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June 22, 2010

British economy “open for business”, says Chancellor

A cut in the rate of small companies’ tax and a new regional tax scheme to boost enterprise outside the South East were the key measures to affect small businesses in the coalition Government’s emergency Budget.

Announcing a Budget intended to reduce debt and deficit in the UK economy, HM Chancellor, George Osborne, stressed that long-lasting recovery had “its foundations in job creation in the private sector”.

Deficit reduction would come from “lower spending, not higher taxes”, with many government departments facing cuts of 25 per cent in their budgets. And, despite some favourable tax announcements for businesses, the Chancellor revealed a controversial increase in VAT from 17.5 per cent to 20 per cent from January 2011, to jeers from the House.

“This Budget is needed to deal with our country’s debts,” George Osborne declared. “I will not hide hard choices from the British people.”

Mr Osborne went on to outline a gradual reduction in public-sector borrowing from £149 billion this year to £37 billion by 2014-15. He forecast that the economy would grow by 1.2 per cent this year and 2.3 per cent in 2011 – lower than the predictions of the Office for Budget Responsibility. The Chancellor also expected unemployment to peak at 8.1 per cent this year before falling to 6.1 per cent in 2015.

But he was keen to stress throughout his speech that enterprise promotion would be at the heart of the UK’s economic recovery. “We live in world where the competition for business is growing ever more intense,” he said. “I want a sign to go up over the British economy that says ‘Open for Business’.”

Business tax

Outlining plans to reform business taxation, Osborne said he wanted to give the UK the lowest corporation tax rate of any major Western economy. “Our current corporation tax rate of 28 per cent is looking less and less competitive,” he said.

This will be cut to 27 per cent next year, and by 1 per cent annually for the following three years. The small companies’ tax rate reduced will be cut to 20 per cent, benefiting 850,000 companies.

Reforms to capital gains tax (CGT) will also help entrepreneurs. Although some sectors of the economy would see a rise in CGT, the entrepreneur’s rate would remain at 10 per cent. Not only that, but rate will apply immediately to the first £5 million of lifetime gains – up from the current £2 million threshold.

Mr Osborne went on to emphasise that he also wanted to make it cheaper for companies to employ people by introducing a new tax scheme to encourage start-ups in regions where the private sector is not strong.

“For the next three years, anyone who sets up a new business outside London, the South East and the Eastern region will be exempt from £5,000 of employer National Insurance payments, for each of their first ten employees hired,” he said. In addition, the threshold at which employers start to pay National Insurance will rise by £21 per week, above indexation, from April 2011.

The Chancellor also outlined minor reforms in capital and investment allowances. From April 2012, the allowance for plant and machinery assets will fall from 20 to 18 per cent, while the allowance for longer-lived assets will fall from 10 to 8 per cent. “Businesses will still receive full tax relief on their qualifying expenditure, but over a longer timeframe,” he said.

He also announced that the Annual Investment Allowance would be reduced to £25,000 a year to ensure support is focused on investment by smaller firms.

Other initiatives to help small firms included plans to cancel backdated business-rate bills, supporting private broadband investment to rural areas, and an extension to the Enterprise Finance Guarantee scheme. The Chancellor said further plans to increase the availability of credit to small businesses are expected in the summer.

VAT and income tax

The most controversial business measure in the Budget was an increase in the main rate of VAT from 17.5 to 20 per cent from 4 January 2010. Current zero-rated items like children’s clothes, books and magazines will remain exempt.

“The years of debt and spending make this unavoidable,” George Osborne said. “This will generate over £13 billion a year of extra revenue.”

Mr Osborne added that there would be no new increases in duties on alcohol, tobacco or fuel, and that the Labour Government plans to increase duty on cider would be reversed – but strong cider will be taxed as wine.

The tax-free personal allowance on income tax will be increased by £1,000 in April, to £7, 475, and Mr Osborne added that the Government’s long-term objective was to increase the personal tax allowance to £10,000. The higher rate of income tax will stay frozen until 2013/14.

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