Budget 2007: The budget and small business. By Simon Sweetmanby
The first reaction was disappointment (going on outrage in some cases). The news that the small companies’ rate is going up from 19% - ultimately to 22% - at a time when the headline rate is to be cut to 28% is a blow to many SMEs. This the day after the Treasury told me that a 3% cut in the main rate (as suggested by the Tory tax reform commission) would be totally unviable. The main winners here are big business. This government does still seem to believe that if it is nice to big business it will stop funding Dave Cameron and his boys. That won’t happen.
The sufferers here will really be companies making between £50k and £300k in profits. This may include a large number of the growing businesses that the Chancellor wishes to encourage, which seems strange. In practice, though, a business of that size will probably be spending enough on plant to qualify for the £50,000 Annual Investment Allowance and will actually pay less tax rather than more.
The Treasury’s argument is that this has been done to reduce still further the tax incentive for small businesses to incorporate, though I would argue that the great days for that have gone already and that people are on the whole thinking more seriously before making the decision as to the legal form to adopt. It probably removes any tax incentive for incorporation, especially since the Treasury is clearly going to keep an eye on developments and will be prepared to turn the screw a bit further.
We must remember, too, that the majority of small businesses are in fact unincorporated, and will not suffer from a change to the CT rates. The cut in the basic rate of income tax is a big headline for them, but the real differences will be very small because of the abolition of the lower 10% rate, and the changes to the NI thresholds at the same time, while a welcome simplification, will probably mop up any savings for most people. Families in the basic rate tax bracket are probably in tax credits, too. A 2% cut in the basic rate ought to be big news, but I don’t think that it really is.
But this is not all the story. The “small companies rate” is actually a “small profits rate” and many large companies are apparently able to take advantage of it. Most small companies in fact pay very little CT, since they are either investing or withdrawing the money.
The Annual Investment Allowance will be significant for small businesses, both incorporated and unincorporated, when it comes in from April 2008. It should allow what is in effect free depreciation for small businesses on plant and machinery, and has the added benefit of being a simplification.
The abolition of IBA and ABA (which admittedly were hard to justify rationally, being based on a 1945 model of the economy) will affect businesses in some sectors, with the hotel trade perhaps as badly hit as any. UK hotel prices are already substantially higher than those in most of Europe (for some reason) and this may not help.
It also reduces the value of the time spent poring over the plans of new buildings to see what can possibly qualify as plant and machinery. It will still be worth doing, but plant which forms part of the premises will now only qualify for the 10% long life assets allowance.
We do get over excited about Budgets, though. In this case a 2% cut in mainstream CT will save some people a lot of money : Tesco might be £2 million better off. But for most of us changes of this size are hardly noticeable. The old excitement about 1p on a pint of beer may have mattered when beer was 50p a pint, but when pubs rarely bother to move it by less than 10p a time it’s lost (not but what many will put 10p on and blame Gordon).
In this case it may be the administrative changes that are more important.
The requirement to file employers’ returns electronically has been put back a year.
The enquiry window will be shortened to one year from the delivery of the tax return, both for CT and ITSA.
There will be some money for basic (going on remedial) training for new staff for small businesses.
One looks at the Budget these days in terms of the administrative burdens which it imposes or relieves as much as its tax effects. Here I think the news is good
- The rates of income tax are simplified
- The distinction between the savings rate and the basic rate is abolished
- There is an alignment of income tax and NIC bands
- Capital allowances are simplified
- IBAs and ABAs are abolished
The simplification message – finally – has got through.