FMWF’s exclusive small businesses’ guide to the Budget

Last week’s Emergency Budget was largely positive for smaller businesses say experts, though firms will not escape the pinch entirely.

So what do the measures announced in the budget mean for small business owners? What are the implications and what do small business groups think of Chancellor George Osborne’s recent moves to reduce the national deficit?

Business rates
The Small Companies Tax rate – now officially known as the Small Profits rate – will reduce from 21 per cent to 20 per cent with effect from April 2011. Currently the small companies tax rate applies to firms whose profits do not exceed £300,000 annually.

Corporation tax, paid by small or medium-sized businesses who have a larger turnover than £300,000, will also be reduced by one per cent every year from 2011, for the next four years, taking it from its current level of 28 per cent to 24 per cent.

Both measures have been welcomed by business groups, with the Federation of Small Business estimating the reduction in small companies tax will benefit more than 850,000 small firms.

And the Forum of Private Business believes cuts to small business corporation tax will make a measurable difference to the fortunes of small and medium-sized enterprises.

Phil Orford, chief executive of the FPB said: ‘Not only did the Chancellor make all the right noises about supporting enterprise and smaller businesses, he backed it up with a number of crucial tax changes. The one per cent reduction in small companies’ tax is obviously more than welcome – it’s something we and the small business community have long called for. It also represents a two per cent cut in real terms as the previous government had planned to increase small companies’ tax by a further percentage point.

But some experts have warned that the reduction in the small companies tax rate could have certain less positive conequences. Toby Ryland, of London-based chartered accountants Blick Rothenbergee said: ‘This will surely result in many small businesses converting to companies and with the owners paying themselves dividends instead of salaries.

‘The result will be a reduction in both employers’ and employees’ national insurance contributions, which are not payable on dividends, and we may well see further legislation to counteract this. As things stand, there seems to be little incentive to continue as a sole trader for the small business.’

Capital Gains Tax
Capital Gains Tax is set to rise from 18 per cent to 28 per cent following the budget. Yet with many experts predicting an increase in CGT to 40 per cent prior to the budget, the actual outcome was less punitive for businesses than expected.

Barry Marshall, UK head of tax at PricewaterhouseCoopers LLP, said: ‘There were unavoidable announcements on significant spending cuts and substantial tax rises. Many of these changes had been trailed with a clear intention to manage expectations. However, tax rises are coming earlier than many had expected. But the rise in capital gains tax to a flat rate of 28 per cent from tonight, was less than many had feared. However, the Chancellor’s desire to keep the tax simple means that entrepreneurs will be disappointed he did not introduce a lower rate for business assets.’

However, Philip Monks, the chief executive officer of Aldermore, the new bank set up to lend to small and medium-sized businesses, was critical of what he described as the double whammy of CGT and VAT increases.

Monks said: ‘CGT rises will be a disincentive for entrepreneurs to go solo and then to invest in their own businesses. HIgher CGT rates will also dissuade business angel investment in small businesses where returns are geared towards capital growth rather than income.’

VAT increase
Far from popular with small businesses or many experts was the announcement that VAT will rise from 17. 5 per cent to 20 per cent with effect from January 4, a move that experts warned would hit small businesses hard, due both to the administration costs of implementing the change, as well as discouraging consumer spending.

The FSB’s John Walker warned that the increase would ‘hurt small firms who will have to pass the cost onto their customers, unlike big business which can absorb the cost’.

Daran Salamian agrees. He set up his business Audio Visual Exclusive, which sells quality televisions, from his bedroom seven years ago. He now employs nine people, has a shop, website, and a 4,000 square foot warehouse in Perivale, west London.

Daran, 29, says: ‘We sell high value items, televisions starting from £500 upwards, and at this level the increase will impact on how and what customers spend. The increase will also affect us more than other firms selling cheaper goods.’

He adds: ‘The market is already incredibly competitive, even more so since the manufacturers began selling to the likes of Tesco and Sainsbury, who can afford to offset the increase in VAT or sell items at a loss. This is another knock for us and means we will be concentrating on paying the bills rather than trying to innovate or expand in coming months.’

The ICAEW’s Lewis said: ‘The VAT increase will make purchases more expensive for non-VAT registered businesses, meaning that it is the smallest businesses which are likely to feel the change the most.

But there could yet be hope added Lewis. ‘By delaying the VAT hike until January 4 of next year, the Chancellor might help avoid a double dip, as the rate change is likely to encourage consumers to bring expenditure on bigger items forward to this side of the new Year, boosting the economy when it is most needed.

