By Liina Vahtras, above, Managing Director, e-Residency
The UK, historically renowned as a vibrant hub for entrepreneurship, seems to be facing new challenges in maintaining its appeal to homegrown talent. According to the latest Global Entrepreneurship Monitor, the UK has slipped to number 25 out of 51 countries on the quality of its entrepreneurial ecosystem. Once known for a dynamic start-up scene and as a launching pad for several successful companies, it now faces the reality of its entrepreneurs increasingly looking towards more favourable destinations. We’ve seen this with Arm choosing to list in the US last year and Tui announcing it may de-list from the London Stock Exchange this year.
SMEs play a crucial role in the UK’s economy, accounting for 99.9% of its business population. To address current challenges and reignite its entrepreneurial spirit, the UK must look externally for inspiration. One model it can learn from is Estonia; a digital revolution that was fuelled by regaining independence, created an environment that caters to businesses and actively encourages entrepreneurialism. Home to companies like Bolt, Skype and Wise, it has the most start-ups and investment per capita in Europe.
A noteworthy aspect of Estonia’s success is the e-Residency programme. This initiative allows global entrepreneurs to establish and manage a business based in Estonia digitally, regardless of their physical location. It has already seen over 1000 sign ups from entrepreneurs across the UK. By learning from examples like Estonia, which has effectively leveraged technology to foster an entrepreneurial environment, the UK can adapt and evolve.
If businesses fail, look at your tax system
High tax rates pose a significant challenge for businesses as they look to grow their operations and become more profitable. This is especially true in the UK, which has one of the highest tax rates in Europe. According to the International Tax Competitiveness Index, the UK ranks 30th while Estonia sits at the top. So just how has Estonia taken the top spot for the 10th year in a row? Understanding that business performance was crucial to the economy, the tax system in Estonia was made to reflect this.
In Estonia, corporate income is currently taxed at a rate of 20% (set to rise to 22% in 2025) when it is applied to distributed profits. Individual income taxes are also straightforward, with a flat 20% rate that excludes personal dividend income. It also offers a full exemption on foreign profits earned by its domestic corporations. This structure provides significant incentives for entrepreneurs looking to start a business, making Estonia a prime location for business in Europe.
While each country has different needs and areas to consider, the UK can look towards other blueprints for success which can inspire thinking around reassessing its current tax system and how to remove hurdles which are hindering business growth as Estonia has done. One learning we have taken away is that for businesses to have renewed confidence, it’s important to show entrepreneurs that you mean business when it comes to their long-term growth and success.
Going digital
The UK government recently withdrew draft regulations after concerns were raised about additional reporting requirements. We can all agree that completing forms and compiling reports is a task few enjoy, especially for business leaders facing numerous reporting deadlines throughout the year.
While reports are a necessary element of running a business, there are ways governments can streamline this process. As part of Estonia’s steps to becoming a fully digital country, we moved all paperwork online and made it easier for companies and individuals to fill out important documents such as tax returns. However, it’s not just about removing the burden of paperwork. Having everything online means that information remains up to date, files are easy to access and there is no need to rummage through numerous invoices and statements to find information.
Similarly, the UK government can take steps to simplify the reporting process, whether that be a long-term move to hosting everything online or cutting down the number of different reports that businesses need to submit each financial year. Creating a simpler corporate governance regime means happy businesses, happy investors and a healthier economy in the longer-term.
Looking to the future of UK entrepreneurialism
The UK has a good base for entrepreneurs to start their businesses, but more could be done to retain founders and help business growth. Drawing inspiration from Estonia could be a step in the right direction. Its initiatives, such as the e-Residency programme, showcase the power of digital integration in fostering a business-friendly environment. By adopting similar strategies, the UK could provide additional incentives and support structures for entrepreneurs, making it not just a place to start a business but also to sustain and grow it.
