Small business tax and the crystal ball

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 4th January 2011.
  • Entrepreneur’s Relief for capital gains tax extends to £5M (from £1M prior to April 2010 and £2M until 22nd 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

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