Labour’s election win provides a chance of using the tax system to drive economic growth and entrepreneurship

Labour’s election win provides a chance of using the tax system to drive economic growth and entrepreneurship. The size of the Labour Party’s victory in yesterday’s General Election provides them with a real opportunity to update and improve the UK tax system to support dynamic and flexible employees and drive economic growth.

Robert Salter, Director says:

It has long been recognized that the correct tax system design can drive specific behaviours and act as a ‘change agent’ for businesses and taxpayers.

There are several areas where a new Labour Government could change the personal and employment tax rules, to encourage dynamic and hard-working employees, so that they act as a catalyst in driving forward the UK economy over the next 5-10 years:

• Provide tax relief for personally incurred training costs (and not just those that are provided by your employer).After all, if someone is keen to develop and improve their skills, it would appear reasonable for the tax system to encourage such behaviour, so that they have the chance to maximise their ‘human capital’ and seek promotion or new job opportunities that increase their skills and overall value.
• The tax-free relocation limit of £8k has remained unchanged since the early 1990s. If the Government is serious about encouraging people to move for new jobs and opportunities (and keen to support employers in this regard too, as they typically have to bear the tax cost of these moves), this £8k limit should be increased to at least £30k.
• The UK previously had tax breaks for profit-related pay – i.e. that element of pay which genuinely depended upon the success of your employer’s business. This profit-related pay process encouraged employees and employers to have ‘common purpose’, when it came to the growth and prosperity of a business, and we need to ensure that this is the case on a going forward basis too. Otherwise, the UK risks further embedding the ‘them & us’ business culture, which has been an unwelcome characteristic of British businesses for much of the last 40+ years.
• Tax-free share award schemes – the limit for such tax-efficient schemes hasn’t changed for 20+ years. Again, if we are serious about encouraging employees into ‘high growth’ (but also high-risk) businesses, uplifting the value of shares which can be granted on a tax-free basis would be an obvious step.
• Remove the IR35 rules on ‘deemed employment’ for owner-managed businesses providing services to corporate clients (e.g. as contractors). The IR35 rules increase the costs faced by end clients – who need to incur unnecessary costs and risks in assessing whether someone is a deemed employee or not, whilst providing the actual contractors (who often take real risks from a business and personal financial perspective) with a ‘double-whammy’ – the tax liability of an employee without any of the benefits of employment (e.g. pension contributions, paid sick leave, paid holiday).

Robert said:

Though the steps given above are not – by themselves – a magic bullet, all these ideas can help encourage employees to grow their own skill set or reward those workers and employees who are willing to work for businesses which might offer real opportunity and growth if everything goes smoothly, but which also often come with real risks of failure too.