Coalition tax plans may hurt small business, warn advisers

Chancellor George Osborne

Chancellor George Osborne

The scattergun approach of the new government in setting out its tax policy
has caused advisers to question whether small businesses have been given a
coherent plan to survive the economic conditions.

Britain’s 4.8m small companies found themselves hit by a deluge of proposals
from the Lib-Con coalition but the lack of clarity leaves businesses operating
in a climate of uncertainty, say advisers.
David Cameron and Nick Clegg’s coalition talked up “simplification” and a
“review” of the small business landscape but omitted the finer details in their
recent Programme for Government document.
“The concern I have is that simplification means taking the advantages away for
small businesses,” said Alastair Kendrick, tax partner at Mazars.

The Lib-Cons are cond­ucting a wholesale review of all small business
taxation including the controversial IR35 legislation which governs taxes for
the self-employed.

They are looking to overhaul the small business framework “with simpler
measures that prevent tax avoidance but do not place undue administrative
burdens or uncertainty on the self-employed, or restrict labour market

“We will reform the corporate tax system by simplifying reliefs and
allowances, and tackling avoidance, in order to reduce headline rates,” the
coalition added.

However, the profession remains unconvinced that the Lib-Con proposals are
achievable. Richard Mannion, national tax director at Smith & Williamson,
said: “The plans for a review of small business taxation sound interesting, and
in particular the dreaded IR35 tax, but I’m not holding my breath.”

Significantly, the difference between the rates of national insurance
contributions paid by employees and by the self-employed, have not been
addressed directly in the Lib-Con plans. “The Treasury has spent considerable
time over recent years trying to come up with a better and simpler system [for
IR35] and failed miserably,” Mannion added.

As a whole, the plans give no overall confidence to small businesses because
so much has been left unconfirmed.

Experts say efforts to balance out any reliefs with clampdowns elsewhere have
caused doubt. The CGT rise on non-business assets is doubly bad for businesses –
first, for not confirming what level the tax would go to from 18%, and for
making assurances that entrepreneurs would still be protected from the

Even the reduction in corporation tax rate for small companies – expected to
fall from 21% to 20% – has hidden pitfalls which leaves the businesses supposed
to benefit at a disadvantage.

Any company currently claiming capital allowances on investments in plant and
machinery is likely to lose overall if they are withdrawn, say advisers. Marios
Gregori, tax partner at PKF, said: “If the £100,000 annual investment allowance
is abolished, many small businesses will have to re-think their investment

“In most instances, they will lose more than they gain from the 1% cut in the
small companies’ rate and may not benefit from the cut in the main rate of
corporation tax for many years – if ever.”

In our view

The Lib-Con coalition must show its full hand on small business taxation. If
the situation remains unresolved, small businesses may find themselves caught

Further reading:

Lib-Con coalition policy implications

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