National Insurance levels
The threshold at which employers begin making National Insurance contributions for staff will rise by £21 per week above indexation, from April 2011. New start-up businesses outside London and the South east and also excluding firms starting up in the east of England, will be exempt from paying National Insurance Contributions (NICs) for the first ten employees they take on. The exemption will run for the next three years and it is hoped will encourage entrepreneurs to employ people by bringing down the cost of doing so.

Yet while welcoming the announcement many experts felt it did not go far enough.

John Walker, national chairman of the FSB says: ‘We welcome moves to give a national insurance holiday to start-ups but we are concerned that 70 per cent of firms operating below capacity, those businesses already trading, will not be helped. We need to see a full reversal of NICs increases to fully offset the ‘tax on jobs’ which the previous administration initiated.’

Entrepreneurs Rate relief
The Chancellor announced an increase in Entrepreneurs Relief from £2million to £5 million. This will mean entrepreneurs who sell businesses will pay capital gains tax of ten per cent on up to the first £5 million of gains made over a lifetime. This was a popular move with small business groups who have called often in recent months for th £1 million limit to be raised, as a way of encouraging entrepreneursip in Britain.

The FPB’s Phil Orford said: ‘The rise in entrepreneurs’ relief threshold to £5 million is more than we could have hoped for and it should ensure that most small business owners are not too heavily penalised when they come to sell their companies.

Enterprise Finance Guarantee
This controversial scheme was set up in January 2009 to provide firms without assets to borrow working capital or fund investment into small businesses looking to grow and develop. The Chancellor announced last week that the scheme would be extended by £200 million to support additional lending of £700 million. The scheme will continue until March 31 2011.

Debbie Griffiths, entrepreneurial business partner at accountancy firm Deloitte said: ‘The EFG scheme plays a key role in providing lending to small firms that would not normally be able to access traditional forms of finance. So moves by the Chancellor to increase the scheme is one that is likely to help a number of fast growing and entrepreneurial businesses.’

But small firms still need clarity about the longer-time existence of the scheme and their ability to access finance warns the Institute of Chartered Accountants in England and Wales (ICAEW). Clive Lewis, head of enterprise at ICAEW said: ‘Closing the scheme would have been bad for business.

Extending it means helping a number of firms that struggle to access money through other routes. While the extension is good news, it is only until the end of March 2011. Businesses will undoubtedly still be in need of support beyond this time and it would be helpful to know what will happen to the EFG scheme longer-term to increase certainty for business.’

Employment law The chancellor pledged to carry out a wholesale review of employment law, which is often cited as one of the biggest hindrances to small businesses looking to grow. Each government department will have to review the employment laws for which they are responsible, with a view to simplifying legislation and ensuring businesses can be more competitive.

The FPB’s Phil Orford said: ‘The pledge for a wholesale review of employment law, quietly announced in the full budget document, is a highly welcome one. Our members frequently city employment law as one of their main areas of concern so any moves to simplify and and rebalance the regulations affecting smaller employers have to be welcomed.’

Regional Development Agencies
The nine Regional Development Agencies (RDAs), which were set up to drive economic development and provide firms with local support and funding, will be abolished. Instead they will be replaced with a new network of local enterprise partnerships.

This announcement received a mixed response from small businesses and experts. The ICAEW’s Lewis said: ‘The structure of RDAs may be dismantled but their most valued work should be carried on by other business partnerships. We should try to maintain publically-backed schemes that help businesses to drive economic recovery.’

Insurance Premium Tax
Insurance Premium Tax, which is paid on different insurances ranging from motor to travel to disaster insurance, will rise following the budget, a move criticised by business experts. The lower rate of IPT will rise from five per cent to six per cent, while the higher rate will match that of VAT, going from 17.5 per cent to 20 per cent.

The British Insurance Brokers Association believes the move will ‘serve only to add further financial pressure during the recession and discourage individuals and small businesses from taking out adequate and appropriate insurance protection’.

Eric Galbraith, BIBA Chief Executive, said: ‘Our research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further underinsurance or even a lack of insurance protection. The last thing people need in a financial crisis is a higher insurance bill. This is a tax on protection.’

BIBA has warned businesses to be wary of cutting back on insurance to compensate for the increase in IPT. Instead it is urging small business owners to seek advice from an independent insurance broker, on the best and most cost-effective way to ensure their business is protected.

Tags: Budget, capital gains tax, economic slowdown, economy, Property Industry

Posted by Helen Loveless on Friday, June 25th, 2010 at 11:46 pm.

Filed under Ask an Expert, Careers, Data Bank, Feature, News, SMEs, Starting a Business, Tagged as: , Budget, capital gains tax, economic slowdown, economy, Property Industry.