The Party of Business

Mark Siara - Mon 10 Mar, 2008

New Labour branded itself the party of business but its regressive taxes put that in doubt.

The Party of Business

In 1997 New Labour was elected on the promise of many things, both real and imagined. Among the many changes from the bad old Labour days was a new found support of business. Fast forward eleven years and we have the nationalisation of Northern Rock. The question now is: has New Labour regressed into Old Labour? Is the Party of Business still the business of the party?

To find the answer let’s take a look at small businesses, sometimes called family businesses, consultancies or even one-man companies. The prevailing wisdom is that small businesses are the bedrock of the economy. Flexible and innovative, these nascent companies provide diversification and the potential to grow into world beaters.

Take the automotive industry, where two men – Charles Stewart Rolls and Sir Henry Royce formed what is now arguably the world’s most prestigious marque. Or look at BAE Systems, formerly British Aerospace, a once-nationalised conglomerate made from smaller companies founded by the likes of the regal-sounding Geoffrey de Havilland, A.V. Roe (Avro) and the Australian-born Harry Hawker. On the other side of the Atlantic the likes of Bill Boeing and Don Douglas were busy developing their own top-notch aircraft companies.

So let us look at New Labour’s record when it comes to small business and see if it’s claim to be business friendly holds any water. To be fair – and that is more than this government deserves – it all started positively. After being elected in 1997, New Labour began a series of reductions in small companies’ corporation tax, from 23% down to 19% by 2002. In addition a starting rate of 10% on the first £10,000 of profits was introduced which again hit its nadir in 2002 at 0%.

All good stuff and very popular. In fact too popular – the government saw that “too many” small companies were being formed and introduced a tax on dividends paid to these family businesses. Then, in one of his last budget before becoming Prime Minister, Gordon Brown announced that corporation tax would rise to 22% - almost exactly where it was when Labour were elected. It appears that the government encouraged a large number of people to incorporate, then didn’t like what it saw and so raised rates back to where they started. It’s rather like offering your fiancée a month’s honeymoon in the Seychelles but post-wedlock, taking them for a long weekend in Bognor Regis.

Then there was the insidious IR35, another piece of ill-conceived and badly implemented legislation. The basic tenet was this: the majority of consultancies are not valid businesses but are simply disguised employees, using the tax system to their advantage and therefore not paying their “fair” share of tax. The fact that many of these so-called employees had no company benefits such as holiday pay, sick pay, pensions or other employee perks was ignored, as was the fact that their companies paid both employers and employees National Insurance.

So, guidelines were drawn up to enable businesses to judge which side of the divide they fell on. However, there was a complete lack of clarity in these guidelines, so a lot of small companies were left in limbo awaiting test cases in the courts and possibly liable to thousands of pounds of backdated taxes. IR35 has potentially criminalised vast sections of the consultancy community. It is time this legislation was taken off the statute, it’s a shambles. Tax doesn’t have to be taxing. Yeah right.

Now you know the government: like a dog with a bone, it doesn’t want to let go. So, not content with the leg-humping IR35, a few years later it decided to cock its leg with S660, or Settlements Legislation. A law from the 1930’s was resurrected which prohibited passing of income or assets to another family member in order to reduce your own tax burden. Some zealot at the Inland Revenue then used this law to argue that a husband and wife as co-owners of a limited company weren’t entitled to share their dividends. This ultimately went to the House of Lords before being kicked out, costing the taxpayer an estimated £500,000 in the process.

Having had its nose rubbed in it, the government decided to bark all the louder by proposing a change in the law. And so we have Income Shifting legislation. Again, businesses don’t know where they stand – the d(r)aft legislation lacks clarity, is inconsistent with capital gains tax and divorce laws and imposes unreasonable extra administrative burdens. And all for what?

By the government’s own consultation document, around £500 million in extra taxation will be garnered. Let’s put that in perspective: it is estimated that the advisors working on the aborted sale of Northern Rock are to charge the government up to £200 million. Admittedly that is a one-off charge but, if we take the £100 billion paid for the Rock itself, it will take 200 years for this extra taxation to clear that one bill. 200 years!

So, is this dog’s dinner simply a chance to scrape a few more tax pounds any way it can, in an effort to disguise the horrible mis-management of the economy that Gordon Brown has presided over these last eleven years? Or, is the Labour party regressing, morphing into its pre-Thatcher incarnation? Is the sheep’s clothing finally coming off to reveal the wolf, fangs bared, ready to attack – with businesses seen once again as exploiters of an unprotected workforce? Is this dogma rather than economics?

“The past does not repeat itself, but it rhymes” said the oft-quoted Mark Twain, apparently. Taking this further, there is a theory that economic and social patterns run in a thirty year cycle. So the 1980s were like the 1950s were like the 1920s: common themes include rising optimism and prosperity in the early part of the decade and, on the social side, a subversive music scene undermining the rigid social norms of the day.

However, we are in the noughties, which should therefore equate to the 1970s and before then the 1940s. Oh dear: an oil crisis, recession or a world war. Of course all this could be mere coincidence but, as a portent it’s not very positive at all, especially for the small businesses courted by New Labour and then left at the altar. All this talk of being dumped and the Seventies remind me of a musician named Graham Fellows. In 1978; he was better known as Jilted John and the most famous line from his eponymous hit was “Gordon is a moron”. The past rhyming, indeed.