Protecting the tax take

Accountants’ tax duties

Times are difficult, but there are still many small businesses making profits, although those profits may well be under pressure. Some are making losses of course. It is fair for all business owners, whether they have companies turning over some millions, partnerships turning over hundreds of thousands or sole traders turning over tens of thousands to expect their accountants to ensure they pay no more tax than they should.

Tax planning by accountants should also include proper management of loss claims, because this also ensures that tax refunds are claimed to the maximum level.

In the case of profitable companies, there should be a good dividend policy so that the (usually) family shareholders pay no more personal tax on their income than they need to, and while accountants are not generally authorised to give pension advice they will remind their clients of the tax advantages of putting money away in the most beneficial way in order to minimise their tax liabilities. All well and good.

Historical notes

Arranging one’s affairs to pay less tax is what most people would think was fair. Not everyone would know of Lord Tomlin’s famous quote “Every man (and we can infer “woman”) is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.” (IRC v. Duke of Westminster (1936)

Increasingly, though, the Treasury has been concerned to get in every penny it possibly can out of the taxpayer, whether business or otherwise. In the Seventies, tax rates were very high for various reasons, and really it was in that period that tax avoidance became very popular, especially amongst businesses. In those days it was mainly very large businesses which had the wherewithal to try to avoid tax. Tax barristers and other experts pored over the statutes to find ways of channeling funds so as to reduce tax due from companies. Many of these means had no commercial reason for being, but were simply to reduce tax.

The game changer

In 1982 the Inland Revenue, as it then was, had two major successes with cases known as Ramsay v. IRC and IRC v. Burmah Oil Co. Ltd. Basically it was determined that any arrangement which has pre-arranged artificial steps with no commercial purpose other than to reduce tax liabilities would effectively fail. This is a simplification, but the rulings established what has become known as the Ramsay Principle, which would mean that any wholly artificial scheme to reduce tax would fail.

Of course this didn’t stop the game of tax avoidance, but tax specialists then tried other ideas which were not totally artificial, often using established principles, but which schemes would not have been set up without the objective of reducing tax.

In recent years, there has been a real crackdown on tax avoidance and HMRC have got very tough. All schemes which are set up with a view to reducing the tax liabilities of businesses and individuals have to be advised to HMRC and that means they can then address how these may be shut down either by changing the legislation or quite commonly taking the taxpayers themselves to the Tax Tribunal and perhaps to the Courts thereafter.

Snake oil purveyors

You as a business owner might receive a telephone call or an email suggesting that you might be able to reduce the business’s and your own tax liabilities though a special scheme. Sometimes the idea might be introduced to you as an “HMRC / Inland Revenue approved scheme”. There is no such thing as an approved scheme; only a scheme which has been advised to HMRC and has not yet been shut down. Such a scheme might of course work for you, but you would need a strong nerve and be prepared to have your tax affairs enquired into in depth. Most directors, partners and business principals would not sign up for that if they knew the risk.

So beware the snake oil salesman selling tax schemes unless you are a risk taker with a strong nerve and funds reserved to pay for the defence of your tax position. You might need to take something for your nerves in addition to the snake oil.

The reality is that many married couples are liable to very different rates of income tax. It is not uncommon to have one who is a 40% payer while the other is liable only at 20% or has no liability at all. Therefore you might think that there would be some mileage in arranging property affairs to take advantage of this.

It is of course conceivable that the person with the higher level of income could be a 50% payer but most people in this position would and should already be arranging their tax affairs appropriately. Where one spouse is just into the 40% band, perhaps these issues would not have been addressed.

In a joint tenancy we said previously that the interests in the property are indivisible. Any profits from renting would be shared fifty-fifty which could be distinctly disadvantageous if there were a significant disparity between the highest marginal rates of the individual owners.

Married couples owning rental property as tenants in common will normally be assumed by HMRC as sharing their profits (or losses) fifty-fifty even if they actually own the property in different proportions. If the ownership percentages are in reality different, the split can be applied to the apportionment of income between the two, but that split must reflect each spouse’s share. A formal election form needs to be completed in these circumstances.

Without an election, if one spouse who wholly owns a property transfers a very small share of a per cent or so to the other, HMRC would make a fifty-fifty split automatically. This would save the couple jointly a significant amount by moving half the income from perhaps the donor spouse’s 40 or 50% tax band to the recipient’s 20 or even 0% tax band.

