Conservative Conference 2022 (part 3): Government seeks to woo business with low tax and deregulation

This report includes:

• ‘Pro-business’ party hails decision to stick to low corporation tax rate
• Government seeks to woo business with deregulation promises
• Investment Zones – all are invited to enter the regeneration game
• ‘Supply side’ reforms – the other half of the sky

The other parts of our post-conference assessment of Conservative tax and related policy can be read at: 
Conservative Conference 2022 (part 1): New Government goes for growth
Conservative Conference 2022 (part 2): Review puts spotlight on high marginal rates and taxing families
Conservative Conference 2022 (part 4): Can Government convince OBR it can meet its targets?

Above: New Prime Minister Liz Truss, Chancellor Kwasi Kwarteng and Business Secretary Jacob Rees-Mogg all addressed the Conservative Party gathering in Birmingham

‘Pro-business’ party hails decision to stick to low corporation tax rate

The Conservatives left nobody who attended the conference in doubt that they want a low tax, low regulation business environment. But gratitude for keeping corporation tax (CT) at 19 per cent is qualified as many businesses and economists are more concerned about the wider economic climate.

Going into the conference we already knew that the planned rise in CT will be ditched and there is to be no extension of the windfall tax on oil and gas companies. In his conference speech, Chancellor Kwasi Kwarteng explained the logic behind the Government’s approach, saying that, when businesses thrive, they create more jobs, they raise wages, and they contribute more for our public services. “Rather than bashing business, we’re backing it. That is why we need to make our tax system simpler, more competitive and pro-growth.” Reversing the planned CT increase would ensure the UK retains the lowest rate in the G20 and would plough almost £19 billion a year back into the economy, he told party members.

The Prime Minister said keeping CT at 19 per cent “helps us face this global economic crisis, putting up a sign that Britain is open for business”.

Chief Secretary to the Treasury Chris Philp told a fringe meeting that there was no doubt in his mind that 19 per cent CT was an essential component of international competitiveness. He told conference-goers that when George Osborne cut the tax from 28 per cent to 19 per cent so much extra investment was stimulated, so many companies were encouraged to come to this country, that the amount raised went up from £35 billion to £55 billion.

This argument, that cutting CT rates raise the take, is a frequent claim among ministers (as it was under previous administrations). For example, ahead of the conference, Liz Truss said that “last time we cut corporation tax we attracted more revenue into the exchequer because more companies wanted to base themselves in Britain, more companies wanted to invest in our country…”. However it is disputed. The numbers cited by Chris Philp are broadly accurate (albeit over a period of 8-9 years) but other factors than the rate were in play.

Economist Gerard Lyons, on the same panel as Philp, identified one of them – that as the corporation tax rate came down, the CT base widened significantly. Another, Stuart Adam of the Institute for Fiscal Studies (IFS), explained to FactCheck that, during the 2010s, the economy was emerging from the 2008 financial crisis. So, even if the headline rate had not been cut, we’d still expect the Government to take in more CT revenue simply because businesses were doing better and making more taxable profits.

Analysis by the Institute for Public Policy Research (IPPR), published during the conference season, cast doubt on the Government’s central assumption that keeping corporate taxes low will boost investment and bolster growth. The think tank says that, whilst UK CT rates have fallen since 2007, UK private sector investment is still amongst the lowest in the OECD, the lowest in the G7, and far below the average among developed economies.

But, the Financial Times reported, although economists do not think a lower CT rate would have a big effect, most think it could raise growth slightly. IFS’s Stuart Adam told the paper that cancelling the CT rise would encourage investment in the UK, provided companies believe it will last. However the FT also says the £17 billion plan to put the CT rate on hold is a ‘policy business leaders have said is not a priority’.

The decision to cut corporation tax is reasonably popular with Conservative MPs, especially the ones who supported Liz Truss in the Conservative leadership election.

