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Future50: Why our growing start-up class is a taxing issue for the chancellor

PUBLISHED: 06:00 20 February 2017

Start-ups and new businesses gathered for an event hosted by the Sheriff of Norwich, Richard Marks. Pictured from left are entrepreneur Steffan Aquarone, John Lewis Partnership chief information officer Paul Coby, Mr Marks and Cafe Rouge founder and UEA chancellor Karen Jones, who spoke at the event. Picture: Steve Cox.

Start-ups and new businesses gathered for an event hosted by the Sheriff of Norwich, Richard Marks. Pictured from left are entrepreneur Steffan Aquarone, John Lewis Partnership chief information officer Paul Coby, Mr Marks and Cafe Rouge founder and UEA chancellor Karen Jones, who spoke at the event. Picture: Steve Cox.

Steve Cox

There are many things which can keep business owners awake at night – but finding ways of paying more tax is not likely to be one of them.

It may well be on the mind of chancellor Philip Hammond at the budget next month.

The rise of self-employment has been fuelling the growth in the workforce over the last eight years, according to the Institute for Fiscal Studies (IFS).

Typically, the increase in start-ups is something which as a country we tend to celebrate rather than decry.

And it was certainly the theme of a reception held by the Sheriff of Norwich at the city’s John Lewis store last week. It has also been a mainstay of government policy through the support of initiatives such as the Start-Up Loans Company, and Funding Circle to help fledgling entrepreneurs get their ventures off the ground.

Yet the IFS points to figures from the Office for Budget Responsibility which estimate that the rapid growth in the number of small companies will cost the Exchequer an additional £3.5bn in 2021–22, because typically they pay less in tax and National Insurance.

It notes the self-employed get a tax advantage averaging £1,240 per person per year as a result of lower National Insurance Contributions (NICs) relative to employees – a break adding up to £5bn a year – which it says “cannot be justified by what are now only very slight differences in benefit entitlements”.

It also acknowledges how company owner-managers can get even lower tax rates by taking income out of a company in the form of (more lightly-taxed) dividends rather than wages.

In simple terms, the thinking appears to be that start-ups are good when they in turn drive job creation, and with it more tax revenues, but perhaps not so good when they fuel the ‘gig’ economy or ‘lifestyle entrepreneurship’.

Responsible businesses want to pay their fair share, but also feel they can reap the reward for taking the risk in the first place and having those sleepless nights.

And even if you are a one-man band, you are still going to need to pay for services, which will spread money through the economy.

So business owners should keep a close eye on the March 8 budget to see exactly what steps, if any, the chancellor might take, and how he will support start-ups and SMEs.

But with Mr Hammond already facing a potential climbdown in the wake of anger over looming business rate changes you sense his measures for the self-employed will prove equally as taxing.

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