Praveen Gupta, Azets’ UK head of tax, called for Rachel Reeves to “encourage and enable SMEs to invest, innovate and grow, and, in turn, support the UK’s economic growth by doing so”.

He added: “At present, local SMEs need a boost. After five years of rising costs they need support to grow, evolve and innovate and to help support their local economies, supply chains and communities by doing so.”

Research from the Federation of Small Businesses shows that SMEs account for around 60% of the UK’s total employment and generate around £2.8 trillion for the economy.

But, Mr Gupta said: “the reality is that many are struggling in the current economic climate”.

Policy suggestions range from lowering the corporation tax rate to an employment tax roadmap so small-to-medium size enterprises have more time to implement changes.

Here is the wish-list in detail, with evidenced rationale for changes by Mr Gupta, who heads up a team of more than 550 tax professionals providing specialist advice to entrepreneurs, owner-managed businesses and large corporates.

Lowering the Corporation Tax rate to 15%, replicating Ireland’s approach

Mr Gupta said: “While we note this would result in an initial reduction in the Treasury’s income, it would encourage businesses to expand, invest in equipment and technology and, perhaps most importantly, create jobs, as well as improving cashflow. It would also increase income to the Treasury through other taxes and would have the additional benefit of encouraging non-UK businesses to base themselves in the UK, creating additional jobs and opportunities for UK supply chains and further increasing tax revenues.”

Following Ireland’s approach would benefit businesses, encourage economic growth and improve the UK’s tax revenue per head, stated Peter Gallanagh, Azets’ UK and Ireland chief executive. Peter added: “Ireland’s Corporation Tax rate of 12.5% has made it a magnet for global brands – creating jobs, boosting infrastructure and increasing tax revenues despite the lower rate.

“The government needs to follow its example and introduce a Corporation Tax rate that allows businesses to reap the same level of benefits, encourages more multi-national companies to set up a base in Britain, and creates extra tax revenue and more jobs.”

Azets’ analysis of UK tax revenues shows that cutting the rate of Corporation Tax to 15% could:

• Potentially save businesses in the UK a total of around £36 billion
• Potentially save around £4,000 for an SME making £70,000 a year profit
• Potentially save around £100,000 for a firm making £1m a year profit.
• Increase the base threshold for Quarterly Instalments Payments for SMEs from £1.5m to £3m

Mr Gupta said: “As a result of the changes to the definition of Associated Companies legislation, this has led to an unanticipated increase in the number of SMEs impacted by Quarterly Instalments Payments (QIP).

“We believe the base threshold for QIP for SMEs should be increased to £3m from £1.5m. This would result in fewer SMEs being eligible to pay QIPs, easing their cashflow burden and freeing up funds for them to invest in growth. Enabling seasonal SMEs to defer one or more QIP payments with interest-free grace periods would help ease the administrative burden they face as well as reducing cost pressures on businesses of this size across the UK. In particular, this would have real benefits for firms in the retail and hospitality sectors, many of whom rely on the ‘Golden Quarter’ at the end of the calendar year – and reduce the gap between forecasted and collected revenue for the Treasury.

“Finally, we propose reducing the interest rates for SMEs for QIPs to a flat 1% per annum. Many SMEs lack the internal resources to monitor threshold and forecast profits accurately, and this can result in unintentional missed payments and significant interest charges, reducing their profits and affecting the funds they have available for expansion and investment. Reducing the rate of interests charged on QIPs would address this, result in a more level playing field and not punish SME management teams who inadvertently miss payment deadlines. Collectively, these proposed changes to QIPs would, we believe, improve SMEs’ cashflow and give them additional funds to invest in staff and technology. At the same time, the proposed change to Corporation Tax would provide a vital cash injection for SMEs and an incentive for foreign businesses to come to the UK, both of which would create jobs and additional revenue for the Treasury.”