People who are not married or in a civil partnership may own property as joint tenants in any respective proportion such as seventy-five twenty-five, but may split the rental income in a different way they have agreed between them, preferably in writing, if they have a disparity in their particular tax rates. Of course they may do this without regard to income tax tax, but the point is that they have considerable flexibility. For capital gains tax purposes, gains will follow the underlying beneficial ownership as outlined.

You will see that it is possible to arrange your affairs in order to reduce the tax burden on a common sense way and without resorting to any scheme HMRC might not like. This does not mean that it is necessarily straightforward to do so as issues outlined here and in the previous article have to be considered carefully. You should seek professional advice before taking action.

If you are buying a property with your spouse or civil partner or even just a business partner and you intend to let it out, make sure your solicitor or conveyancer knows this and arranges the most suitable ownership status. Generally for tax reasons this will be as tenants in common. As a tenant in common you will each own a specific share of the property, which may be half, or a different specified percentage.

The other sort of joint ownership is known as a joint tenancy. In that situation each person owns an indivisible share of the whole property and cannot pass a share to another person. In the event of the death of one of the owners of a property held as joint tenants, the ownership of the property passes to the survivor, and this cannot be changed by a gift by will.

A joint tenancy may not be a good idea from the point of view of the survivor in terms of inheritance tax planning as it may be liable to significant IHT on the death of the survivor. If gifted on by the survivor it would require that person to live seven years after the gift to avoid an inheritance tax charge on death. Whether or not a property is owned by a married couple, it is a very inflexible arrangement.

The terms and types of ownership in Scotland are different from those already mentioned, which apply to England and Wales, but the same situations as above are provided for.

Having a property owned by people as tenants in common gives more flexibility. Firstly, the property doesn’t have to be owned on a fifty-fifty basis. It can be owned in whatever percentages may be agreed, such as 75:25 or 95:5. Actually several people could have a distinct share of a property. A person’s share could be willed to someone other than a joint owner if desired, or if one married person or civil partner wanted to leave the share to the other, then a will would take care of it with no difficulty. The point is that there would be room to plan who should inherit and at the same time take account of inheritance tax considerations.

A share of a property owned as tenants in common can be sold or transferred to another party. A gift to a spouse / civil partner would not attract capital gains tax, though a sale to a non-spouse would (if there were a gain) and a gift to a non-spouse / civil partner would be valued at the market rate for capital gains purposes.

You will see that the distinctions between joint tenancies and tenancies in common are important for tax purposes. A joint tenancy arrangement has much less flexibility. If you need to understand more about the nature of these distinctions you should take legal advice. In the next article we will be discussing the income tax issues relevant to the two types of ownership.

If you have Furnished Holiday Lettings (FHL) business losses in the current tax year ending on 5th April 2011 this is the last year (2010-11) in which you will be have the ability to set them off against other general income.    i.  e. earnings, investment income and non-FHL lettings profits etc.

If you already have losses or if you would have losses if you brought forward the timing of necessary expenditure such as repairs to properties to spend before 5th April, you should consider doing so as in future losses post 5th April 2011 will only be offset against other FHL income.

There is a summary of the changes to the tax treatment of FHL here.

Plant and machinery at the funfair

If you are thinking of selling your business or thinking of buying one, please do get tax advice at the outset. Of course commercial considerations are paramount, but once you have decided in principle upon making a move to sell, or a move to buy and started looking at the numbers, do take into account that those numbers may be affected in a major way by tax considerations.

Selling the owner managed company

In most circumstances a small owner-managed business is best sold as a whole. In other words, sell the shares in the company to the new owners and then they will take on the business, the obligations including tax liabilities and the employees lock, stock and barrel. Of course the purchaser will do their due diligence and there will be safeguards for the buyer, the seller and the employees.

The advantage is that upon the seller(s) receiving the proceeds of sale in cash, there is only a capital gains tax liability to worry about. In most cases Entrepreneur’s Relief will limit tax to10% of the gain on sale up to £5M with the balance of any gain taxable at 28%. This is very tax-efficient.

Only in particular circumstances which I will come back to will a share sale not be very advantageous in selling the business.

Buying a company in business

Purchasers of a business usually see matters differently. They would often wish to purchase the assets rather than the company. The assets will be revalued for tax purposes so they will take on real property at a higher cost and therefore lower gain on later disposal. They will acquire plant and machinery at current value and be able to write it off over several years. Of course they will have to pay for the goodwill of the selling business but at the same time they are buying in future tax allowances.

