Coalition government - what it means for your business

The past week has been a momentous one in British politics. An inconclusive election, fraught with technical difficulties and allegations of fraud, produced a result in which no single party secured overall control of the House of Commons. Days of backroom wrangling followed – which ultimately resulted in the first coalition government the UK has seen in 70 years.

David Cameron achieved his aim of residency at 10 Downing Street, but not in the circumstances for which he had initially wished. Instead, the Conservatives have been forced to make significant concessions to the Liberal Democrats – including major changes to their policy plans, five cabinet positions, and Nick Clegg as Deputy Prime Minister.

This remarkable government, which apparently desires to “change the character” of British politics, must first deal with a spiralling budget deficit and the prospect of a return to recession. The new administration has already begun the process of passing new legislation that will have a direct effect on the wallets of business owners and consumers. So what does this coalition government mean for your business?

What are the government’s business policies?

Labour’s proposed 1 per cent increase in employers’ National Insurance Contributions (NICs) was one of the touchstone issues of the election campaign. Employers may be relieved to hear that these plans have now been scrapped by the incoming administration.

The income tax threshold will also be increased by £1,000 in April 2011, with a view to ultimately raising it to £10,000 – putting more money in the pocket of business owners and consumers at the end of each tax year.

But how will these commitments be paid for? To begin with, the rate of Capital Gains Tax (CGT) will increase for individuals. Although the government has promised “generous exceptions for entrepreneurial activities”, this increase could have a dramatic impact on the financial well-being of anyone who pays themselves through dividends – as many business owners and contractors do. It is worth remembering, though, that the Conservatives have expressed a desire to see IR35 scrapped, meaning that fewer contractors will have to use dividends as a payment method.

Buy-to-let landlords will sadly bear the brunt of any CGT rise. Although details of the new tax rules are yet to be fleshed out, it is thought that investors will be taxed more heavily when disposing of properties.

VAT is also all but guaranteed to rise. Despite pressure from retailers to avoid any increase in the tax, it is widely suspected that there will be a VAT hike of at least 2 per cent. It remains to be seen what impact this will have on consumer spending. Last year’s reduction in the headline rate was widely cited as one of the key drivers encouraging the UK out of recession, and some analysts fear that an increase could have the opposite effect.

What about the deficit?

The new government has said that it wishes to plug the deficit using mainly spending cuts, rather than tax increases. Indeed, it is thought that around £6 billion of public spending will be slashed this year alone.

The corollary of this is that government support for businesses is likely to be cut. Many firms now rely on grants from national and local governments, but the number and scale of these is likely to be reduced. At the same time, HM Revenue and Customs will begin to chase outstanding payments even more aggressively. Indeed, many businesses have reported that the taxman is now less inclined to accept proposals under the ‘time to pay’ scheme than at any point since its inception.

While a reduction in the deficit is obviously good news for the economy as a whole, there is widespread concern about the means by which this is to be achieved. Many believe that cuts this year could derail the recovery – and businesses will, of course, bear the brunt of reductions in consumer spending as a result of rising unemployment.

Will they actually get anything done?

The ability of the new coalition to actually achieve anything is still unproven. Until just a few days ago, the idea of Liberal Democrats and Conservatives working together in government was virtually unthinkable. Many of those in the cabinet will have to overcome their tribal instincts if they are to get legislation drafted and passed.

The lukewarm reaction given to the new government by the financial markets indicates that, while most analysts are happy to have a government in place to deal with the deficit, many remain unconvinced that it will remain stable. Regardless of this, businesses must be prepared for changes that will impact significantly on their financial livelihoods – and that of their customers.