PBR: Small business support extended but NI rises

EFG and ‘time to pay’ schemes extended, corporation tax hike deferred but national insurance increases by a further 0.5%

9 December 2009 14:22

Free guides

Alastair Darling said today’s pre-budget report (PBR) promoted “long term” growth as he conceded that the global recession had hit the UK harder than expected.

The chancellor said the economy had contracted by 4.75% this year, up from the 3.25-3.75% he predicted in April’s budget. He added that the economy would start “growing by the turn of the year”.

Darling also revised up his forecast for this year's budget deficit to £178bn from £175bn.

Despite the need to cut back on public spending, he outlined a number of measures which he said would help small businesses, including extending the availability of the enterprise finance guarantee (EFG) scheme for another 12 months.

The scheme sees the government act as a guarantor for 75% of bank loans to firms with a turnover of £25m or less and Darling said the extension would provide a further £500m of loans for small businesses.

John Wright, national chairman of business lobby group the Federation of Small Business (FSB), said: “Extending the Enterprise Finance Guarantee scheme, which we called for last year and has seen more than £600m lent out to just over 6,000 businesses, is a welcome move, although we wanted to see the scheme extended indefinitely and promoted further to help small firms get much-needed access to finance."

There was also an indefinite extension to the ‘time to pay’ scheme, which allows firms to spread out tax bills, and has allowed 150,000 small businesses to defer £4bn of payments.

Darling said the government would postpone the planned rise in the small companies' rate of corporation tax, from 21% to 22%, until April 2011.

The move was welcomed by the FSB.

“Holding off the planned 1p rise in small companies’ Corporation Tax will give small companies a real helping hand, giving them the chance to expand and invest, and to grow out of the recession with confidence," said Wright.

Other measures included increasing the tax relief on empty properties, so companies with empty buildings of a value below £18,000 will not pay business tax, a cut to a 10p corporation tax for company profits that derive from R&D, and a strategic ‘fund of funds’ for high tech industries that will receive a further £100m of government money.

The chancellor unveiled plans to set up a ‘capital growth fund’ which will provide capital for small and medium-sized businesses and will be funded with £500m of contributions from major banks and financial institutions.

However, news that all employer, employee and self-employed rates of National Insurance (NI) will rise by 0.5% from April 2011, will be unpopular with small businesses. Darling said he would raise the starting point from which NI was payable to £20,000 to protect those on low incomes. NI is currently levied on employers at a rate of 12.8% and employees at a rate of 11%.

Andrew Jupp, head of tax at accounting firm Tenon Group, said: "Darling said this would be a balanced budget - and it certainly was in terms of aiding small businesses. But what he gave with one hand he took away with the other.

"Cheers over the extension of time to pay scheme and deferral on the rise in corporation tax were quickly replaced with groans following the 0.5% increase in National Insurance Contributions."

Wright said: "While unemployment continues to rise, it is unaccountable that the Government hasn’t considered a new approach, such as a National Insurance rebate for new jobs in small firms. This pre-budget report should have encouraged and rewarded job creation in 2010, rather than imposed this tax."

Stephen Herring, a senior tax partner at BDO Stoy Hayward said significant national insurance rises are an "unsurprising response" to the huge budget defecit.

"Together with VAT and income tax, national insurance is one of the three largest tax collectors and this was a predictable response by an administration that has 'form' with previous national insurance raids," he said.

"However, I am particularly concerned that the rise in employer's national insurance rise may inhibit improvement in the aggregate level of employment. In essence, employers national insurance contributions represent a tax on jobs.

"We probably now know the full picture on national insurance increases but we are only on the first chapter with regard to VAT and income tax," he added.

Chris Maddock, tax director at Vantis, expressed surprise that there was no change to capital gains tax (CGT), which many commentators had predicted would rise to close the gap with the impending 50% top rate of income tax.

"CGT remains unchanged at 18%, offering a wide discrepancy between CGT and the top income tax rate," he said.

"There is nothing to stop the perfectly legal wrapping up profits in a company and therefore paying only 18% CGT and not 40% income tax (soon to be 50% for top earners) – potentially a 22/32% possible saving for an individual.

“There was widespread expectation that this difference would be rectified in favour of the Treasury but the chancellor has missed an obvious opportunity.”

Darling also surprised some by confirming that while VAT will rise to 17.5% in January, as previously announced, he had “no other changes in VAT to announce”.

Phil Orford, chief executive of lobby group the Forum of Private Business (FPB) said: “This year’s PBR wasn’t a terrible one for small businesses but it was fairly uninspiring. It was essentially a list of recycled schemes. There were no new ideas in there of how to help small businesses, just extensions to the existing ones.

“Our members were hoping this PBR would lay the foundations of a bold new tax and regulatory environment which would help small businesses prosper and grow. Sadly, we don’t seem to have seen that – it’s a case of business as usual and it’s not enough.”