The buyer’s advantage is the seller’s disadvantage

If a company sells its assets rather then the owner(s) just selling their shares, the company realises gains on its property upon which it will have to pay corporation tax. It may have taken advantage of generous Annual Investment Allowances and have written down plant and machinery assets to nothing which might have cost up to £150,000 or so over the last couple of years. There may be many assets which would be revalued on sale and a lot of corporation tax would have to be paid back.

All-in-all the asset purchase route is great for the buyer, but the seller would have to suffer quite a lot of corporation tax before liquidating the company and (by HMRC concession) being allowed to liquidate the company and pay capital gains tax with Entrepreneur’s Relief. Although the capital gains tax on liquidation might be restricted to only 10% it might be on a lesser amount after the company has met its corporation tax liabilities. The effective tax rate for the seller might easily be in the mid thirty-per-cents though the buyer would be happy.

Exception to the seller’s rule

The selling company may have been trading at a loss for a year or so. If that is the case (and we may be talking about a fire sale of a failing business) then even if the assets out of the company to the buyer, the losses brought forward may cancel out the profits on revaluing the assets prior to sale, thus leaving more in the pockets of the selling company’s owner.

To sum up…

• In general the selling owner will wish to dispose of all the shares in the company to the new owner.

• Usually only a loss-making company will be very willing to go the asset-sale route.
• The buyer will wish to purchase the assets and business but not the company.

It makes sense that if the buyer insists on an asset purchase that is unhelpful to the seller from the point of view of incurring extra corporation tax, the seller should look for a higher price in at least part compensation. It should be part of the negotiation.

I am sure you can see that the time to get tax advice is at the outset, well before any draft agreement is drawn up between the seller and the buyer.

Why not find out how we can help with your difficult tax issues? Call on 0845 456 3583 or email enquiries(at)jonstow.com for an early appointment?

Following the Coalition’s decision not to abolish the Furnished Holiday Lettings (FHL) tax category with all its advantages over the letting of investment property, we now know what the Government does intend for the future.

Donegal cottage

The regime for FHL is not going to be quite as generous as it was in the past, but we should be thankful that it is not going to be axed altogether. The previous qualifications for a letting to be an FHL were:

• the property should be available for holiday letting on a commercial basis for at least 140 days in the tax year;
• it should be let for at least 70 days;
• individual lets should not exceed 31 days
• the holiday property should not be let to the same person for more than 31 days in the year in the holiday letting period of at least 140 days.
• outside the holiday letting period longer term occupation by one tenant should not exceed 155 days in a tax year.

From 2012-13

• the property should be available for holiday letting on a commercial basis for at least 210 days in the tax year;
• it should be let for at least 105 days;
• individual lets should not exceed 31 days
• the holiday property should not be let to the same person for more than 31 days in the year in the holiday letting period of at least 210 days.
• where the FHL business comprises multiple properties the qualifying days rules will be averaged between the properties so that all will fall within (or without) the FHL category. There will be clarity rather than confusion.
• a “period of grace” will be introduced to allow businesses that do not continue to meet the “actually let” requirement for one or two years to elect to continue to qualify throughout
• that period.

From 2011-12

• losses made in a qualifying UK or European Economic Area (EEA) furnished holiday lettings business may only be set  against income from the same UK or EEA furnished holiday lettings business

The change to the loss relief position is significant. Previously as FHL losses were treated as trading losses they could be set against and individual’s other income of the same year or carried back to be set against the taxpayer’s income of the previous year. If taxpayers will have other income in 2010-11 and anticipate some expenditure in the near future relevant to their FHL businesses they might consider spending the money earlier if it would enable them to claim loss relief against other income in 2010-11.

It is worth repeating the unchanged advantages from my earlier post:

• any capital gains made on FHL-qualifying properties will be liable to capital gains tax at the business rate of 10% and would qualify for the new Entrepreneurial 10% lifetime band which is now to be £5 million, more than enough for most FHL owners one would think.
• a capital gain on one property may be rolled over into another replacement property subject to certain conditions being met. Therefore the gain would only be taxed on the final sale of the replacement assuming that was not also replaced.
• you can claim Capital Allowances in respect of equipment such as white goods purchased for your properties, and can write down the costs against current income. For non FHL furnished rentals normally you are only allowed a deduction of 10% of the rent.

Undoubtedly there will be some property owners who will find that their lettings no longer qualify as Furnished Holiday Lettings and therefore they will ultimately pay more tax. Others whose businesses continue to qualify will not be able to set off their losses and again will pay more tax on other income.

