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2011: What has the government done for small business?

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29th Dec 2011
Contributing Editor accountingWEB
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David Cameron set the tone for the year when he told entrepreneurs at the launch of the Red Tape Challenge in April:  “I want us to be the first government in modern history to leave office having reduced the overall burden of regulation, rather than increasing it.” Throughout the past year, the coalition government introduced a string of initiatives, from cutting red tape to simplifying tax regulations and employment reform to boost the UK as an entrepreneurial base. AccountingWEB looks back to see what changes were introduced and what exactly they have achieved.

Red Tape reduction

For many business people, employment law is a specific barrier to growth because it puts them off taking on new employees. To kick off the year, the government launched a consultation on reform of the employment tribunal system. By October, the government confirmed that it would extend the qualifying period for unfair dismissal from one to two years, as well as announcing a review of the tribunal rules and procedures.

November’s sickness absence review continued this theme by proposing reforms on the rules for dismissing long-term sick workers and tax breaks for employers who help those workers return to work.

The Red Tape Challenge asked employers to comment on particularly onerous regulations and started with the retail and hospitality industries. The government’s second statement on regulation reform, published in September, claimed its one-in, one-out reform strategy program resulted in net reductions in regulatory costs from 6 out of 10 government departments.

Diana Bruce from the Chartered Institute of Payroll Professionals investigated the government’s red tape reduction initiatives for AccountingWEB and described the proposals as apromising start”. However, the British Chambers of Commerce attacked the claimed £3bn in cost savings, arguing that the government had imposed £45m in additional costs on businesses during the first six months of 2011.

The chancellor announced in his autumn statement that employment law and health and safety reforms would be tackled in the next phase of the Red Tape Challenge.

Access to finance

In reality, access to credit is probably the issue that exercises most small businesses, and there was no shortage of initiatives to do something about it, starting with the Project Merlin deal in February under which the high street banks would free up £76bn in lending for small firms. But after three months, the scheme was already falling more than 20% short of its £19bn-a-quarter target. By November, the government renewed its efforts with more finance initiatives for small businesses, including:

  • A £95m government Regional Growth Fund (RGF) backed with £500m from RBS, NatWest and HSBC.
  • A £21bn National Loan Guarantee Scheme to lower the cost of bank loans for businesses with turnovers up to £50m.
  • Extension of the Enterprise Finance Guarantee (EFG) from January 2012 to include businesses with up to £44m annual turnover. 
  • New Seed Enterprise Investment Scheme (SEIS) to be launched in April 2012, offering 50% income tax relief on investments, along with a Capital Gains Tax exemption on gains realised in 2012-13 and then invested through SEIS in the same year.
  • Small business rate relief holiday extended for a further six months from 1 October 2012.

But with the backdrop of continuing disappointment with bank lending, Eddybee, an adviser to small firms, commented on our sister site BusinessZone that the government's finance measures needed to be better targeted. “I hope I am proved wrong, but if the government really wants to help the smallest businesses then I can't help thinking this needs to involve equity investment as opposed to bank loans,” he said.

Accounting simplification

In the spring, UK and European business ministers announced plans to simplify financial reporting by removing certain accounting requirements for micro companies. The plans included simplified rules for profit and loss account and balance sheet reporting for the smallest businesses. Although firms must still submit simplified balance sheets to Companies House, they will no longer need to file accounts.

Employment minister Ed Davey claimed the move would save 1.5m small British companies up to £300m a year, but the reform was not well received in the accountancy world. Steve Collings reviewed the government’s discussion paper ‘Simpler Reporting for the Smallest Businesses’ and argued that the majority of accountants were not in favour of the reforms.

Audits could also be rarer after Vince Cable announced plans to take smaller companies out of the audit regime, which, he claimed would save 42,000 small firms up to £40m per year.

Tax simplification

In March, the Office of Tax Simplification (OTS) called on the Treasury to suspend IR35 or compel HMRC to make changes to its implementation until wider structural reform. However, Chancellor George Osborne announced in the Budget 2011 the government’s plan to keep IR35 as it is but to introduce changes to HMRC administration and create a new IR35 Forum. Simon Sweetman called the retention of IR35 a bluff that was detrimental to small businesses.

“So after all these years of Tory MPs fulminating about the iniquity of IR35, what do they do when they come to power? Nothing,” he huffed.

In the run up to the March Budget, the OTS, the IFS Mirlees review, business lobby groups and AccountingWEB members all urged the government to grasp the simplification nettle and merge income tax and National Insurance Contributions into one basic tax. In what we highlighted as a potential landmark moment in the 2011 Budget speech, Chancellor George Osborne said he would consult on the “options, stages and timing of reforms to integrate the operation of income tax and NICs”.

