Small business owners and entrepreneurs will be filled with renewed optimism today following the Alistair Darling’s Pre-Budget Report yesterday. Small firms were hopeful that measures would be announced to help them through the current downturn and the speech did not disappoint. The main changes affecting small and medium businesses and their owners are:
Business Tax
As many people predicted, the
planned increase in corporation tax rate to 22%, for standalone companies with profits up to £300,000, has been deferred by one year. Accordingly the rate will remain at 21% until 1 April 2010.
More surprising was the decision to allow businesses to offset losses of up to £50,000 against profits made over the previous three years. This is beneficial if current losses exceed prior year’s profits. Claims are for accounting periods ending in the year to 23 November 2009 and businesses should consider shortening their next accounting period so that too falls within the qualifying year.
Employment costs will rise from April 2011 as employer’s NIC increases to 13.3% from 12.8%.
HMRC have established a support service assisting businesses in financial difficulties by enabling them to spread tax bills over an agreed payment plan. All taxes paid by business are covered but interest will be charged as normal.
VAT
The change attracting most headlines is the reduction of the VAT standard rate from 17.5% to 15%, with effect from 1 December until 31 December 2009. For fully ‘VAT-able’ businesses this only provides a small cash-flow benefit, although there is an opportunity to do your clients and/or customers a favour by not issuing invoices until the reduced rate comes into effect.
Where payments are received or invoices are issued prior to 1 December and the goods or services are supplied after that date, an election is available to charge the reduced rate. A credit note is required to evidence this VAT reduction. Similarly there is legislation preventing businesses invoicing in advance when the rate reverts to 17.5%.
Personal Tax
Business owners fortunate enough to earn over £100,000 per year should be aware that there are changes to personal allowance due to be implemented in April 2010. Under these changes certain income - that between £100,000 to £106,475 and £140,000 to £146,475 - will suffer a 60% effective tax rate. We would recommend making additional pension payments in these circumstances. In addition April 2011’s increase in earnings and savings rate to 45% and dividend rate to 37.5% on income over £150,000 together with 0.5% increase on all NI rates (including 1% rate increasing to 1.5%) will add further complexity to dividend vs bonus calculations performed to ensure maximum profits. Overall tax costs of income extraction will rise. This enhances the tax benefit of “storing” profits extracted on sale which attract tax at no more than 18%.
Mark Allwood is a Tax Manager at haysmacintyre