Beyond the headline rate, Kwarteng reiterated in his speech that he will maintain the £1 million Annual Investment Allowance (AIA), giving 100 per cent tax relief on investments in plant and machinery. This was welcomed by MPs, professional bodies and businesspeople before and during conference. Businessman Paul Faulkner told a fringe meeting that setting AIA at a high permanent level was ‘very welcome’. Business Secretary Jacob Rees-Mogg praised Kwarteng’s move on the AIA at an FSB event on the fringe.

The Growth Plan indicates that the Government are continuing with the review of research and development tax reliefs, with further reforms possible at a future fiscal event. CIOT’s George Crozier asked Chris Philp whether the capital allowance review launched by the previous administration in March was also still ongoing. The Chief Secretary replied that this was a matter for a future Budget so he would not speculate on it.

At a Taxpayers’ Alliance/IEA event, the Chancellor was asked whether the Government would look again at adopting the OECD plan for a global minimum tax. He did not address the specifics, saying only that ‘setting tax is an important part of sovereignty’.

Government seeks to woo business with deregulation promises

Businesses with up to 500 employees will be exempt from some regulations and reporting requirements, the Government has announced. While ministers are full of praise for business not all of those who attended the conference found it a positive experience.

On the first day of the conference the Prime Minister announced plans to expand small business exemptions from some regulations and reporting requirements, meaning that “an additional 40,000 businesses will be freed from future bureaucracy and the accompanying paperwork that is expensive and burdensome”. Specifically the definition of small business for regulatory purposes will, with immediate effect, now apply to those with fewer than 500 employees, where previously it was set at fewer than 50 employees. The government will consider a future consultation on potentially extending the threshold to businesses with 1,000 employees, once the impact of the current extension is known.

In his conference speech, Business Secretary Jacob Rees-Mogg told affected firms the Government would be “extricating them from a host of regulatory burdens, including costly non-financial reporting requirements which are simply paper shuffling”. As we review, repeal or amend the 2,400 pieces of European law on our books, any EU regulation which remains will no longer apply to these SMEs of up to 500 employees – and it will be ‘done by the end of 2023’, he said.

 But some business groups expressed scepticism about the scope of the changes, saying those most affected would be the 4,000 companies with between 250 and 500 employees. This is because those which are classed as medium-sized enterprises, employing 50-250 people, already do not have to comply with certain corporate governance and reporting requirements. Andrew Henley, a professor at Cardiff University’s business school, has pointed out that the 250 employee threshold is a globally accepted definition for an SME, so the change will put the UK at odds with the rest of the world and make comparisons of small business performance problematic.

It is not clear whether there will be favourable shifts in tax policy for ‘small’ businesses where eligibility for a tax relief or incentive is limited by reference to the number of employees. So far government statements suggest that the change applies only to reporting and regulations. One area that may be affected by the change is transfer pricing, ICAEW has pointed out, given the exemption which applies here for SMEs. However the Government has indicated that these are not blanket exemptions, and they can be overridden in appropriate cases as a result of the policy development process. In short, it’s a case of wait and see.

In his platform speech, the Business Secretary also said that research and development ‘must be a focus for value for money and turning our innovations into inventions’ and must ‘turn seed capital in R&D to real investment capital for the nation’. Amid doubts over his commitment to tackling climate change, Rees-Mogg promised: “I am committed to Net Zero by 2050.” But he added that the UK would go green “in a way that makes the British people better off not worse off, drives growth instead of hindering it, and levels-up, by boosting industries in our regions instead of imposing costs that drive them to the brink of ruin.”

Out on the fringe, the Business Secretary told an FSB meeting the Government will look to ‘back’ small businesses as the best way to grow the economy and increase employment in the UK. At a Conservative Home event, he likened the Government’s actions to those of the early 1980s, with a tightening of money supply and loosening of fiscal levers to stimulate growth. He described small business owners as ‘unpaid tax collectors’ for HMRC.

