Report

A capital idea?

This report from UK think tank the Social Market Foundation examines a change of approach to helping small firms to increase their investment.

SMEs will have a key role in closing the UK’s investment gap with other economies. However, to ensure that SMEs can make such a contribution, a more strategic policy approach towards SME investment is needed – one that goes beyond the focus on corporation tax rate and more generous capital allowances.

Between 1997 and 2021, investment levels in the UK were 4.9 percentage points of GDP lower than the OECD average. This equates to an annual £109 billion “investment deficit”. Cuts in corporation tax rates have had little noticeable long-term impact. The introduction of full expensing for plant and machinery is only expected to make a relatively small difference, with the impact on SME investment potentially smaller still.

To achieve the kind of shift in SME investment behaviour that will feed through into a substantial long-term increase in aggregate business investment, a more strategic approach to the role of SME investment in the aggregate picture is needed. Three key challenges holding back SME investment behaviour: liquidity, lack of sufficient savings, and limited financial management capabilities.

RECOMMENDATIONS: Make the “Fair Payment Code” compulsory for all large enterprises in the UK underpinned by a stronger Small Business Commissioner (SBC); Introduce a system for SME employers to recoup some of the costs that they incur acting as unpaid tax administrators; Introduce an allowance for retained earnings for smaller firms, and develop a formally accredited, nationally accessible and subsidised financial management training offer for SMEs.