ICAEW research and member insights reveal that many feel it it is too expensive to do business in the UK, with the inflexible business rates regime, more businesses being pushed over the VAT registration threshold and costly red tape. As part of its campaign to back business-led growth, ICAEW has explored the issues and possible solutions.
1. Business rates block expansion
Business rates do not fall when trade does and rise when you invest. The current regime burden firms with large, impenetrable costs that are fixed from day one, slow to adjust, and often discouraging investment and improving productivity.
Business rates make expansion riskier than it needs to be, unlike VAT or corporation tax which flex with performance.
Successive governments have gone some way to improving business rates, with further improvements announced in the 2024 Autumn Budget, but more needs to be done to improve the system and encourage greater investment and help raise productivity.
Evidence
Business rates set a de facto revenue floor that doesn't flex with performance
- Rates are a largely fixed cost: In 2025/26 the standard multiplier is 55.5p per £1 of RV.
A £100k RV unit attracts a charge of £55.5k/year, meaning businesses must generate £185k in sales at 30% gross margin just to cover the rates bill. - Other taxes flex with income: VAT scales with output, Corporation Tax scales with profit. Business rates however, do not directly reflect performance.
- ‘Liabilities don’t scale with profitability’, warned ICAEW in written evidence to Treasury Committee, making taking on new premises risky.
Valuation lags current conditions and limited appeal options magnify risk
- The 2023 revaluation took effect in April 2023 but was based on April 2021 data, leaving bills detached from today’s reality.
- If business deteriorates, there’s little relief unless physical or location factors change.
Investing in productivity improvements often raises bills
- Some plant and machinery (P&M) is included in rateable value. In 2019 the Treasury Committee found this was unfair on manufacturing businesses.
A Make UK survey found 42% of manufacturers would invest more if P&M were excluded.
At Tata Steel Port Talbot, a £185m furnace upgrade led to a £400k/year rates jump.
But business rates do have advantages as a source of taxation
- They tax the immovable: You can’t take land and buildings offshore, making the base hard to avoid and stable for revenue.
- Simple to collect: Property location is fixed.
- Big revenue: Business rates were expected to raise £31.8bn in 2024/25, a major chunk of non VAT revenue.
Solution
ICAEW welcomes the government’s recent announcement on business rates. It’s a step in the right direction, and shows recognition of the need for reform of the system to incentivise growth.
That is why we are calling for replacing the business rates system with a pro-growth and productivity system that incentivises the improvement of business premises and encourages investment in green infrastructure.
2. Uncertain worker status puts brakes on hiring
Employers’ national insurance (NI) is a de-facto payroll tax on jobs, raising hiring costs and damping growth, long recognised by ICAEW as such since the 1980s reforms.
Opacity erodes trust: Two parallel charges on similar income hide true marginal rates and fuel uncertainty about government intentions.
The split is artificial and distortionary, driving status arbitrage (employment vs self-employment/personal services company/dividends).
The current regime is not even tax-efficient for government with complexity and loopholes leaving revenue on the table, as well as adding costs and burdens for honest employers.
Evidence
Disparity in employment tax rates and rules drives arbitrage: While it is for the government to set tax rates, there are clear incentives for workers to not be classified as employees for tax purposes. The myriad rules that try to ‘fix’ behavioural distortions are not business friendly. Engagers, workers and agencies have to negotiate IR35, off-payroll working, managed service company legislation, agency legislation, and from 2026, the new umbrella company legislation. This complicates compliance but still leaves workers (mainly low-income workers) at risk of unknowingly becoming caught up in tax avoidance.
Employment status needs clarity: The fact that there are three employment status types from an employment law perspective but just two for tax is confusing. As highlighted by the plethora of cases, determining a person’s status for tax is not straightforward and the courts reach different conclusions based on small points of detail. This does not assist engagers and workers to get things right.
The snapshot of HMRC compliance activity at 31 March 2025 shows that the tax under consideration relating to employment issues across its large business compliance and wealthy individuals and mid-sized business compliance was around £6.5bn (almost 10% of the total).
Solution
The consultation on employment status due before the end of 2025 should be taken as an opportunity to also reform employment status for tax and to consider the potential for alignment of status for tax and employment law. The government should:
- Consult on the potential benefits of a statutory test for tax employment status to introduce certainty and reduce the costs associated with arguing over legal interpretation.
- Consult on wider reforms that take account of how differences in rates and the tax treatment of expenses drive behaviour and whether they are fit for purpose in the current business landscape.