Throughout AccountingWEB’s entire history since 1997 members have repeatedly called for an end to the unnecessary complexity and administrative burdens that the parallel employment tax regimes cause for businesses and their advisers. But this proved to be another area were early promises failed to bear fruit. By November, Treasury minister David Gauke was promising to transform “the customer experience of the personal tax system”, but refused to countenance the merger of income tax and NICs due to the sudden emergence of the contributory principle as a barrier to merger.

John Whiting, the policy director at the OTS, expressed his disappointment. “I don’t think anyone at the OTS thinks it’ll be a quick process, but if you had the one levy it would ‘solve’ IR35. If you don’t go whole hog, you’ll have to look at other devices,” he said.

HMRC and the government dashed business hopes in yet another area that had caused concern throughout the year. Whether businesses were ready or not, the Real Time Information system for PAYE would have to be introduced in 2013 to pave the way for the new universal credit, HMRC confirmed in November. “There is no flexibility in terms of the ultimate go-live date of RTI,” it said.

As has been the case for so many reform pledges in the past, the status quo proved once again its intractability to change. It is a depressing prospect, but the most likely outcome in the next 12 months will be further compromises and sacrifices to expediency as the tax simplification bandwagon gets bogged down in detail and further consultations on the consultations we've already had.

Closing down a business

Perhaps it typifies 2011 that some of the most avidly read articles of the year were to do with dissolving companies. AccountingWEB contributor Jennifer Adams detailed the procedures for striking off a company in November and followed up with a guide to liquidation the following month.

In between the two, an almighty row blew up around the different circumstances and tax treatments that applied. First, the Treasury Solicitor confused everyone by changing its advice on bona vacantia, which holds that any remaining assets after a company is struck off belong to the crown. Initially, the government lawyers' website said they would withdraw the concession under which they do not chase amounts under £4,000. In early November, the advice was changed again to confirm that they will not attempt to recover any unauthorised distributions prior to dissolution.

Then in a measure introduced alongside draft Finance Bill 2012 clauses on 6 December, the Treasury announced that HMRC's ESC C16, which allows companies to distribute capital in a struck-off business without the recipients incurring an income tax charge, will be put on a statutory basis, up to a limit of £25,000.

The measure disappointed Andy White from CBW, who had written an analysis of the ESC C16 consultation for us in February, and tax lecturer Paul Soper, who launched a campaign against the repeal. Both of them complained that the new regime, due to take effect from 1 March 2012, will cost small business owners more by forcing them to pay for a liquidation (typical cost estimated by HMRC: £7,500) to escape income tax on any distributions above £25,000.

There is a sad familiarity to David Cameron's enthusiasm for announcing business-friendly initiatives that, when you go back to review them, prove to be light on substance. He could almost be Tony Blair in disguise. Whatever the colour of their rhetoric, the UK government and its agencies still appear to be structurally incapable of thinking small when it comes to business.

What are your views on the government's reforms for small businesses? How have they affected your clients and are they proving beneficial?

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By dstickl
02nd Jan 2012 22:31

IR35: OTS is wrong! There is a 'quick process' / other device

Here's a way to overcome Labour leader Ed Miliband’s tease at PMQs that jobs were not appearing in the private sector in 2011: Support "StartUp Britain" - and as David Gauke MP is minister i/c IR35 – get OTS & DG to initiate a quick process change to the IR35 Secondary Legislation, to moderate IR35's "5% allowance" [whose 5% rationale still appears to me to be unexplained] as follows:

A- As there was no change to the IR35 regime in the ’11 Budget for "growth" (contrary to the 20 May'10 announcement) may I suggest a change to the "Social Security Contributions (Intermediaries) Regulations 2000 SI 2000/727" Section 7 (1) Step One that reads:
 QUOTE 
7 Worker's attributable earnings—calculation
 (1) For the purposes of regulation 6(3)(a) the amount of the worker's attributable earnings for a tax year is calculated as follows:
 Step One
 Find the total amount of all payments and benefits received by the intermediary in that year under the arrangements, and reduce that amount by 5 per cent 
ENDQUOTE.

B- I therefore suggest that the words "by 5 per cent" be replaced by the device of the  following words that have the virtue of encouraging the “excluded middle” to work:

"by a monetary amount that is the greater of either (a) the VAT registration threshold for a worker who did not work for a period of at least three (3) calendar months after the date his or her previous contract for service if any ended or (b) 5 (five) per cent for all other workers"

C- BTW: I gather from evidence set before Parliament that the tax cost of the above suggestion might be less than £1m pa, or £220,000 on latest figures! i.e. negligible!
 And for civil servants it may help newly redundant public sector workers seek new work, through releasing their entrepreneurial talents into the private sector, as hinted by Labour leader Ed Miliband.

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