Encourage growth through amending Employment Taxes

Mr Gupta said: “Employment Taxes have become one of the largest challenges for businesses, especially SMEs, over the last year. Research from the Institute of Directors (shows that changes to Employer National Insurance introduced in last year’s Budget have increased Employer NI costs for 81.1% of businesses. Our own analysis shows that the employment cost to businesses increased by 45% between 2021 and 2026 for one employee working 30 hours a week and earning the National Minimum Wage.

“This is almost twice the rate of inflation for that time period and equates to an increase of more than £6.5k per worker. We would like to see the Government set out a clear rolling Employment Tax Roadmap which looks ahead for two tax years. The NIC and NMW changes announced in Autumn 2024 left employers in a very uncertain and difficult position and the timing of the Budget only gives businesses four months to plan for and adapt to any changes that may be introduced in the new tax year. An Employment Tax Roadmap would enable business leaders to plan more effectively and budget more accurately, which would lead to them implementing any tax changes more effectively and accurately, and create more stability for businesses and the economy – in terms of growth, tax revenues and recruitment.

“We believe the introduction of a 12-month employer NICs holiday for SMEs who recruit their first employee would boost SME growth and encourage them to hire. While we understand the rationale behind the Government’s changes to NIC, the reality is that it is a cost burden on businesses and a barrier to new employers. Numerous SME clients have told us that it has led them to reduce the number of people they hire this year, and introducing a policy such as this one, which could be supported by a new NIC code that would enable relief to be claimed via payroll, would support those firms who are looking to grow, expand and recruit by giving them 12 months’ grace from paying NI for hiring their first employee.

“We also believe increasing the Employment Allowance to £15,000 would ease the NI cost on many smaller SMEs and start-ups and provide them with additional revenue to invest in staff, stock or technology. While we note this would have an impact on Treasury income, we believe this is outweighed by the socio-economic benefits of this change in policy. The change would take 6.75 employees earning the National Minimum Wage for a 30-hour working week out of Employers’ NI, which would reduce costs for smaller firms and encourage them to recruit more staff. Our final employment tax proposal is to end the freezes on PAYE and NIC thresholds which are set to remain until 2027-28. Inflation-driven wage increases have meant more salaries have exceeded the NIC thresholds, which has placed additional costs on businesses alongside the increases to National Minimum Wage.

“A consequence of this is that businesses have faced higher wage bills without receiving corresponding tax reliefs or allowances, which has made it hard for those smaller employers who wish to recruit staff to do so and made it more challenging for them to offer competitive remuneration packages to their current employees. Increasing the thresholds in line with inflation would go a long way to resolving this issue and send a strong message to SMEs that the government is taking steps to reduce their cost burden and support their efforts to reward their staff.”

Evolve VAT to kick-start growth

Mr Gupta said: “While we recognise the importance of VAT for the Treasury, we believe a number of carefully targeted refinements could encourage SME activity and growth without the Treasury facing a significant drop in revenue.

“Indeed, the measures could help to increase the overall tax revenue generated. The first of these is an increase in the VAT registration threshold to in excess of £200,000. This would mean that smaller businesses, especially start-ups, would register at a slightly later time. This would decrease administration costs for smaller businesses and start-ups, improve pricing competitiveness in the marketplace and provide smaller businesses with additional funds in their early stages to expand, recruit and invest in staff or technology. We also believe the introduction of a simplified and more efficient recovery process for VAT incurred on overseas expenses could provide a cash flow benefit to UK businesses that use the 13th directive refund procedure to reclaim this.

“In our experience the procedure is currently too labour intensive and costly and that overseas countries are slow to process and make repayments. 

“Changes to this procedure could encourage UK businesses to increase their overseas activities, which in turn could increase the UK tax take. A reciprocal arrangement for overseas businesses claiming the VAT they incur on UK expenses could encourage overseas businesses to come to the UK, which could provide job opportunities and increase tax revenues.