3. Regulatory overlap is wasting resources
There are too many overlapping regulations creating duplication and wasting time and money. There’s no permanent mechanism for businesses to report regulatory barriers or inefficiencies. Regulators tend to default to risk aversion, stifling innovation and experimentation.
Evidence
The UK government says: “Over time, billions of pounds of regulatory cost have contributed to our economy being less competitive and less attractive for new investment than it could be. Some studies suggest red-tape costs could be 3-4% of GDP, or around £70bn."
ICAEW's Q2 2025 Business Confidence Monitor revealed that 43% of businesses report regulatory requirements as a rising challenge. In the construction sector the results hit a survey record 57%, with planning delays a key concern. Of respondents in the banking, finance and insurance sectors 58% also cited this as a rising concern.
At an ICAEW-led roundtable held in September 2024, participants emphasised:
- the sheer volume of ongoing rulemaking,
- the absence of effective post-implementation review processes (especially for existing "stock" regulation), and
- challenges in early evaluation of new rules.
Solution
Cut overlap and duplication in regulations and reduce complexity
- Set expectations with formal guidance or legislation that defines “regulator” and embeds conduct and design principles for new or reformed regulators.
- Ensure accountability with a standardised KPI taxonomy covering timeliness, clarity, innovation, compliance burden, and stakeholder satisfaction. Enable independent body reviews
Surface duplication and barriers faster
- Establish a ‘report a regulation’ portal. A single-entry point for firms to flag duplications, unclear guidance, or process delays. Auto-route cases to the right regulator and publish a triage status board with service level agreements. Link to KPI taxonomy. Enable the public to see who regulates what.
Shift from default risk aversion to smart experimentation
- Support the Regulatory Innovation Office to encourage a system-wide adoption of risk appetite/innovation statements, and a common sandbox playbook. Enable independent assessment of how effectively regulators encourage innovation.
4. Overly complex regulation in financial services
The complexity of regulation in the financial services sector is hindering investment and growth. A strong, competitive financial services sector matters for the whole UK economy. It underpins investment, jobs and innovation across every region.
The government’s focus on cutting compliance costs is welcome, but this must be achieved by making things simpler – through reducing duplication and streamlining oversight – not simply by lowering standards.
Evidence
In ICAEW's Q2 2025 Business Confidence Monitor, 58% of banking, finance and insurance cited regulation as a growing challenge - this was the highest of any sector and well above the UK average of 43%.
Complaints to the ombudsman over debanking have surged 69% since 2020/21, with 81% of those being business-related this year.
Solution
Clarify roles and responsibilities across regulators to cut duplication and overlap.
Streamline data collection with coordination between regulators and sunsetting for reporting.
Simplify and consolidate rules to be proportionate, transparent and easier to navigate.
5. Energy costs make UK uncompetitive
Rising and volatile energy prices erode margins. The UK is a high-cost place to do business, with energy costs some of the highest in the developed world. SMEs lack leverage to negotiate fair contracts or reliable incentives to invest in efficiency.
Evidence
Escalating and unstable costs: SMEs from pubs to rural boutiques report energy bills rising faster than they can absorb, with some unable to even secure supplier quotes. According to ONS data UK business electricity prices nearly doubled between 2021 and 2023 and, despite easing through 2024-25, remain about 75% higher than early-2021 levels.
Planning and investment barriers: Business networks and advisors highlight that short-term relief schemes and volatile markets deter efficiency investment, while unclear frameworks on renewables leave SMEs without a pathway. A government behavioural research report found that potential changes to business rates are the single greatest barrier to SMEs adopting rooftop solar PV, directly hindering renewable uptake.
Cashflow and contract pressures: Entrepreneurs stress that delayed government support, high standing charges, and complex tariffs worsen already critical liquidity problems, limiting SMEs’ ability to negotiate or plan long term. Ofgem reports that 64% of businesses experienced rising energy bills, with 76% responding by cutting usage, and many facing difficulties negotiating or securing affordable contracts.
Solution
Explore collective buying power for SMEs: Crown Commercial Service (CCS) runs huge, well-governed energy buying frameworks and risk-managed trading for the public sector. Pilot a voluntary “SME cohort” inside a CCS framework operated by local authorities/growth hubs.
Make non-domestic quotes truly comparable with a standardised one-page quote format.