In a separate fringe meeting Chief Secretary Chris Philp praised the Business Secretary for his commitment to reducing business regulation. Jacob Rees-Mogg is going to ‘lay out a whole lot more ideas’ over the weeks ahead, he told the ThinkTent. Andrew Allum of the TaxPayers’ Alliance, speaking at the same event, said Britain was over-regulated and Government needed to ‘get out of the way’. Allum said when he heard Labour leader Keir Starmer say he was not afraid to use the power of government to help working people succeed, he thought: ‘Yikes!’

New Financial Secretary Andrew Griffith told a CPS event that society needs business more than ever before. All the challenges we face require the intersection between the ferocious problem-solving power of private enterprise, combined with a government that creates the right framework, he added. In a perhaps slightly hyperbolic comment, Griffith said it cannot be right that the only time a businessperson is ever on the BBC is because they are greedy, underpaying their staff or exploiting their consumers. Robert Colvile, of the CPS, claimed we have not been a country that values entrepreneurship. Entrepreneurs are, he bemoaned, typically characterised as ‘ghastly capitalists’.

The ‘ghastly capitalists’, however, are reportedly not feeling much love from the Government either. The Enterprise Forum business reception on the evening of the Chancellor’s keynote speech is an annual conference tradition, with the Chancellor invariably giving a brief address. But this year’s remarks from the Chancellor were so perfunctory that he ‘left the business audience stunned’ according to one attendee. At the annual business dinner, held later the same evening, it was reportedly a similar picture, with the Prime Minister absent, other ministers arriving late or not at all, the Chancellor speaking only for a matter of seconds and diners turfed out of the room before their desserts. Sensing an opportunity to score a point at their rivals’ expense, Labour responded by offering up to 25 free places at their forthcoming Business Day for business leaders who felt short-changed by the Conservatives.

Investment Zones – all are invited to enter the regeneration game

Ticking the boxes for deregulation, low taxes and levelling up, investment zones are a key part of the Government’s economic strategy. But will they create growth and jobs, or just relocate them?

In his keynote speech, Kwasi Kwarteng claimed investment zones would, in an unprecedented way, empower local areas to do things differently, liberalise planning rules, releasing land and accelerating development, cut taxes for business in these zones, accelerate tax reliefs for new structures and buildings, provide relief on investments on plant and machinery and lower taxes which stop businesses hiring and skilling up their workforce. Speaking at a Taxpayers’ Alliance fringe event, he called them ‘incredibly exciting’.

Simon Clarke, the Secretary of State for Levelling Up, Housing and Communities, used his platform speech to claim the zones “represent an amazing opportunity for every corner of our country, and illustrate perfectly how this government intends to go further on levelling up”. The minister said the zones must be led by the people who know best what their area needs and what it does not, adding that they will target specific and effective sites that would benefit from accelerated development and a tax structure that incentivises investment and finding where things can be sped up and doing it, not revisiting already shovel-ready projects, slowing them down.

According to the Financial Times the tax incentives for investment zones will include (for businesses that set up inside the zones): 100 per cent tax relief on investment in new plant and machinery in the first year, 100 per cent business rates relief on newly occupied premises, and a holiday on employers’ national insurance contributions (NICs) for employees earning less than £50,270 a year. The Government’s Growth Plan itself says only that these are ‘under consideration’, alongside enhanced Structures and Buildings Allowance, and a full SDLT relief for land and buildings bought for use or development for commercial purposes, and for purchases of land or buildings for new residential development.

Analysis by PwC concludes that the tax benefits of investment zones are similar to those seen in the existing freeports regime, but that they appear to be intended to be more generous and longer lasting. The only significant area where Freeport status has advantages over investment zones is on customs, where there are no direct benefits proposed for investment zones. Existing freeports have been invited to apply for investment zone status.

