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Chancellor of the Exchequer, George Osborne, presented his seventh Budget to parliament last Wednesday, the first for a majority conservative Government since November 1996. However the implications for small firms are not straightforward.
For businesses, the major talking points are the proposed cuts in corporation tax and the introduction of the National Living Wage.
Despite the UK already having the lowest rate of corporation tax in the G20, the Chancellor announced that it would be reduced again in 2017 to 19% and then 18% in 2020. This decision is most likely to benefit larger businesses with substantial profits, however it will have much less of an impact on smaller firms whose profits are marginal in comparison.
From April 2016, the Government also plans to introduce a national ‘Living Wage’ of £7.20 per hour for over 25s, which will replace the existing £6.50 minimum wage. This living wage is set to rise to £9.00 per hour by 2020.
The introduction of the living wage will impact most heavily on small businesses that employ a significant number of staff at the minimum wage.
Several business groups were anticipating that the issues of late payments, and business rent and rates to be highlighted in Mr Osborne’s budget address, however much to their dismay these were not mentioned.
In the previous 2014 budget, SMEs in the exporting, house building, and science-based industries benefitted from a number of Government giveaways, which generated some valuable intellectual property for the UK. Fewer specific sectors were mentioned in this year’s budget, however industry and agriculture were both earmarked in the address.
There was also good news for small firms in the South West currently who are undeserved by broadband, as the Chancellor announced a £10m investment programme to improve the region.
The Chancellor announced that there would be a 50% increase in the national Employment Allowance, from £2,000 to £3,000. This could help some businesses to offset the increased wage costs attributed to the introduction of the national living wage.
The proposed cuts in corporation tax could also help ease the pressures of wage increases, but this will vary from one organisation to the next, depending on profitability and the number of minimum-wage staff currently employed by the business.
Accountancy firm BDO has calculated that the increase in the Employment Allowance will only allow employers (who currently pay minimum wage) to offset the living wage increases up to 2,000 hours. After this, BDO says that businesses will lose out, unless they are profitable enough to benefit from the reduction in corporation tax.
The Office for Budget Responsibility (OBR), predicts that the increased staffing costs are likely to cause 60,000 job losses, however it considers this “fractional” compared to the 1 million jobs that it estimates will be created in the wider economy.
Director of The Entrepreneurs Network (TEN), Philip Salter, joined a number a small business pundits who were unimpressed by the Chancellor’s decision. He expressed his concern that business owners would “be forced to sack employees” if their payroll costs were to rise so significantly.
Speaking to the Telegraph Mr Salter said: “If the Chancellor wanted to help the low paid, he should have slashed Employers' National Insurance, 70% of which is paid for by the employees, rather than just increase the Employment Allowance from £2,000 to £3,000 a year.”
Limited companies, whose director is also the sole employee, will no longer benefit from Employment Allowance, so were dealt a huge blow by this announcement. Additionally, there are no new incentives or support for entrepreneurs to launch solo start-up businesses.
As a means of encouraging businesses to invest in future productivity and growth, the Annual Investment Allowance allows SMEs to make tax-deductible investments in plant, machinery and equipment.
The current allowance is set at £500,000, but it was set to be slashed to £25,000 in 2016. However, the Chancellor announced on Wednesday that it would only be cut to £200,000.
Although small business organisations were calling for an increase in the allowance and will be disappointed with the news, a number of commentators have commended the Chancellor for establishing a long term rate and it is believed to have the potential to add up to £1bn to GDP by 2020.
Director at Industrial Vision Systems, Earl Yeardley, said “The Chancellor should be applauded for fixing the annual investment allowance at £200,000.”
“We have already seen a significant increase in investment made in our new automated production lines and cells across the UK manufacturing base. By establishing a long term rate, this is sure to boost productivity and help leverage the UK at the forefront of the global manufacturing sector.”
Another announcement made in the Chancellor’s budget address was that councils are to be given control over Sunday trading hours.
The most likely implication is that several large retailers will choose to stay open later on Sundays, however it is feared that this could damage smaller retailers, as larger firms absorb a higher share of consumer spend over the weekend.
John Allan, chairman of the Federation of Small Businesses (FSB), is concerned about the potential impact on smaller retailers and believes that the Government should be taking broader view to support these businesses.
“Bringing forward reforms to business rates is an immediate priority. We should also do more on liberalising licensing laws, easing planning restrictions and on improving customers’ access to parking. All are areas which are currently doing more to hold back the high street than Sunday trading.”
“Under current proposals, the decision to change Sunday trading rules will be devolved to the local level. It is critical these local decision makers include small businesses in the debate. Local businesses are at the heart of our communities and the ones most likely to feel the direct impact of these proposals. Their concerns should be listened to, before any decision is made.”
In an attempt to stimulate growth in the small business sector and encourage start-ups, the Chancellor announced that a number of new Enterprise Zones would be created, where small businesses enjoy reduced taxation and additional support.
A number or “Northern Powerhouse” cities including Liverpool, Manchester, Leeds and Sheffield have already benefitted from enterprise zones and the Government claims that these have helped to create over 15,000 jobs in England.
Several smaller cities in these areas have now been invited to submit pitches.
The Government plans to force banks to share the credit information of small businesses, to give these companies the best chance of securing loans.
This will include sharing rejected loan applications with online platforms that can match SMEs with alternative finance providers.
The British Business Bank has also been tasked with “increasing and diversifying” the supply of finance available to SMEs, and according to forecasts it will facilitate up to £10 billion of finance by 2019.
Home owners that use peer- to-peer room renting networks such as Airbnb, will see their “rent-a-room” tax allowance increase from £4,250 to £7,500 per year. This will allow them to rent a room in their main residence tax-free, up to an income limit of £7,500.
These measures have been introduced to facilitate the peer-to-peer industry in the UK, so there is no tax relief for buy-to-let landlords.
From April 2016, the Government intends to scrap Dividend Tax Credit and introduce a tax-free Dividend Allowance of £5,000.
This will mean that some business owners could take home more cash by paying themselves in dividends. However, as Justine Roberts, co-founder of Mumsnet points out, tweaking tax policy is always a headache for small firms and that it’s usually financial advisers that profit from the changes.
The Office of Tax Simplification (OTS), has been given additional powers to reduce red tape. We have already seen the tax return move online, but we can expect to see more tax reporting go digital in the future.
The OTS will put forward its recommendations for a reformed tax system as part of the 2016 Finance Bill.
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