Ensure SME access to suitable tariffs, including at least one smart-meter time-of-use tariff, and one with a capped standing charge so low-usage or seasonal SMEs aren’t penalised.
Encourage rooftop solar and onsite generation by providing business rates certainty, removing residual planning friction, and better promoting existing capital-allowance rules.
6. Firms struggling to hire digital talent
Even large firms struggle hiring key digital talent, it’s even harder for SMEs. While shortages have eased since the unusual post-pandemic period, persistent shortfalls in key digital skills constrain SMEs, particularly in growth sectors like construction and specialist engineering.
Training pipelines and frameworks lag industry needs, and the apprenticeship levy is hard to use. Visa rules restrict access to overseas talent that could plug gaps. SMEs lack time, capacity and HR expertise to train and retain staff amid wage competition.
Evidence
Hiring gaps: An ICAEW member reports even large, regulated firms being unable to find AI-regulatory skills, it’s tougher for SMEs. Other members report struggling to “get the right skills”, and engineering shortages that hinder delivery and risk inflation.
System blockers: ICAEW members cite visa requirements hampering diverse, skilled recruitment. One member raised concerns that curricula aren’t producing graduates with workplace-ready tech skills, pushing extra training onto employers/universities.
High cost: An ICAEW member working in the construction sector noted long lead-times to train to competence and then losing staff to higher wages. One member in manufacturing said compliance “resource cost” was a huge spend - stretching limited SME HR capability.
The Department for Education 2024 Employer Skills Survey showed that the skills-shortage vacancy density had decreased from 2022, but remained higher than in 2017. In 2024 the figure was 27%, compared with 36% in 2022 and 22% in 2017.
The survey also found fewer establishments were investing in training: 59% in 2024 compared with 60% in 2022 and 66% in 2017. Meanwhile, establishments with skills gaps had decreased (12% compared with 13% in 2017) and fewer employees have skills deficiencies (4.0% judged not fully proficient compared with 4.4% in 2017).
Management quality varies widely and is lower in smaller firms. According to the ONS, the mean UK management score is 0.55 (0–1 scale). Large firms average 0.68 vs 0.51 in 10–19 employee firms. The World Management Survey consistently finds the US at the top, with Germany, Japan and Sweden close behind. The UK trails these leaders and has more poorly managed firms.
Solution
Hiring gaps
- Expand digital skills bootcamps so that more people can benefit from these well-regarded courses. Add a Department for Education endorsed, SME-targeted AI essentials strand to standardise the AI offer.
- Use the new apprenticeship flexibility to target skills gaps as the main route to higher-level skills, including management skills, with clear regional targets and progression paths.
- Simplify the apprenticeship system, with streamlined administrative processes and clear guidance for employers to make it easier for SMEs to engage.
System blockers
- Embed employers in apprenticeship design and review through sector advisory panels. Prioritise management skills, as well as technical skills, to fill the UK management gap.
- Facilitate collaboration between higher education providers, employers and professional bodies to co-design internships and job-linked degrees to widen participation and develop workplace-ready digital skills.
- Track the share of the workforce with a technical qualification as their highest qualification. Adopt a strategy to move the UK from bottom to top of the OECD.
7. SMEs cannot access finance needed to grow
High interest rates, strict lending criteria and the need for substantial collateral or long credit histories mean many SMEs are rejected for finance or face unfavourable loan terms.
Awareness of available finance options is low, and access varies sharply by region and sector. Even where finance is available, application processes can be complex and time-consuming, deterring smaller firms from pursuing growth plans.
Evidence
ICAEW has found that more than two-thirds of intermediaries (69%) cite lack of awareness as the biggest barrier to SME finance. Meanwhile only 26% of SMEs seek external advice before applying for finance.
Use of external finance dropped to 43% in 2024, despite rising demand according to the British Business Bank's Small Business Finance Markets Report 2025.
Regional and sectoral imbalances persist, with some areas significantly underserved by finance providers. The British Business Bank found that London and the South-East received 72% of SME equity investment in 2024. However, ICAEW's Business Confidence Monitor Q2 2023 found capital access problems are more prevalent in London (22%) and the East of England (20%) than in Scotland and Wales (12%).
Solution
Use technology to link SMEs to investors, perhaps through a procurement portal.
Explore a new version of the Growth Voucher Scheme that closed to new applications in March 2015. That scheme was successful in helping small businesses access strategic advice around financing (ICAEW Representation 84/23 SME Finance).