Unless the expenditure on equipment is very high one would expect the ordinary furnished lettings “wear and tear” allowance of 10% of the rent to afford the replacement of lost capital allowances.

The new regime is not quite so friendly as the previous one, but as the last Government was minded to abolish FHL altogether we should be thankful for small mercies and some quite big ones in terms of capital taxes.

It is not possible to cover every detail or quirk of an issue in an article such as this. As always, please take paid-for professional advice before making any changes to your business or personal tax status.

Most business owners will tell you what they think their accountants do: they prepare the accounts and do the tax return. They probably think of this as pretty much a process. There are two misunderstandings implicit in that sort of thinking; the first is there is a sort of sausage machine at work and that you put in the figures and get a certain result, and the second is that there is no room for manoeuvre.

Most SMEs, by which I mean the larger ones within the official definition down to much smaller almost micro-businesses, are owned by families or family members. Sometimes there is one family involved, and sometimes there are several. I have come across one company with three generations of three different families actively involved and working in the business.

What business owners should expect from their accountants is not just the “doing”. Business owners should expect from their accountants some thinking in terms of the tax side of things. Most accountants will deliver this. Those that fail to do the thinking may be the larger firms who will use their junior staff to cut their teeth on “smaller” companies and who do not have the experience to think. Sometimes the very small firms are rushed off their feet to do all the accountancy work and are not able to think properly about the tax process beyond doing basic tax calculations.

Business owners do need to ask their accountants the right questions of course and also prompt their accountants sometimes. There is basic stuff such as looking at the best methods of extracting profit. Is the company making best use of dividend payment options to its shareholders as opposed to salary because provided there is a profit reserve this is one of the simplest ways of saving tax? However, there is a lot more to think about than that. A few items for consideration might be:

• Paying dividends as opposed to all salary to the shareholders working in the business
• Paying dividends to shareholder-spouses not liable to higher rate tax (this needs careful management).
• Claiming capital allowances correctly including Annual Investment Allowance and talking to the business owners about timing for investment in new plant, machinery and factory or workshop fittings. Timing the claims to gain maximum tax relief.
• If the company has losses, setting of these against profits of earlier periods in the most tax-efficient way.

There are of course some fancy tax schemes advertised as saving pots of money. I will not say they do not work, but an MD needs a strong stomach and an ability to sleep well at night, given that these always draw from HMRC an enquiry into the company tax affairs. My advice would be to stick to the tax basics but make sure the accountant does them.

JCB 532s by Jongleur100

SME owners do need to engage with their accountants and keep them informed. If a business needs a new JCB or a new truck or several within the next few years, talk to the accountant about timing. These decisions depend on cash-flow of course, but in terms of tax allowances, timing is everything especially for large items. Ask before purchase, not afterwards when it is too late.

Your relationship with your company’s external accountants should be about both sides asking questions. The relationship should be a partnership and you will get the best and most profitable results by talking.

Recently I have written posts on Furnished Holiday Lettings and on the new Capital Gains regime. Such is the enthusiasm for property investment and development even in these troubled times (and I share that interest myself) that I thought I should write a brief summary of the taxation implications of these interests and activities.

Property still offers the prospect of profits and long-term investment gains at a time when share markets are uncertain and yields on savings are generally poor. TV programmes such as Homes under the Hammer and Property Ladder are very popular and while there is no pretence that there is an easy way to make a fast buck it is clear that many people do make a reasonable profit by putting their money and often their labour into improving and refurbishing houses, flats and even commercial premises. What is rarely discussed on television is the taxation aspect of these activities.

UK taxation law looks at the nature of the property activity in order to determine the basis of taxation. Of course there are from time to time grey areas, but I will endeavour to explain the distinctions as clearly as I can.

In Homes under the Hammer we tend to have two types of approach in terms of those who buy their new property at auction, the investors and the developers.

Property investors

Many people buy with a view to refurbishing and letting their properties. Therefore there is clearly a view to long term investment. These people will expect to pay income tax at their appropriate rates on their lettings profits, which are the excess of their rents received over the running costs and expenses, which would include repairs and re-decoration, any utility expenses paid by the landlord, insurance, mortgage or finance interest and any other maintenance to be undertaken by the landlord.

The rates of income tax on profits could vary from the basic rate of 20% to 40% or even 50% for those on incomes over £150,000. As they are holding their properties to receive an income stream they are true investors. When they sell their properties after holding them for a period, their investment profit will be subject to capital gains tax at the rates of 18% or 28% as appropriate on gains realised after 22^nd June 2010.

