Chancellor needs to take strategic approach to unlock small business investment – London Business News | Londonlovesbusiness.com

Small businesses need simpler tax regime as part of new approach to closing the UK’s £109 billion annual investment gap.

In a briefing out today, the Social Market Foundation – a cross-party think tank – stresses the need for the Chancellor to take measures in the Budget that unlock small business investment.

The SMF noted that the current approach – mainly focused on cuts to corporation tax and full expensing – do not address key barriers that small businesses face in making investment decisions.

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”.

SMF highlight research indicating that if small businesses could fully realise their desired levels of investment in technology, it could unlock up to £145 billion in additional output. Small businesses in the UK struggle with underinvestment primarily due to liquidity issues such as cashflow, insufficient savings to make much needed investment, and inadequate financial management skills

The report suggests that this confluence of issues isn’t fully addressed by full expensing, while the evidence indicates that cuts to corporation tax have made little noticeable difference to the UK’s long-term business investment levels.

Britain’s late payment culture has a significant influence on small business cashflow, and it is promising that the government is looking to try and tackle this constraint on investment, SMF said. The SMF called for liquidity constraints to be further eased through a broader programme of tax simplification – looking at both PAYE and VAT, since the costs of tax administration are particularly burdensome on the smallest of businesses.

Another barrier to overcome is the financial management skills deficit amongst entrepreneurs and SME owner-managers. SMF calls for the government to develop a formally accredited, nationwide financial management training programme tailored specifically for small business owners and managers. This programme would enable them to improve their cash flow management and make better informed investment decisions.

Richard Hyde, Senior Researcher at Social Market Foundation, said, The investment behaviour of small businesses is influenced by a complex set of factors, including constraints on cashflow, limited savings, and gaps in financial management capabilities.

“To truly unlock the investment potential of SMEs and boost their contribution to the UK economy, we need a more strategic approach to this challenge.

“This isn’t just about cutting tax rates or offering capital allowances—it’s about addressing the range of barriers that prevent SMEs from making high-quality, long-term investments. By improving financial management skills, easing liquidity pressures, and creating an environment that encourages businesses to build up retained earnings as a pool of financing, we can increase not only the likelihood of SMEs investing but also the scale and quality of those investments.”