14-02-2008
How will the 2008 Budget impact small business?
by Rosie Beasley
In the current climate of economic instability, some small business owners may be looking towards the Budget release on 12th March for a ray of light. Others, however, are already looking at how to best prepare their business for higher tax rates and a potential increase in red tape and bureaucracy.
The reality is that the Budget will touch all businesses in some way, whether positively or otherwise. For the small business owner, then, the best course of action is to examine the issues at hand, understand if and how they may impact on the business, and then take pre-emptive action where possible.
The first step is to find out what are the key issues that small businesses should be focusing on over the next month or two. Here is a brief run-down:
Capital Gains Tax
Of all the issues that the Budget raises, Capital Gains Tax is the one that has caused the most furore in the SME community. A new flat rate of 18% and the abolishment of taper relief will have implications for all but the smallest businesses, and many will not have time to consider their position before the new rate comes into effect.
ICAS Director of Taxation, Derek Allen said: “It would be irresponsible to enact complex changes and not give a sufficient transitional period for taxpayers to consider the implications and arrange their affairs properly. At the very least, the Chancellor should defer the implementation of this legislation for up to 2 years. If this is not possible, he should still allow taxpayers who owned assets at 6 October 2007 a period of up to 2 years to sell those assets and gain the benefit of indexation allowance.”
The Chancellor has recently changed his original proposal and introduced a 10% rate for lifetime gains up to £1 million, however this move really assists only the smaller independent businesses. Entrepreneurs whose investment in a business is less than 5% of the shares will not be eligible for the 10% rate and the government has been accused of stifling entrepreneurs and discouraging business growth in general.
The new GCT rates will come into effect from 6th April 2008.
Corporation Tax
Many businesses will welcome a reduction in the main rate of corporation tax which is to be introduced in the new budget – from 30% to 28%. However, small businesses will be hit by a rate hike over the next year. The Small Companies’ Corporation Tax rate will be increased to 22% from 19% by April 2009.
The Chancellor has justified the increase as an attempt to close the gap in tax between the self-employed and the small business owner. To balance out the tax rise, there will be a 100% relief on new capital investments of up to £500,000, an environmental tax credit and an increase in the tax credit for research and development investment.
However, most small businesses will see only the downside of the new tax. Richard Lambert – director general at CBI – warned: “The change will benefit big profitable companies that might otherwise be thinking of shifting their activities to lower tax regimes.” However, “some companies that for one reason or another don't pay much tax will lose out. So will small companies that don't invest much, and so will not be able to benefit from the new capital allowances."
Research and development tax credits
SMEs will benefit from an increase in tax credit for any investment made towards research and development activities. The new rate is between 150% and 175%.
Simplifying tax and business support
Part of the government’s aim in the 2008 budget is to simplify many of the procedures relating to business administration, in order to lessen the burden on small businesses.
Reviews of three key areas are scheduled for 2008/2009. Anti-avoidance legislation will be looked at, as will VAT and corporation tax, along with around 20 other measures.
However, small business owners may want to steel themselves for the outcome of these reviews and any resulting legislation, considering that the forthcoming increase in small companies’ corporation tax is one such ‘simplification measure’.
FSB National Chairman, John Wright, commented: “we welcome these plans, but the way in which the whole issue has been handled has seriously eroded small businesses’ trust in the Government. There has been huge uncertainty about what small businesses’ tax liabilities would be from April 2008 and this has made planning for the future very difficult. Even now small business owners have very little time to prepare before these new changes come in.”
Increases in tax duty
Certain businesses should also be aware of an expected increase in duty on products such as fuel and alcohol.
With petrol prices already pushing £1.10 per litre on diesel in some parts of the country, small businesses that rely on their commercial vehicles in order to trade, such as hauliers, couriers, distributers and manufacturers, will already be feeling the squeeze. The increase in duty on fuel of 2% (4% over the next year) may therefore have a seriously negative effect on small and growing businesses, despite it being in line with inflation. This percentage equates to about an extra 2p per litre. According to Roger King, chief executive of the Road Haulage Association, this will mean a haulier could pay around an extra £1200 per year to operate an average sized truck.
Alcohol duty will also be increased by 4% - a move which will affect pubs, bars and clubs across the country as well as large retailers like Majestic and independent off-licences. The increase will inevitably have to be passed on to the customer.
Preparation is key
Small businesses would be wise to review their business plans in the light of the new tax rates, and work any extra costs into cash flow forecasts. Any asset sales where the business will lose out due to Capital gains tax should be organised and completed by 6th April 2008, especially where taper relief would have applied.
