December 11, 2009
We predicted it would be a controversial pre-budget report and it lived up to expectations, with some headline measures that are clearly designed to win over the hearts and minds of Labour’s core supporters. But in spite of this, most observers would agree that overall, it was a pretty good result for Surrey’s business owners.
VAT was expected to rise beyond the original 17.5% rate from January 1st and we all predicted capital gains tax would be increased in line with increases to income tax rates. But these changes didn’t materialise. Yes, the National Insurance rises will mean higher tax levels, but given the state of the economy, the overall increases to bolster Treasury reserves could have been a lot worse. This post outlines some of the key changes announced this week which affect SMEs and examines the more positive ones, separating what appears to be spin from substance.
Short-termism continues to inspire tax policy
Although it doesn’t impact small business owners, the bank payroll tax is worth mentioning because it represents a good example of an ill thought out policy designed to garner pre election support. This tax is imposed for a temporary period and requires any institution which is regulated by the Financial Services and Markets Act (banks, building societies, insurers etc) to pay 50% tax on all discretionary bonuses to the extent that they exceed £25,000 and which are awarded to employees between now and the 5th April 2010.
Whether banks bailed out by taxpayers should be giving their staff bonuses in the midst of an economic crisis has been a focus of intense discussion and clearly those organizations who decided to issue Christmas bonuses this year will have already announced their plans to employees, so last minute u-turns are going to prove difficult. This policy clearly forces banks into a no-win situation and HMRC have stated they are watching carefully for any avoidance tactics as they wait for the banks to pay up. Interestingly, there is an exemption for contractual bonus entitlements entered into before the Pre-Budget Report where the payer has no discretion as to the amount of the bonus. It will be interesting to see how many bonuses prove to fall within this exempt category.
Whilst this policy will undoubtedly generate short term revenues, when one takes a longer term view, it is clear this move will also impact on the profitability of the institutions themselves. And since the Government is now a major shareholder in many of them after the bail outs required, their own revenues will be dropping as a result of the reduced returns achieved, reversing the overall benefits of the tax increase. Clearly not a well thought out piece of legislation.
RJP has previously mooted the idea of a cross party group to decide upon tax policy which isn’t politically motivated, and this is yet another example of why such a change would be for the greater good.
Turning to the announcements that affect business owners, topping the list are the forthcoming increases to National Insurance. In the Budget earlier this year, we learned of the forthcoming 0.5% rises to contributions due to take effect from April 2011. Now, in addition, we have a further rise of 0.5% to contributions also due to take effect from April 2011. So the Chancellor has actually achieved a 1% increase in NI, announced in 0.5% stages, to dampen the perceived blow to employees, employers and the self employed.
It isn’t all doom and gloom however and there were a number of positive announcements for SMEs, albeit some more beneficial than others, and which unfortunately upon closer inspection could amount to little more than PR. Consequently, we have divided the more positive measures unveiled into those we regard as genuinely beneficial policies and those which resemble spin.
What was genuinely good about the PBR?
The Time to Pay arrangement, a saving grace for so many small businesses struggling to maintain their cash flow these past months, has been extended. This is very good news and the Government has said it will maintain this policy for as long as necessary. So far, well in excess of 60,000 UK businesses have used the scheme.
In addition, the planned 1p increase to corporation tax for companies with profits below £300,000 (and which would have created a corporation tax rate of 22%) has been postponed by a year, to April 2011.
For those hit by the commercial property slump, the threshold for empty property relief has been extended so that properties with a rateable value of less than £18,000 will be exempt from paying business rates.
What measures are just superficially beneficial?
In the wake of so much criticism about the lack of business finance available, another scheme has been announced – the “capital growth fund” which offers up to £500,000 for eligible firms. In addition, the Enterprise Finance Guarantee Scheme, which was introduced to replace the Small Firms Loan Guarantee Scheme, has been extended. It will be interesting to see how many SMEs directly benefit from these schemes, because in our experience it is very few.
One announcement given weight in the Chancellor’s speech was the encouragement of Research & Development (R&D), designed to foster entrepreneurial innovation. However on closer inspection, the only way in which this affects small businesses, other than those in the pharmaceutical industry, is that the requirement for any resulting intellectual property to be owned by the company claiming the relief will be abolished.
Another announcement which is to be applauded, but which isn’t likely to create more than a ripple among business owners, is the abolition of company car tax for electric cars, and the introduction of 100% capital allowances for electric vans. However, the news of the boiler ‘scrappage’ scheme has been favorably received and is likely to benefit many thousands of homeowners.
Overall then, considering the state of the economy, the pre-budget announcements could have been, and arguably should have been, a whole lot worse. Given that the Chancellor has promised to sustain public spending and that taxes are the Government’s primary source of revenue, one must expect that the main Budget of 2010, regardless of which party is in power, will bring further tax increases and controversy.