Enable larger Start-Up Loans via the British Business Bank (the threshold of £25k is unchanged since the start of the scheme in 2012) and simplification of the guarantee support.
8. Late payment is expected
Late payment is so engrained that SMEs are surprised to be paid on time, they often wait months for payment.
UK SMEs face a normalised late-payment culture, with 90-120 day terms and delays that drain working capital. Large firms may dictate unfair terms and push risk down supply chains while many SMEs are wary of challenging customers.
Historical public sector slow-pay and cumbersome procurement compound cash-flow strain. Weak enforcement has enabled poor practices, though reforms and stronger penalties are now being consulted on.
Evidence
One ICAEW member reported customers taking 90-120 days to pay hit cash flow, while a Midlands manufacturer said: “...it’s the larger players on 120 days... big companies do whatever they want.”
The government found in 2022 that 57% of SMEs extending trade credit said late payment was a problem (27% of SME employers), and 29% cited late payment as a major obstacle to success.
ICAEW roundtable participants advising SMEs said that firms were “scared to push back”. They reported that instant-sale businesses were still demanding 120-day terms and that risk is pushed down supply chains onto the smallest players.
ICAEW business members working with the public sector argued that procurement was “crippling", taking "far too long" and requiring "extensive time and effort”.
Solution
Strengthen delivery and digital adoption to tackle late payment culture: Alongside proposals in consultation, the UK must accelerate digital adoption to help SMEs manage invoicing and cash flow more effectively. Examples include encouraging SME e-invoicing or other digital solutions through incentives, training and integration to reduce delays and improve transparency.
Increase visibility and empower the Small Business Commissioner: To ensure the success of the government’s proposed reforms on late payment, the Small Business Commissioner (SBC) must be equipped with the right tools, authority, and resources to deliver meaningful change. This includes not only enforcing penalties but also proactively supporting SMEs through education, dispute resolution and cultural change initiatives. The SBC should be empowered to act as a central hub for best practice, with enhanced visibility and faster intervention powers.
9. Audit should help support growth
In the UK, audits for SMEs are often not proportionate. The Financial Reporting Council (FRC) considers the International Standards on Auditing (ISAs) scalable, but practitioners say they’re still too burdensome.
Delaying adoption of the International Auditing and Assurance Standards Board (IAASB) Less Complex Entities (LCE) standard risks higher costs and fewer quality audits for SMEs and charities.
Meanwhile, the 70% non-audit services fee cap in the FRC Ethical Standard may hinder efficient sustainability and other assurance where the statutory auditor is best placed.
ICAEW has heard that firms need to keep a certain amount of headroom under the 70% cap, for unplanned non-audit services that may arise. This is likely to include transactions services, including IPOs, clearly key to the UK growth agenda, but which may be competing with sustainability assurance engagements within the cap.
Together these issues raise costs, reduce comparability and may deter investment, which is at odds with the government’s growth and proportionality aims.
Evidence
Scalability gap and SME burden: ICAEW members report ISAs (and UK ISAs) aren’t proportionate in practice. Audits are costly, auditors hard to find, and lifting thresholds is a blunt tool that can reduce comparability and raise SMEs’ cost of capital. The FRC has argued against UK adoption of the IAASB LCE standard and focused on alternatives that have not moved the dial.
Assurance market constraint: The FRC Ethical Standard’s 70% non-audit services fee cap, amid scarce sustainability expertise, can block efficient delivery of sustainability (and soon AI) assurance by the financial auditor, despite potential synergies. Any change requires government action.
Solution
Adopt the LCE standard for defined use-cases: The UK government should press the FRC to consult on and enable:
- UK adoption of the IAASB LCE audits (same reasonable assurance, lower burden) for SMEs,
- voluntary audits below the statutory threshold, and
- Deparmtment for Digital, Culture, Media and Sport and the Charity Commission consider use cases for charities (Between £1m–£15m income, or wherever the £1m threshold lands following current consultations).
Targeted fee-cap carve-outs with safeguards: Consult on adding sustainability to the ethical standard ‘white-list’. This could be for a time-limited period, with independence safeguards (for example, audit committee pre-approval).
Proportionality package: Improve practical proportionality guidance, monitor outcomes (through KPIs on SME audit cost, audit quality and access to capital), review thresholds only with data, and publish an implementation roadmap with a 24-month review.
More recommendations
Drawing on members expertise and our research into business confidence, ICAEW has outlined recommendations to policymakers advice on how to approach regulating for growth.
Find out moreDownload