Property developers

Others are expecting to improve and sell on their properties as soon as they are ready. These people are carrying on a trade as property developers and will pay income tax on their profits from sale rather than capital gains tax. If they are not trading through a company then they will also be liable to Class 2 and Class 4 National Insurance, the latter being income related, and remember that “income” means their profits from buying, refurbishing or re-developing and selling on.

The difference in the basis of taxation from the investors who hold their properties is really one of intention. A habitual practice of property improvement and sale is likely to be seen as “an adventure in the nature of a trade” as the tax parlance has it. The intention is to make money usually over a relatively short term. Case law says that even one deal may amount to carrying on a trade if there is a clear intention towards profit from that deal. Many of the scenarios seen on the television programmes involve “amateur” property developers buying a flat or house, doing it up and / or converting it and selling it on. This will amount to trading. The profits will be subject to income tax and NIC rather than capital gains tax and consequently will be taxed more highly. Deductible expenses will include not only the cost of the refurbishments and other building works, but also any mortgage or finance payments. This should be contrasted with the investors who may claim finance costs only against letting income and not against their capital gains.

Because of the relatively high taxation rates which may apply to profits realised by developers subject to income tax they may decide to operate through a company. It is possible to cushion the effects of taxation a little using a corporate vehicle and it might be appropriate for even quite small scale developers, but I would always recommend seeking professional advice before taking this route. It is a complex area and now is not the time to explore it.

Grey areas

Now and again the differences between investment property management and property development may be blurred. Sometimes a would-be developer may decide to let the refurbished property while awaiting an improvement in the market and such a situation would look less like trading and more like investment. It could be that an intending investor repaints a garden flat, tidies up the garden and then before it is rented out gets a really good offer to purchase which is too good to turn down. To make a judgement over tax treatment will depend on the facts and in some cases a good argument.

Other complications

Unless operations are on a very large scale, generally our developer on the TV model will not have to worry about the onerous requirements of deducting tax paid to subcontractors under the Construction Industry Scheme, but before diving in it is always worth getting professional tax advice.

There are other taxes involved in residential property, notably Stamp Duty Land Tax (SDLT) on purchase of any real estate and if you are selling you might consider the advantages of looking for first time buyers who currently have advantages in terms of having higher thresholds before paying SDLT.

From 6th April 2011, the rate of SDLT on properties valued at over £1M is 5%, but that will not concern most smaller-time property investors.

Summary

The property market is still “hot property” with promise of real rewards. The tax implications are quite complicated, but not too difficult to pick through with proper professional advice. Why not give us a call?

© Jon Stow 2010, 2011

Making the tax system simpler is an admirable aspiration but it does not necessarily make it fair. The recent changes in the capital gains tax rules, or at least in calculating the charge to capital gains tax demonstrate this amply.

As expected and as heralded well in advance by the Coalition, the rates of capital gains tax were increased. Although effectively for basic rate taxpayers the main rate stayed at 18%, for the majority including the basic rate taxpayers deemed to go into the higher rate threshold by dint of their gains will find themselves taxed at 28%. There were a lot of howls about the anticipated increase before it happened. People were afraid that the rate would be increased to 40% or even 50% for the new super-taxpayers, but this has not happened, and was never likely to.

People have short memories of course, and prior to April 2008, the headline capital gains tax rate was usually 40% for investment gains as opposed to business gains. What we had then was taper relief, which could reduce the post 1998 gain charged by 40%, so in fact few people would have suffered a full 40% whack of tax after allowances unless their gains were very short term. Business taper relief reduced the gain by 75% after two years giving an effective rate of 10%.

After April 2008 and up to 22^nd June 2010 the main capital gains tax rate was 18%. There was a lifetime “Entrepreneur’s Relief ” on business gains up to £1,000,000. This would be typically in respect of the sale of a business or an interest in a business and again gave an effective 10% tax rate though as mentioned, only on the first million.

Post June 2010 the position is

• Higher rate tax payers will pay 28% tax
• Those who do not breach the higher rate threshold will pay 18%
• The 10% rate for entrepreneurs will be extended to the first £5m of lifetime business gains
• The annual exempt amount for capital gains tax will remain at £10,100 for 2010-11

The main difference between what was the pre-April 2008 regime and the the two subsequent revisions is that there used to be some acknowledgment of the ravages of inflation. Taper relief in the period 1998 to 2008 took account of this if in a rather arbitrary fashion. On assets held prior to 1998 and post 1982 there was indexation allowance based on the retail price index.