‘Accelerated development’ refers to a proposal to ‘streamline’ planning applications. The Government say they will “will work with sites to understand what specific measures are needed to unlock growth, including disapplying legacy EU red tape where appropriate.” It appears that while some investment zones will have both tax and development benefits some will be designated ‘tax sites’ and some ‘development sites’, with only that category of benefits. The suggestion is that regulations will be tailored on a case by case basis.

The most common criticism of the zones – heard on both left and right of the political spectrum – is the suggestion that, rather than generating new jobs and growth, they will just relocate them. This was put to Chief Secretary Chris Philp at an event. He replied that the Government think they will be ‘genuinely additive’, stimulating growth that would not otherwise happen. As an example of such a zone that had worked in the past he gave Canary Wharf. This had been, he claimed, a ‘desolate, post-apocalyptic industrial wasteland’ – but was now Europe’s financial capital. This had been done not at the expense of the City of London but in addition to it.

If this approach works, why not just have one enterprise zone and call it England, asked event chair Mark Littlewood from the IEA. Philp responded that, firstly, most of the Government’s reforms are nationwide. But also, he added, there is no limit on investment zones - any local authority that wants to have one in its area should come and talk to Simon Clarke.

Is this really true? Could the entire country – the rich bits and the poor bits, city centres and country villages – soon be covered in investment zones? In practice, no. An article in the FT a few days after the conference made much of intelligence that the Prime Minister has overruled the Chancellor and determined there will be no limit on the number of applications for investment zones, and no cap on their numbers at this stage. But it is clear from the apparently well-informed article that while any local authority can put a bid in, the number of bids that will be accepted will be capped, albeit potentially at significantly more than the 40 zone limit the Treasury has proposed. (The PM reportedly wants ‘100 or even 200’ zones.)

The Treasury has reportedly warned that, uncapped, the zones could cost the Exchequer “up to £12bn” a year in lost taxes. However, as noted above, the number will be capped. It is also worth noting that the size of the zones generally looks likely to be a lot smaller than whole local authority areas. Examples in The Growth Plan of ‘illustrative sites that may have the potential to accelerate growth and deliver housing in the way the Investment Zone programme envisages’ are generally quite small areas such as airports and industrial parks, though some are potentially large (albeit often vaguely described) areas such as ‘Workington and the Energy Coast’ and ‘sites in the Black Country’.

Which bids will succeed? The Treasury told the FT: “there will be a high bar for investment zones based on the greatest impact on growth, housing supply, value for money, and supporting the regeneration of under-developed areas.” While most parts of the country could make a case under at least one of these criteria, realistically most successful bids are likely to be large brownfield sites in less prosperous areas. It may be telling that, despite the wide geographical spread of the authorities the Government is in early discussions with about investment zones, only one of the 24 illustrative sites offered by the Government is located in the three regions in the east and south east of England (which together contain more than 40 per cent of England’s population).

Do investment zones constitute the ‘full fat freeports’ mooted by Liz Truss in the summer during the leadership contest? That might be stretching it. But they can be seen as a second sizeable step down that road.

‘Supply side’ reforms – the other half of the sky

Tax is not the only lever in the Government’s Growth Plan. But will they be able to deliver substantive reforms, and will they deliver meaningful growth?

At a fringe meeting on the first day of the conference, Chief Secretary Chris Philp complained that the Growth Plan has a lot more beside tax but that it has been drowned out. He promised the Government would turbocharge infrastructure investment, speed up road and railway building and incentivise investment. That said, some of the measures to deliver these objectives turned out to have tax elements to them, namely fixing the annual investment allowance (AIA) at £1million, increasing seed enterprise investment scheme (SEIS) limits to encourage investments in early stage businesses, and maintaining venture capital trust (VCT) and enterprise investment scheme (EIS) tax reliefs beyond their currently planned sunset in 2025. These can all be thought of as part of the ‘supply side’ agenda.

Speaking at the same meeting, economist and former Liz Truss adviser Gerard Lyons defined the supply side agenda as ‘all the ‘I’s’. That is: investment (in buildings, skills and training), innovation (eg good universities), infrastructure and incentives (into which he wrapped lighter regulation as well as lower taxes). Get all those ‘I’s right and you reduce inequality too, he added.

