Budget will Boost Small Business Growth, say Business Groups
Business groups have welcomed HM Chancellor George Osborne’s Emergency Budget plans to cut small companies’ tax and exempt many start-ups from National Insurance Contributions (NICs), saying it will encourage enterprise growth.
In his inaugural Budget speech, the Chancellor outlined plans to:
- reduce the tax rate for small firms from 21% to 20% next year
- introduce a tax break of up to £5,000 on employers NICs for each of the first ten employees at new businesses outside the South East and eastern England
- create a Regional Growth Fund to provide finance to encourage innovation.
However, Mr Osborne also announced an increase in the main rate of VAT from 17.5% to 20% from January 2011.
A boost for struggling businesses
The National Federation of Enterprise Agencies’ chief executive, George Derbyshire, said that the Government had introduced “dramatic” steps to help struggling small businesses.
“The exemption from NICs for new businesses outside of the South East is a positive measure. It will particularly help areas that have been badly hit by public sector cuts, such as the North East.”
“One of the hurdles for businesses to jump is the financing of employment in order to grow, so to have a three-year exemption for ten employees is dramatic and will meet the needs of the vast majority of firms. A lot of the measures will help small firms, but it remains to be seen how the public spending cuts will impact on the economy as a whole.”
The British Chambers of Commerce economist, Steve Hughes, said the Budget was fundamentally positive for small firms.
“Paying less tax allows them to reallocate their profits to resources and reinvestment, so the reduction in the small companies’ rate is a good thing.”
“The rate only applies to firms that make a profit, but as we go into recovery it will free up cashflow for businesses that have had problems throughout the recession.”
Tax changes for businesses
Capital gains tax (CGT) will remain at 18% for low and middle-income earners, but higher rate taxpayers will pay 28%. The ten % CGT rate for entrepreneurs will remain in place and will be will be extended to the first £5 million of lifetime gains, as opposed to the current £2 million threshold.
“The CGT changes could have been worse,” said Steve Hughes. “Osborne has seemingly taken the needs of firms into consideration and introduced a more simple change, and the increased rate for higher earners isn’t as much as expected — there was a lot of speculation that it would rise to 40 or 50 per cent.
“That is at the expense of the annual investment allowances further on down the line, but a lot of firms prefer a lower headline rate rather than having those allowances at their disposal,” he said. “In this situation, the Government had no choice but to raise VAT and it’s probably the least harmful tax to increase for the business community.”
Macintyre Hudson tax principal, Patrick King, agreed that the Budget had mostly been favourable for small firms.
“Although the capital allowances are being restricted, that is not coming in until 2012. Also Annual Investment Allowance (AIA) is coming down to £25,000 at that point, while the capital allowance is being reduced to £18,000 from £20,000 and from £10,000 to £8,000 for long-term assets.
“That is just a slowing down of tax relief rather than a reduction — they will just get it more gradually,” he added. “We thought AIA might go immediately and completely, and that capital allowances could be restricted severely so it could be a lot worse. You get a couple of years of the lower rate before it kicks in so the message must be to maximise their use of the £100,000 AIA for the next year or so before it changes, where you have the option.”
Not all good news for business
However, business owner Adam Ewart, founder of online music store Karacha, said that the VAT rise would outweigh the benefits of the Budget for small firms.
“The 2.5% rise in VAT is a huge issue for small firms,” he said. “A lot of firms won’t put up their prices because they will not want to risk scaring customers off, or they just won’t remember come January, then months down the line they will find they have this deficit. The VAT rise won’t hurt the customers, it will hurt the business.
“Firms will lose more from the VAT rise than they will gain from the reduction in corporation tax or small business rates. If a company has a turnover of £500,000, they will be paying £12,500 extra in VAT, while if they work on a ten% profit margin and they get £50,000, one% off that is only £500.”