It was stirring stuff from the chancellor last Tuesday when he used higher than Germany’s. Tim Porter questions Gordon Brown’s commitment to business. his Budget speech to announce: ‘We will champion the needs of small business – we will cut taxes on enterprise.’ But amid all the changes aimed at helping families with children, how well did he help enterprise and small business?
Businessmen will always look to lower tax rates and Gordon Brown made much of the fact that the UK has the ‘lowest rate of any major industrialised country anywhere’. This is in the context of trumpeting next month’s cuts in both main and small companies’ rates of corporation tax – which we already knew about of course. But there is no harm in replaying a winning theme.
What tax professionals know, however, is that looking at the burden of corporate tax plays a rather different tune. Allowances differ around the globe and this leads to a corporate tax burden of almost 4% of the UK’s GDP, compared with around 1.5% in both France and Germany.
In other words, the UK’s headline rate may be low, but companies really pay it.
The tax burden isn’t just represented by corporate tax payments. There is a considerable and increasing burden in terms of compliance costs.
Corporate tax self-assessment will increase that. But more important is the way that so many of the government’s flagship changes impact on business.
Take the working families tax credit for instance – an admirable idea, but one that will mean payroll departments will have to take on part of the social security department’s role in paying benefits to the less well-off. The report a few months ago by Bath University – partly funded by the Inland Revenue – pointed to an annual cost per employee of #288 for complying with payroll rules and regulations. This burden falls disproportionately heavily on small business, of course, and I did not see anything in the Budget to make a real attack on this. In fact, I feel it’s a burden that will continue to increase as the forced privatisation of much of our tax collection system continues.
Perhaps I am being churlish. After all, the new small business service sounds promising. I particularly liked the idea of the payroll service – some real help with coping with payroll regulations for those just getting going, and who find the whole regime baffling and time-consuming. I’m sure any small businessman will agree. The idea of Hector in SBS uniform arriving to help me comply is rather appealing.
Then there are the increased capital allowances on plant for small and medium-sized businesses. Since that is just continuing something that was already there, one has to ask why they are not simply made permanent. The prospect of better allowances for research and development is welcome, particularly as this is to be available via a tax credit – with, I assume, the prospect of a repayment – rather than simply a deduction against profits that aren’t there at the moment. Mind you, most R&D is carried out by large companies, so I hope this is not all that is going to happen on this front.
Then there was the flagship 10% rate for the smallest companies. (Will this be the MCR – mini companies rate – to distinguish it from the SCR, or small companies rate?) This would apply to companies with profits under #50,000, said the chancellor. Well, yes. But like the SCR, it applies up to a limit – actually #10,000 – and then phases out as profits increase towards that top limit of #50,000. There was also the unpublicised attack to ‘personal service companies’, where the individual works through the company primarily for one ’employer’.
In the wake of all of this, trade secretary Stephen Byers’ announcements the next morning look interesting.
The new corporate venturing measures aim at encouraging larger companies to invest in smaller companies. Let’s hope that it is not shrouded in red tape and larger enterprises do assume the mantle of venture capitalists. Also the new enterprise management incentive scheme could make enticing reading to lure high-flyers out of the security of plcs to help small growth companies with the attraction of approved share options or shares up to, say, #100,000. But there are a lot of question marks and a consultation period so watch this space.
In all of this, one beacon really shines out – the new all-employee share scheme that is scheduled to come in next year. Christened NESSIE by my partner John Whiting (New Employer’s Share Scheme for Investing Employees), the scheme does look very promising. The idea of allowing tax-free investment by the employee, and tax-free shares matching – and more – from the employer is something that we have argued for for some time. It could well be the replacement for the dying profit-related pay schemes, and, providing the small business can sort out how to make a market in its shares, could well make a difference.
That, to borrow a phrase, is something I do commend to the House.
Tim Porter is a tax and legal services partner at PricewaterhouseCoopers.
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