Disclaimer: I am both a Director of a small business, and a small businessman, so the hyphen in the title was deliberate, but not strictly necessary.
I’m not an economist, by any stretch of the imagination, and I’m very pragmatic as a person generally. I understand that politicians have a massively tough job: it is impossible to please everybody, any of the time (never mind all the time). I’m not one to criticise for criticism’s sake, and I often sympathise with the leaders of our country – irrespective of their party allegiance – when they make what seems to be an ostensibly sensible decision for the benefit of our country. Inevitably, the dissenting voices will always be heard above the consenting ones.
But one aspect of this week’s Budget really rankles as a small business owner. Not because it’s taking money out of my pocket, particularly (I could go and find another job somewhere if what I was after was a more secure income in the short-term), but because it’s frankly missing the point.
What I’m talking about here is, of course, the dividend tax shakeup. Again.
I often bemoan (as my colleagues will I’m sure testify) that while inflation and prices rise, salaries never seem to do so at the same rate. This is part of economic theory that I will simply never understand – I’ve come to terms with that now. But the dividend rules were changed only last year, and those at the top have decreed that they need to be changed again. To what end? According to this Telegraph article, Mr Hammond’s aim is “to bring the taxation of self-employed people and small businesses owners more into line with the tax paid by employees”.
But this is simply missing the point. On two counts, actually:
Small and Medium Enterprises (SMEs) are “the backbone of the economy”, to trot out a (possibly now irrelevant) EU line. Irrespective of whether we are in or out (or doing the hokey-cokey), the principles don’t change though. A cursory Google search sees countries around the world – developed and developing, across the continents – using the same terminology in their rhetoric about business. It is important. The growth of SMEs (and in some cases their exports) is ultimately what drives the economy of a country, with that money flowing back in to the state, or being spent in local fruit and veg shops, or paying for tickets to go and watch your football team at the weekend. You get the picture. SMEs are a vital cog in the wheel; without them, the economy doesn’t stand up. People should be encouraged to be adventurous, not put off; the need for small business should be fuelled.
Secondly, then, and with that in mind, the aim of this change as stated above (to bring the taxation of self-employed people in line with employees) is in itself flawed logic. There is another factor at play here which Mr Hammond and his team have neglected. It is a key factor in the decision of choosing to be an employee or a business owner. Here is the argument as the Budget implies:
In a perfect world (where Mr Hammond sees this picture, as above) the scales are totally balanced. It’s a simplified picture, yes, but if this were true, his utopian vision of equal tax for self-employed and employees would make a great deal of sense.
He’s missing something, though. More than 50% of small businesses fail within the first five years (source). This risk is a massive weight on the left-hand side of the picture above. Yes, the reward can also become a massive weight on the right, but without that risk initially, you simply can’t get any reward at all. To extend my rollercoaster metaphor, you can’t have the euphoric downhill of an exciting white-knuckle ride without having to sit on the laborious climb to the top first.
What economic policy should be doing, then, is to mitigate the risk for those new companies. (It does, to an extent, with the tax bands – lower income is taxed at a lower rate. But that’s not enough, as that is the same for employees, funnily enough.) It should make that risk factor – the slow uphill bit of the rollercoaster – smaller in the short term. It should be encouraging people to make that leap.
Whether the dividend cuts would have put us off setting up Evidence Based Education is open to question, but one thing is for sure, they will put some people off, somewhere. If the risk factor of starting a business is being completely ignored, there is no incentive to move from employment to self-employment. If you’re taxed the same when you’re employed as you would be running a business, why would you take on the pressure, admin, commitment, red tape and one-in-two chance of failing?
Well, if ultimate success were guaranteed, you still would. But since when has that statement ever been true?