done to reassure the investment community of the financial benefits and potentially huge reward that can come with investing in SMEs.

Analysis by LSEG shows that if these approaches are adopted, existing AIM companies will create up to 38,000 new jobs within the UK, with the cost of capital for high growth companies reduced by 25 per cent.

Britain is full of talented entrepreneurs, but this is not reflected in the setup of the  tax and regulatory codes.

Our financial regulations are not working for small businesses. They’re not doing enough to encourage entrepreneurial ambition or reward a company for growing. Instead, they’re stifling investment opportunities and limiting innovation. This has to change.

David Richards is the President, CEO and co-founder of British software company WANdisco

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