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.

The Institute of Directors has a close and collaborative working relationship with HM Treasury. We represent around 20,000 individual company directors, predominantly of mid-sized and smaller companies based in all regions and nations of the UK. The segment of the economy that we represent is the growth engine of the UK economy, and it is therefore important that we work together to create the best possible climate for investment to support our country’s future prosperity.

At present our members are facing real difficulties. Our most recent survey data 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 your predecessor’s 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 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, your predecessor 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 your own initiative of a Future Skills Unit 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 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

There has been discussion in the media recently around the ideal rate of Corporation Tax. While any reduction in business taxation would be welcome to our members, if it came to a choice we would prioritise cuts to employers’ national insurance contributions for the reasons stated above.

However, as businesses consider how they can support the Government’s net zero target, there is an opportunity to use Corporation Tax to incentivise the action that is required. Our own research shows that business leaders are keen to understand what they need to do to meet our national 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.

The Institute of Directors therefore advocates the creation of a future ‘wedge’ between the corporation tax paid by those businesses that are net zero and those that are not, creating a clear incentive for all businesses to achieve the desired change. 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 further detail around these ideas and would be happy to engage on this issue further with your officials.

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.

Your sincerely

Jonathan Geldart

Director General, Institute of Directors