Ways to grow UK plc

Channel companies favour cuts and investment to get the economy out of the doldrums

Business leaders are demanding additional measures to boost the economy after a disappointing 0.2 per cent growth rate was announced for the second quarter.

The coalition has said it will cut corporation tax. However, Tory MP David Ruffley argues that it must come down as low as 18 per cent - the OECD average - for there to be any real effect. There has also been much talk of abolishing the top 50p income tax rate, which would primarily affect the highest paid. An alternative would be to raise the tax-free allowance, perhaps to £10,000. Tax relief in the form of exemptions for firms just getting off the ground has also been suggested.

Another possibility is reducing the amount of regulation that currently hamstrings many businesses. But which regulations should stay, and which go? And should the rules on construction be loosened?

We polled channel players to find out what solutions they favour.

Replace cost with investment
Philip White, chief executive officer of financier Syscap [pictured, left], says debates around the boardroom table or with industry peers would likely bring up very similar options to what has been suggested. All of them could be useful, although he is not sure how tax reform would ultimately be received.

"But what people have been talking about is a manufacturing-led recovery. One key to manufacturing - particularly at a time when people haven't invested - is investment. Because you need efficiency in order to get scale. And you need to take out cost and replace it with investment in systems and processes to get efficiency," says White.

Anything that can fuel investment may fuel growth, and cutting income tax might just work if done right. The cost of living is rising and living standards are being eroded, and that affects beyond the consumer, from the retailer in the high street all the way through to the corporation.

"We could look at cutting that top rate so people do start to reinvest," he says. "I am not sure that I would hold with a reduction in VAT, though. I think VAT is a tax of choice; we are only going to pay additional VAT on something we want to buy. If you don't have the cash in the first place - because you are paying 50 per cent income tax - you won't."

White agrees that bureaucracy and regulation do put people off investing and growing their businesses. "But clearly, you can't compromise things like health and safety or equality in the workplace," he adds.

He also called for direct action from the IT industry. The channel should get together, perhaps using CRN as the medium, and lobby the government to get the best results, says White.

Reduce rates to fuel expansion
Alan Pett, managing director of UK operations at services provider Intact Integrated Services [pictured, left], says that anything that central government can do that helps with either business rates, taxation or regulation has potential benefits.

"But I suspect the biggest issue for many smaller businesses, at least on the commercial side, is still with finance. If you are going to secure growth, you need to invest in infrastructure and other things," says Pett.

He also thinks some firms could look at potential abroad - thinking outside the UK to get more creative - and perhaps achieve growth that way. That is part of what Intact has been trying to do, he adds.

The problem is partly a dearth of good, impartial, free or cost-effective advice. Organisations such as UKTI do help, but generally only in a UK-centric way and at a low level.

"For example, if you're trying to work overseas, you need to know the local labour laws, how to manage physical delivery across borders, what are the main likely concerns for the business, how do you manage risk and so on," says Pett. "How did we get it? Some of it we had to pay for."

However, he warns that tax and rates reductions would probably not be enough to boost the economy, especially since there is no scope for such cuts in the state finances. "We need to be able to tackle debt. We do really need to reduce it," he says. "There is no magic bullet."

Get customers confident to spend
John Sollars, managing director of consumables reseller Stinkyink.com [pictured, left], says he agrees the economic results are disappointing, but they are no surprise for his business.

"To be honest, we got to the end of May and it was like falling off the edge of a cliff. Everyone I have spoken to is down - suppliers, everyone. Business is tough at the moment, really really difficult," he says.

"The big issue is debt; we [the nation] have got to pay it."

However, Sollars says that simply cutting the 50p top rate won't have any impact at all, because so few people in that tax bracket would be affected. Primarily, it is about consumer confidence, so tinkering with tax rates or regulation won't help, he adds.

"It's not about planning regulations; it is about people having the confidence to start moving again," says Sollars.

"The last two years, we have grown with a compound annual rate of 60 per cent a year. This year, we will be happy to deliver 10 per cent. It's not bad, but it is really hard work."

Facilitate business spending
Mark Bishop, a specialist in education, technology and AIM-listed clients at accountancy Grant Thornton, says the focus for the IT industry should be on getting businesses to spend, whether on new IT infrastructure or on system upgrades.

"Realistically, the best way to see growth in established B2B resellers is going to be through freeing up cash and making money available for them to spend," he says. "So it's a bigger question in that there will be more cash for everyone because of making everybody more able."

That would happen either by making UK businesses more profitable or more cash-generative, and reducing the corporation tax rate would help. Getting more business into the UK would be a good idea, but that would be a long-term play, so Pett suggests it may be better to focus on more or quicker growth abroad.

"It is about generating cash from business that's here. Cutting business rates might do that. And cutting other taxes that they should cut: cutting VAT would help business cash flow, and cutting National Insurance would free up cash," he says.

If the government takes less out of business or helps reduce administration, more business can be done. And the government would get the money back, in different ways, if private-sector organisations become more profitable. So cutting taxes and rates could be a good thing if done carefully, suggests Pett.

Cut cost and offer the right relief
Martin Large, chief executive officer of distributor Steljes, agrees that all the options suggested could prove positive - perhaps with the exception of liberalising construction planning.

"I don't think that's one of the things that particularly concerns us," says Large. "I absolutely buy the whole argument that corporation tax rates should be lowered. If you think about when we brought Smartboard [pictured, left] into the country and started to distribute it, it took four years until we got £1m back. So that's three years of investment where we were losing money. And having the taxman take 30 per cent of everything we took.

"That's an awful lot of money that could be invested in new jobs, new business, getting jobs and overall - not just for the company but for the people we employ."

Large says that when he worked in financial services, his company "seriously looked" at moving to Ireland because of the UK's high tax rates.

"I would rather have the money in the company to invest than in the government's pocket," he says.

He would like to see the top rate cut from 50p, and says the government has to get people spending money if it really wants to stimulate enterprise. Have lower taxes, and enforce their payment. That might require further action on the banks, too.

"You still can't borrow for personal or business purposes. Put the money back in the hands of customers. The customer will spend it, there is no doubt about it. And then make sure that the higher-paid people do pay tax," he says. "Greece, for example, is a country that cannot collect its own taxes. It only collects about 25 per cent of its taxes from people who live in the country."

On top of that, regulations are a real problem for many businesses. Many laws are obscure and resource-consuming, especially for smaller companies, notes Large.

"It is absolutely endless. And the real cost of it is the time, resources and money we have to put into dealing with all those issues. It is the opportunities lost because you're dealing with these things," he says. "I dread to think what it's like if you're trying to hire your first or second employee. How do you find out about it all, and how much of your time is it going to take?"

Perhaps tax breaks could also be offered to small companies to hire people, suggests Large.

OBR: UK will fail to meet 2011 growth targets