The following day the Chancellor listed the main elements of the Government’s non-tax growth strategy: childcare, agriculture, immigration, planning, energy, broadband, business, financial services… He promised reforms in these areas would “break down the barriers that have held our country back for too long”. The Government would deliver “Sensible, economic reforms to produce more of the products and services we need to drive down costs.”

This list reflected The Growth Plan, which promised measures being brought forward in the coming weeks will include:

• Reforms to improve access to affordable, flexible childcare (see below)
• Plans to improve agricultural productivity growth
• A plan to ensure the immigration system supports growth while maintaining control (The FT says this will make it easier for companies to bring in talented staff from overseas for short-term placements in the UK)
• New legislation to speed up the planning process to enable infrastructure to be delivered more quickly
• Plans to build more homes in the places people want to live and work
• Plans to further support rollout of digital infrastructure
• Changes to enable defined contribution pension schemes to invest in innovative businesses
• An ambitious deregulatory package for the financial services sector

In principle there is broad support for much of this agenda, including from people who have been critical of the new Government’s tax agenda. For example, Gavin Barwell, who was chief of staff to former prime minister Theresa May, said the Government was ‘right to be reforming the supply side of the economy by for example speeding up the planning system and making changes to the immigration system to address labour shortages.’

However there is some scepticism about how easy it will be to translate broad strategic goals into detailed proposals and get them through Parliament. Kate Andrews, Economics Editor at The Spectator, and well connected on the free market right, suggested in the Daily Telegraph that tax cuts may have been given a disproportionate amount of attention from the Government so far ‘perhaps because they assumed putting more money back in people’s pockets was the easy part’. But now the more difficult part begins of finding spending cuts, scrapping bad regulations, reforming sectors that have been impossible to touch even at the best of times, she said. Andrews warned: “if the Tories don’t get on board with a wider range of supply-side reforms than just tax cuts, the party is not going to meet its growth targets.”

Another influential free-marketeer, Ryan Bourne of the Cato Institute, suggested on Conservative Home that the Government must flesh out its supply-side plans for growth, and they must be ‘realistic’ given the political mood. This requires finding mechanisms that assuage fears, bring sceptics along and compensate those who lose out (for example cheaper energy for those affected by fracking projects or onshore wind).

The Guardian last week drew attention to a pamphlet of ideas from a free-market think-tank with close links to Liz Truss and Kwasi Kwarteng, suggesting these amounted to a blueprint of ‘slash and burn’ ideas that could form the basis of the Government’s supply-side reform programme. The document from the Free Market Forum (FMF), an offshoot of the Institute of Economic Affairs (IEA), contains articles suggesting scrapping free childcare hours, releasing green belt land for housing, cutting regulations to encourage cooperatives, doing more to encourage employee share ownership and making it easier for companies to engage self-employed workers. On the tax side it also contains short essays calling for the restoration of the link between tax and household income, using the extension of the “Super Deduction” as a springboard to simplify corporation tax, phasing out tariffs on goods the UK does not produce, taxing all income the same (whether it comes from benefits, work or wealth), replacing fuel duty with road pricing, scrapping SDLT and scrapping corporation tax. A majority of the articles are written by MPs, some of them now ministers, and the listed supporters of the FMF include Truss and Kwarteng. There is no suggestion that the authors of the articles support proposals beyond the piece they have written, or that supporters necessarily endorse any of the proposals, but the collection of ideas can reasonably be considered to offer some pointers about the likely direction of travel of the new administration.

The other parts of our post-conference assessment of Conservative tax and related policy can be read at: 
Conservative Conference 2022 (part 1): New Government goes for growth
Conservative Conference 2022 (part 2): Review puts spotlight on high marginal rates and taxing families
Conservative Conference 2022 (part 4): Can Government convince OBR it can meet its targets?