The UK Tax system continues to undermine UK Productivity

Wed 22 Nov 2017

There is more in the Budget about poor productivity in the UK with the OBR revising down productivity growth projections, but seemingly no recognition of the fact that the UK tax framework completely undermines productivity growth in the all-important mid-market corporate sector.

Very broadly the top rate of tax on dividends paid from a mid-market company to its owners is just under 40%. The top rate for capital gains tax on a share disposal is 20%.  Many entrepreneurs and owners can access a 10% rate either under Entrepreneurs’ Relief or Investors’ Relief.  Some can even access a 0% rate if they invested through EIS.  So a moment’s reflection tells you that there is a massive economic incentive created by the tax system for owners in the mid-market company sector to realise value by maximising short term profit and selling their companies in the relatively short term.

If we are serious about improving UK productivity we need to have owners who are incentivised through the tax system to take a long term approach to investment in their companies: in their human capital, their technology base, their long term economic relationships, and their long term IP. It is this approach to long term investment that has made the German Mittlestand sector so successful.  Instead in the UK we have created powerful fiscal incentives for owners to do the exact opposite.

So, what needs to be done if we are serious about long term investment in our privately owned companies? First remove the fiscal incentives to make short term capital gains rather than to invest to create long term profit growth supporting dividend returns.  Second begin to tilt the balance in favour of the dividend returns.  Make it economically rational for owners to take a long term view and to seek to get their return from growing long term profitability and taking dividends rather than creating short term profit for a quick sale.

This then begins to create a sound basis for long term investment by owners. It might even – by increasing the tax take from capital gains tax – help improve government finances.

Until these perverse incentives in the tax system are properly addressed don’t expect any real change in those productivity numbers whatever other cosmetic changes or narrowly focussed initiatives governments might propose.

For further information please contact Lindsay Pentelow – Lindsay.Pentelow@mazars.co.uk