NB: The AIA is the Annual Investment Allowance, which enabled businesses to write-off 100% of the costs of qualifying investment in the year it was undertaken against tax, up to the value limit of the AIA in the relevant tax year. [...] So too, is the macroeconomy and the state of demand in particular, as well accessibility to adequate external finance (where sought), the investment practices of (any) external investors and the availability and cost of an appropriately skilled workforce. [...] The latter has included the ability to charge interest on overdue monies and the creation of the Prompt Payment Code (which is soon to be replaced by the Fair Payment Code) and the Small Business Commissioner to oversee it.95 xxiii Ultimately, this piecemeal approach has not xxiii The replacement of the Prompt Payment Code by the Fair Payment Code was announced in September 2024. [...] 17 SOCIAL MARKET FOUNDATION Increasing the availability of internal financing for investment Helping SMEs to save in order to increase their pool of capital The tax system should “work with the grain” of the financing preferences of most entrepreneurs and owner-managers and encourage the most efficient form of investment financing – retained earnings. [...] Whilst the reform proposed in Recommendation Three is not exactly the same as the changes brought in by Chile and Estonia, nevertheless, the evidence from these two countries offers policymakers a good idea of the kinds of benefits that could accrue to SMEs from such a change and in-turn the gains that are likely to be enjoyed by the wider economy as a result of the impact on SME investment behavi.
Authors
- Pages
- 31
- Published in
- United Kingdom
Table of Contents
- The UK’s poor investment record 2
- Low investment has resulted in comparatively poor productivity performance 2
- The role of SMEs in the economy and the UK’s productivity record 3
- Raising SME productivity and boosting firm growth should be central goals of any efforts to increase the UK’s overall long-term prosperity 4
- more Investment by SMEs is key to boosting their productivity 4
- Strategic investments are key drivers of SME productivity 4
- SMEs are currently failing to invest on the scale that they would like to 5
- The limitations of full expensing 6
- A political consensus on full expensing 6
- On balance full expensing is more likely to help investment levels than general cuts in corporation tax rates 6
- The positive effect of full expensing on SME investment levels is likely to prove limited 8
- Investment decisions are complex and not easily incentivised with tax measures alone 8
- The external environment 9
- Business characteristics 9
- Boosting SME investment levels in the long-run 10
- Three key constraints that need to be eased in order to unleash greater small business investment 10
- Liquidity constraints on SME investment behaviour 11
- The availability of internal financial resources to fund investment 12
- The financial management capabilities of SME leaders and managers 14
- A strategic policy approach towards SME investment 15
- A more integrated set of measures are needed to boost SME investment 15
- Tackling the liquidity constraints on SMEs 15
- Improving SME cash-flow by reducing the late payment problem 15
- Easing cashflow challenges by tackling the costs associated with the tax system 16
- Increasing the availability of internal financing for investment 18
- Helping SMEs to save in order to increase their pool of capital 18
- Improving financial management capabilities in smaller businesses 18
- A new programme for the upskilling of SME leaders and managers 18
- Annex 1 – International evidence on the Association between changes in profit tax rates and the impact on investment 21
- Annex 2 – retained earnings is the primary source for funding UK business investment 22
- Annex 3 – summarising international evidence on the benefits of exempting retained earnings from taxation 23
- The Chilean experience 23
- The Estonian experience 23
- ENDNOTES 25
