IoD Letter to the new Chancellor of the Exchequer

Dear Chancellor

I would like to congratulate you on your appointment as Chancellor of the Exchequer. I have enjoyed working with you during your time as Business Secretary and look forward to continuing our dialogue in your new position.

As you are aware, business leaders are facing real difficulties and are feeling apprehensive about the state of the UK economy. However, I know that they will also be hopeful that we can now move on from the recent political uncertainty. In fact, among those of our members who said in our most recent survey that they were pessimistic about prospects for the UK macroeconomy, ‘political instability’ was the second most-cited reason for that pessimism (24%), after the rate of inflation (32%).

Our survey data also shows that almost nine in ten expect their costs to rise in the year ahead, the highest proportion ever recorded. When asked more specifically about their most acute pain points, macroeconomic instability is the top concern of our members (58%), followed by the cost of energy (52%), skills shortages (47%) and employment taxes (42%). In particular, we find a strong statistical connection between pessimism around the wider macroeconomy and investment intentions, both of which have been on a downward trend since the start of the year.

Reverse the rise in employers’ national insurance contributions

As we said at the time, we opposed the decision to raise employers’ national insurance contributions at short notice outside of a Budget and implemented without a Finance Bill. In our letter to the then Chancellor, dated 20th September 2021, we noted that the government’s own impact assessment stated that the measure would have “significant macroeconomic impact, with consequences including but not limited to for earnings, inflation and company profits”. Our own data suggests these effects are now coming to pass.

National Insurance is quite simply a tax on jobs, which businesses have to pay regardless of whether they are profitable. For some of our members, the increased costs mean they have no choice but to push up the prices they charge, making inflation even worse. For others, the rise in the cost of employing people threatens the future livelihoods of the colleagues they employ when that cost becomes impossible to justify.

At a time when business is already facing unprecedented energy and other supply-side costs we urge you to reverse this decision, and scrap the recently-introduced increase in employers’ national insurance contributions. This would be the single most impactful action that would improve the situation for SMEs trying to grow in very difficult circumstances.

Make the capital expenditure super-deduction permanent

When business confidence in the macroeconomy is low, the case for government incentives to raise levels of all types of investment becomes even stronger. In his February Mais lecture, former Chancellor Rishi Sunak stated that he was considering using the tax system to incentivise greater business investment, including reforming the UK’s Capital Allowance Regime. As recently as 26th June he told Parliament he would introduce “tax cuts to drive growth on business investment and innovation in the autumn”.

In our recent response to your department’s consultation on this issue, we called for the 130% capital super-deduction to be made permanent. Contrary to some reports, our data shows the positive impact the super-deduction has had. Whilst there has been declining overall levels of business investment in recent months, even less investment would have taken place if the super-deduction did not exist.

Use the tax regime to address skills shortages

We have had productive conversations with your officials over the last few months around the workstreams of ‘People, Capital, Ideas’ and we would like to thank your teams for the positive and open way in which they have approached those discussions.

One idea which we have been exploring is to build on the Future Skills Unit initiative being developed within the Department of Education and establish a new, fully independent, Shortage Occupations Agency, with a statutory remit to advise on current and future skills shortages areas for the UK economy.

The resulting list should then be used as the basis for providing tax incentives to employers to provide workplace training in these specific areas. This would address the market failure of firms that train their staff in shortage areas then being more likely to lose them to competitors also seeking the same skills.

Similarly, sole traders should be permitted to deduct the costs of training in new areas for their business if that training is in a shortage area identified by the new agency, again incentivising people to acquire the skills our country needs and reducing the ‘skills shortages’ pain point for our members. Our suggestion would also reduce deadweight loss to the Exchequer by being targeted to the parts of the labour market where there is greatest need.

Using Corporation Tax to incentivise net zero

As you know, the rise in the market price of energy has had a negative impact on many businesses. For many, fuel and energy are significant cost components.

In the long run, the best way to reduce the UK’s vulnerability to adverse developments in global energy markets is to reduce dependency on expensive fossil fuels. Therefore, we urge the Government to facilitate this process by speeding the transition to a low carbon economy and by taking immediate measures to improve energy efficiency.

To date, government policy has failed to address the contribution that SMEs can make to achieve our national climate change goals. We believe that the best way to spur change would be a clear, commercial incentive for business to invest in energy efficiency measures through a differential corporation tax for companies who have achieved net zero. This is something that an emergency budget could consider in the context of re-evaluating next year’s hike in corporation tax.

Our own research shows that business leaders are keen to understand what they need to do to meet our climate targets, but there is uncertainty around the short-term business case for change, particularly given other pressing calls on their organisations’ time and resources in the here-and-now.

By creating a ‘wedge’ between the corporation tax paid by those businesses that are net zero and those that are not, there would be a clear incentive for all businesses to achieve the desired change, and so reduce our dependence on global energy markets. We believe that this simple, yet significant policy change could be a huge stride towards meeting this country’s climate change target. We have recently published detailed proposals around these ideas and would be happy to engage on this issue further with your officials.

For smaller firms, additional direct help may be needed to facilitate energy efficiency. Therefore, we also support the proposal by the Federation of Small Businesses to provide ‘Help to Green’ vouchers to help cover the cost of investment in microgeneration and other energy efficiency measures.

Once again, I would like to congratulate you on your new position and hope that we can find an opportunity to meet and discuss these issues in due course.

Yours sincerely

Jonathan Geldart

Director General, Institute of Directors