Following the publication of the Employment Rights Bill, the Government's own analysis in terms of the impact that the new legislation will have concedes that it will cost british businesses (including those setting up a new business) £7.4 billion over 10 years to implement and resource the measures. Moreover, research conducted by Brightmine has found that 76.3% of employers are concerned about making the right to bring an unfair dismissal claim a day 1 right, not only due to the extra risks involved in recruiting new staff, but due to the extra costs and resourcing required.
Taxes
Furthermore, with the level of taxation in this country at a 70 year high, the Recruitment and Employment Confederation (REC) has warned the Government against imposing yet more taxes and costs upon businesses in the upcoming Autumn Budget on the 30th October 2024. Indeed, the Chief Executive of REC, Neil Carberry, stated: "In light of the impact assessment of the Employment Rights Bill forecasting billions of pounds of additional costs to business, the last thing firms want to hear in the Budget is news of even more costs, or more complexity for how they run their businesses".
Too Expensive For Start-Ups?
So this begs the question as to whether it has become too expensive to set up a new business in the UK?
New Businesses
The latest Red Flag Alert Report from Begbies Traynor for the third quarter of 2024 found that there was a record number of businesses, 632,756, in "significant financial stress". This number represents a 32.3% year on year increase.
Moreover, one group that advises new businesses recently stated: "The past few years have been disastrous for UK startups. In quick succession, we’ve had a recession, a pandemic, a Brexit, a cost of living crisis, and a number of global conflicts – all of which have left little breathing room for new businesses."
Furthermore, the funding that is available for new businesses to set up has fallen to its lowest level in 6 years.
And all this is before the Government added an extra £7.4 billion in extra costs on business via the Employment Rights Bill, with extra taxes and business costs potentially to follow in the Autumn Budget
Options
So what can the entrepreneurs looking to set up a new business do to try and reduce the costs, taxes, and burdens to get their start up off the ground? The options available to them include the following:-
- Set up the new business abroad: One option for entrepreneurs is to establish their new business in a country with more favorable tax laws, lower operational costs, a more favorable regulatory environment, and access to new markets. Countries like Ireland, Estonia, or Singapore offer attractive incentives for setting up a new business, including lower corporate tax rates and simplified regulatory environments. However, this option may involve having to deal with cultural and language barriers, potential political instability, and legal complexities in foreign jurisdictions. Furthermore, in terms of the UK economy, this would lead to the loss of domestic jobs and tax revenue, and reduce economic growth. Hence, as we set out in a previous article, if the Government wants to encourage entrepreneurs to set up a new business and stay in this country, and attract inward investment, then it needs to reduce taxes, costs, and burdens, as opposed to adding to them. By adding to them, entrepreneurs will simply vote with their feet and move abroad. This is borne out by a recent article in the Financial Times which reported that "a growing number of business owners are considering leaving the UK".
- Run the new business either without employees or minimise the number of employees required: By leveraging technology and outsourcing certain functions, entrepreneurs can maintain a lean operation for their new business. This approach reduces payroll taxes and administrative burdens associated with managing a larger workforce. However, it may limit the company's capacity to scale rapidly and could impact service delivery if not managed carefully. It could also lead to burnout from handling multiple roles. Furthermore, again in terms of the UK economy, this would lead to the loss of domestic jobs and tax revenue. But again, if the Government wants to avoid this from happening, then it needs to ensure that the costs involved in taking on employees remains financially viable. This is perfectly possible without compromising on employee rights and protections. The answer is simple - reduce business taxes, especially corporation tax. At 25%, corporation tax is far too high in the UK. In the Republic of Ireland, it is just 12.5%. As highlighted above, the Brightmine survey found that 76.3% of employers are concerned about making the right to bring an unfair dismissal claim a day 1 right, in part due to the extra costs and resourcing involved. If, however, the level of corporation tax and other business taxes were brought down to the levels found in the Republic of Ireland, then the level of corncern expressed by business leaders would almost certainly be far far lower (probably well below 50%) as the extra rights envisioned by the Employment Rights Bill would then be perfectly affordable for most employers. That is, the problem is not with the Employment Right Bill, but with the fact that business taxes in this country are far too high and need to be brought down, especially corporation tax.
- Utilizing government grants and funding programs: Entrepreneurs should explore various government incentives, grants, and loans designed to support startups. These can provide essential funding, though they often come with specific eligibility criteria.
- Adopting a lean startup model: Implementing lean principles allows businesses to minimize waste and maximise efficiency. This method focuses on developing a minimal viable product (MVP) to test market viability before scaling operations, which conserves resources.
- Leveraging co-working spaces instead of traditional office leases: Co-working spaces offer flexible rental terms and lower overhead costs compared to long-term office leases. They also provide networking opportunities but may lack privacy for sensitive business operations.
- Taking advantage of tax reliefs and allowances: The UK offers several tax relief schemes for startups. Entrepreneurs should ensure they are fully utilizing these benefits to reduce their tax liabilities.
- Implementing digital tools and AI for efficiency: Investing in AI and digital solutions like cloud computing, project management software, online marketing tools, and digital payment systems can streamline operations and reduce the costs associated with physical infrastructure. However, there is an initial investment required for technology adoption.
- Choosing a cost-effective business structure: Selecting an appropriate legal structure for the new business, such as a limited company or partnership, can impact tax liabilities and administrative costs. Consult with a financial advisor to help determine the best fit.
- Negotiating favorable supplier terms: Building strong relationships with suppliers may lead to discounts or extended payment terms, helping manage cash flow more effectively.
- Outsourcing non-core functions: Outsourcing tasks such as accounting, IT support, or HR services can reduce overheads by allowing businesses to focus resources on core activities without needing specialised in-house staff. However, as we highlighted in a recent article, the downsides of outsourcing cannot be ignored. Companies face potential loss of control over key processes, confidentiality risks, communication barriers, hidden costs, and concerns about service quality. Additionally, there is the risk of losing internal expertise and becoming overly dependent on external providers, which can lead to operational disruptions if the outsourcing relationship falters.
- Engaging in strategic partnerships: Collaborating with other companies for joint ventures or resource-sharing agreements can lead to reduced operational costs for a new business and expanded market reach.
- Exploring flexible financing options: Entrepreneurs might consider alternative financing methods like crowdfunding or venture capital to access funds without incurring significant debt early on.
Start-Ups: Navigating the Challenges
Whilst the landscape for starting up a new business in the UK is undeniably challenging due to high taxation, entrepreneurs are not without options. By strategically navigating these hurdles, they can still find pathways to success. Leveraging technology and adopting lean operational models can help minimise overheads and maintain flexibility. Moreover, taking full advantage of available government grants, tax reliefs, and funding programs can provide crucial support.
Entrepreneurs should also consider creative solutions like co-working spaces or strategic partnerships to reduce costs without sacrificing quality or growth potential. By negotiating favorable terms with suppliers and choosing efficient business structures, startups can further optimise their financial management. Ultimately, whilst the burden of taxation poses significant barriers, innovative thinking and proactive strategies can empower entrepreneurs to successfully launch and sustain their ventures in the UK market.
Nevertheless, it is essential that the Government work towards creating a more conducive environment for entrepreneurship by bringing down business taxes, especially corporation tax. That will stop the exodus of entrepreneurs abroad.