The flat rate system Mr. Darling introduced a couple of years ago was wonderful for those who realised investments that they perhaps hadn’t held all that long. A rate of 18% was very acceptable. However, it was not very kind to those who had held assets longer since we must remember that the pound in your pocket in 1982 (if you were alive to have one) would have been worth about 38p by March 2008 and 35p now.

On a short-term gain the post June 2010 flat tax of 28% is still very acceptable. However, suppose one had an asset since 1982 which had cost £100,000 then and had only increased in value by an amount equivalent to the RPI.

In 1982 Mr. X buys a painting by a modern artist for £100,000. Although a lot of art has increased considerably in real value, this artist has rather gone out of fashion. In July 2010 Mr. X sold his painting for £282,000, which coincidentally is close to the increased value as per the RPI. In real terms, Mr. X hasn’t made a bean. Just the same, after deducting his generous £10,100 allowance he has to pay tax of over £48,000 just for keeping an important art work safe for the nation and not even taking into account twenty-eight years of insurance premiums and burglar alarm maintenance.

The Government has announced that it wishes to simplify the tax system, and I applaud that. However, simple doesn’t always mean fair. It is not fair to Mr. X.

Mr. Darling’s simple system was not fair to many employees who bought into share schemes with some expectation that they knew how much tax they would have to pay, but that’s another story.

© Jon Stow 2010

Following George Osborne’s “Emergency” Budget in June and still in the middle of a downturn, it is been hard to assess the immediate impact of the changes announced on small businesses. This practice acts for many who are wondering how they will be affected, and whilst there was a good deal of immediate reaction in the aftermath, there has been time for some more considered thought.

I am not blessed with second sight, but will dive into the debate anyway. Firstly, here are the basic measures:

• For small incorporated businesses the corporation tax rate is remaining at 21% this year but reducing to 20% next year.
• The main rate for large companies is coming down from 28% to 27% next year and the Government intends to reduce the rate to 24% over time.
• The capital allowance rate will be reduced from 20% to 18% in 2012 on plant and machinery so it will take a little longer to write off the costs.
• The Annual Investment Allowance which allows a full write-off on many capital items (obviously with a balancing charge if an asset is sold) is reduced from £50,000 to £25000 in 2012.
• VAT will rise from 17.5% currently to 20% from 4^th January 2011.
• Entrepreneur’s Relief for capital gains tax extends to £5M (from £1M prior to April 2010 and £2M until 22^nd June 2010,) and allows the 10% rate of tax on gain on the sale of a business for each qualifying individual taxpayer. Gains over £5M will in general attract the new main CGT rate of 28%

Where does this leave small business? I am not sure the impact of the new regime of taxation will be all that great. The main problem for business in general is the downturn in the economy itself. For a small company the reduction in the corporation tax rate coupled with the reduction in relief on annual capital allowance write-downs is likely to be fairly neutral. The reduction in Annual Investment Allowance would hardly affect most businesses with less than around five employees because their annual allowable capital expenditure would be less than £25K anyway. There are always exceptions of course, but generally there would not be much effect.

For unincorporated businesses the personal allowance will be increased next year to £7,475 for basic rate taxpayers, so there is some useful help at the micro-business end.

The increase in the capital gains Entrepreneur’s Relief is welcome, but would not have much effect on the running of a business in the medium term. Business owners need no incentive to work as income and cash flow will always be the drivers.

This brings us to the significant VAT increase next January. I have heard suggestions that business-to-customer operations (B2C) will be badly affected though the impact on business-to-business (B2B) goods and service providers would be less affected. I do not buy this argument. Clearly if there were a detrimental effect on B2C then B2B’s market selling through to B2C would be affected as much.

When Alistair Darling announced the cut in the VAT rate from 17.5% to 15% in November 2008, many of us thought that this would have no effect on purchasing or in boosting the economy. The argument was that if someone could not afford to pay £50 for something or baulked at paying it, they were not likely to splash out £48.93 for it either with the VAT reduction. The VAT rate was restored to 17.5% last January, so the argument will now be that if someone is prepared to pay £50 for something, they will probably pay just over £51 for it.

I cannot see that the VAT change will have much effect on the economy. Given that it was a mistake to reduce the rate because there was no perceivable impact other than a severe loss to the Exchequer, the increase is unlikely to affect business all that much either.

Maybe the impact of all the general tax increases will be to slow economic growth, but it seems to me that for business the specific tax changes will be fairly neutral in the short term, and quite possibly beneficial in the future.

What do you think?

© Jon Stow 2010