Business tax changes following the Emergency Budget

There is no doubt that following the Emergency Budget on 22nd June, most people are feeling financially worse off. But for the small business sector there are some silver linings, albeit temporary in some cases. Here are a few of the main business tax changes:

National Insurance Contributions

An unexpected measure announced in the Budget – taking effect from Budget Day – is the new relief from Employers’ National Insurance Contributions. This is for new business start-ups, based outside of the ‘Greater South East’ region. Relief will be available for the first ten new employees, for their first year’s employment in the new business. The relief will be capped at £5,000 per employee, giving maximum relief of £50,000. This scheme is intended to run for three years until 2013-14. Full details of the scheme will not be available until September 2010.

Capital Gains

One expected change is the increase in the rate for Capital Gains Tax (CGT). It was anticipated that the rate would be closer to the top rates of Income Tax, but it was actually increased to 28% where an individual’s combined taxable income and capital gains exceeds the £37,400 Basic Rate Limit for income tax. The 28% rate will only be applied to the excess gains, so taxable gains falling within the BR Limit will still be subject to the 18% rate.

Another change to the CGT rules is the increase to the lifetime limit for Entrepreneurs’ Relief.

For gains arising after 22 June the lifetime limit is raised to cover gains on business-related assets up to £5m. Gains made prior to the Budget will be covered by the previous limit of £2m. Any gains covered by ER are charged to CGT at 10%.

Corporate Tax

The rate of Corporation Tax for small companies (where profits do not exceed £300,000) will be reduced from 21% to 20% from 1 April 2011. Further annual rate cuts will reduce the main rate to 24% from 1 April 2014. These rate cuts are introduced as part of a general review of the CT scheme that will be undertaken over the next few years.

One likely outcome of this review is that some existing reliefs will be removed – partly to fund these reductions in the headline rates.

Capital Allowances

An example of the sorts of changes that might be made to tax reliefs is the proposed amendments to the Plant and Machinery Capital Allowances rules. These alterations will be effective from April 2012. The two rates of Writing Down Allowances will be reduced from 20% per year to 18% and from 10% per year to 8%.

VAT

The standard rate of VAT will rise to 20% from 17.5% with effect from 4 January 2011 – allowing the Christmas and New Year sales to go ahead at the lower rate. The rise will have a knock-on effect to the special rates for those using the VAT Flat Rate Scheme. Financial accountants are on-hand to offer firms expert advice and guidance on how the Budget specifically affects them and other financial issues. By working closely with accounts, small firms can ensure that their costs are kept to a minimum.



David Woodgate is chief executive of the IFA and a barrister by training. Before joining the IFA he was chief executive of the Institute of Administrative Management and held senior management positions in the City with organisations including Royal Bank of Scotland and NatWest.

Business Barometer Survey points to high pressure for businesses

Managing cash flow, Government red tape and lack of lending facilities were highlighted as some of the main challenges faced by today’s businesses in the annual IFA Business Barometer Survey.

The Survey by the Institute of Financial Accountants (IFA), which was released on 24th June at a launch ceremony in London’s BIS Conference Centre, canvassed the opinions of IFA members; we currently have over 10,000 strong members.

Questions focused on the plight of small businesses in post-recession UK. The challenges businesses claim to be facing include:

• Attracting new business/clients;
• Finding and affording good staff;
• Rising taxes;
• HMRC bureaucracy and poor service, online and by telephone, taking up non-chargeable time;
• Competition from companies providing extremely low quotes;
• Finding lenders – banks frequently refuse reasonable lending applications.

George Derbyshire from National Federation of Enterprise Agencies and guest speaker at our recent Business Barometer Launch said:

“There is no question that a thriving small business sector will be central to economic recovery, and the IFA and its members are uniquely well-placed to test the temperature of the sector. The findings of the Barometer Survey provides an agenda not only for the Government, but for all of us who work to support small businesses.”

IFA members were asked what their experience was of the willingness of banks to lend. Only 2.6% said they were ‘very willing’. Whereas almost 37% said they were unwilling and a resounding 25% claimed to be ‘very unwilling’.

I think the general feeling is that banks are too risk averse. They are not flexible and SMEs are finding it almost impossible to obtain credit. When banks do lend, it is always accompanied by strict personal guarantees, excessive charges, bigger deposits, and shorter loan periods.

Peter Ibbetson, Chairman of Small Business Banking at RBS and NatWest, also spoke at the recent launch event and had this to say:

“We are committed to supporting UK businesses and as part of our partnership with IFA we are launching a number of locally based workshops up and down the country. This will ensure we continue to work closely with the Institute and give its members every opportunity to discuss access to finance with our local business managers. It's this  positive approach that has helped the Bank extend £10.4 billion of new facilities and approve over 85% of credit applications to UK businesses in the first quarter of this year." 

There is, however, a strong belief that this situation could change, with 73% of IFA respondents agreeing that more could be done to improve availability of and access to credit.

Small businesses are calling for Government-backed guaranteed lending, National Insurance breaks, matching funds for businesses taking on unemployed people and supplements provided for training.

Phil Orford, Chief Executive of Forum of Private Business commented on the survey:

“Without the ability to maintain a healthy cash flow you don’t have a business at all, alongside rising taxes and the cost of complying with legislation, banks are still reluctant to make affordable credit available to many SMEs and this is a major barrier to their survival and growth.”

However, almost a third of IFA members claimed to be optimistic about the future of business, with 27% believing that ‘things will improve somewhat’ over the next 12 months. Around 26% of members thought there would probably be no change, with just under 25% expecting ‘things to get a little worse’.

As the Financial Management Professional for SMEs and with the finger on the pulse of the financial industry, the IFA is doing everything it can to help its members, most of whom are struggling following the recession.

IFA members and fellows working in SMPs (Small and Medium Practices) are particularly well placed to understand and meet the needs of SME businesses.



David Woodgate is chief executive of the IFA and a barrister by training. Before joining the IFA he was chief executive of the Institute of Administrative Management and held senior management positions in the City with organisations including Royal Bank of Scotland and NatWest.