“Our final suggestion is to introduce targeted VAT relief for sectors of the economy where businesses are struggling. EU countries like France, Spain and Portugal are offering reduced VAT rates to sectors like hospitality, leisure and entertainment. Following their example would provide a welcome boost to businesses in affected sectors which could be further affected if consumers cut back on their spending. It could also encourage businesses in these sectors to retain or increase their staffing levels.”

A fairer Non-Domestic Rate system

Mr Gupta said: “We believe the current system of Non-Domestic Rates penalises businesses which need to occupy space and discourages them from investing in larger premises and in growing their staff numbers. A multiple based on revenue and profit levels and employee numbers would result in a fairer system and raise additional revenue for the Treasury by bringing businesses who have higher profits and/or higher staff but do not occupy a premises, as well as dovetailing nicely with the government’s levelling-up agenda and initiatives.”

Innovation incentives that encourage SMEs to invest

Mr Gupta said: “We believe that R&D relief for SMEs needs to be increased, and a graduated Enhanced R&D Intensive Scheme introduced. R&D claims from SMEs are 31% lower for this financial year than they were in 2023-24, and rumours of the introduction of a minimum spend for claiming relief are further deterring small businesses from submitting a claim. We believe the net benefit for SMEs (in profit) should be increased from 15% to 20%, and a sliding scale introduced for loss-making SMEs related to their spend on qualifying R&D. This would see firms, for example, who spend up to 30% of their total expenditure on R&D receiving a cash credit of 14.5%, while those who spend up to 50% could receive a cash credit of 20%.

“A move such as this one would help encourage and incentivise innovation and would benefit both start-up and scale-up businesses. We also believe the R&D enquiry window should be reduced to six months post-submission. The current window for enquiries can be up to 15 months if made through an amended return. Enquiries themselves can take up to 18 months and it is only once these enquiries have concluded that a business can be ordered to repay their relief as well as pay any potential interest and penalties. Reducing the enquiry window to six months would eliminate uncertainty around reinvesting the benefit from the R&D tax relief scheme, which would create a more agile SME market and would enable businesses who are holding back their relief to invest it in growth. As a final point, we believe the Patent Box initiative needs reforming. In the 2022-23 tax year, 41% of the £1bn total annual relief available through Patent Box went to just five large businesses.

“This initiative should be easily accessible to businesses of all sizes, with serious consideration given to financial support for SMEs requiring IP strategy and tax advisor support. At present the scheme is aimed more at larger companies with the capital and infrastructure to invest regularly in IP. This puts both young and small businesses at a disadvantage. Making it more accessible to smaller firms would enable them to invest the tax savings in R&D, jobs and growth. Furthermore, any IP generated through this initiative would be retained domestically, creating a more competitive tech landscape in the UK for SMEs and enhancing the UK’s position as an IP-rich nation.”

Refining Capital Allowances

Mr Gupta said: “When it comes to Capital Allowances, we believe full expensing should be broadened out to include second-hand assets and assets for leasing. Doing so would provide a boost to SMEs who are facing financial constraints or have a focus on sustainability, as well as levelling the playing field between owner-operators and leasing businesses. It would also help businesses who are part of group structures by reducing the risk of them inadvertently not receiving intended relief as a result of group-wide purchasing and leasing arrangements.

“We also believe that increasing relief for ‘green assets’ to 100% would encourage sustainable investment and restore the relief that was previously available under the now abolished Enhanced Capital Allowances regime to the previous level instead of the 50% relief currently offered.

Exchange of Capital Allowance losses for payable tax credits

“This would boost cashflow for SMEs who make losses and incentivise loss-making businesses to continue to invest in their projects, teams and ideas,” Mr Gupta said.

“The final Capital Allowances policy change we would propose is an increase in the rate of Annual Investment Allowance to more than 100% for SMEs. At a time when SMEs need support now more than ever, increasing the rate to 150% would provide additional funds for SMEs to invest in growth – adding more money to supply chains and local economies right across the UK.

“The sums of money these policies would save SMEs are significant – and could make a substantial impact on their ability to invest, expand and employ.”