The Debate: Will the Budget help SMEs?

Red tape ties up SMEs

By Neil Hamper

I am getting tired of trying to second-guess the cryptic messages sent out by the chancellor on 10 December. The confusion caused to small business and their advisers has been compounded by the Inland Revenue’s implied threat ‘if we were to tell you – we would have to kill you’.

One thing is clear – some form of knee-jerk legislative proposals will be introduced on 17 March. From the perspective of small businesses, I do not understand how a chancellor, without consultation, can introduce a corporation-tax saving, zero-rate band, only to find out that two years later the advantage is about to be neutralised.

I also wonder why this is seen as an opportunity to impose more bureaucratic burdens on small businesses who, by their very nature, are fragile beings.

Politicians love bureaucracy, because it ‘fudges’ any hope of holding politicians and governments directly accountable to the electorate for their actions. It is like a sea of treacle – the more you try to wade ashore, the more you get bogged down.

But why pile on bureaucracy to batten down the tax saving opportunities in what is a small business sector? Although it represents some 3.7 million businesses, they probably account for 20% of the country’s GNP. Surely the chancellor’s efforts would be better focused at the ‘big battalions’, who are able to buy the slick, tax-saving advice that is costing the Exchequer dearly.

The Polish supplier to a small business I came across recently was given the great news that the Polish government is to allow tax-free trading for some five years, following entry into the European Commission. It is also looking to abolish many businesses burdens to help SMEs set up, flourish and even consider expansion.

This news appears to be an acknowledgement of true capitalism. In the UK, on the other hand, we seem increasingly intent on controlling all walks of life with bureaucratic burdens. The bureaucrats love it – they become ‘experts’ in their particular narrow fields – the politicians love it because they can blame the way it is upon the regulations.

• Neil Hamper is chairman of the Federation of Small Businesses’ taxation and financial affairs policy committee

Gift or Trojan horse?
By Anne Redston

Small businesses have received a succession of tax goodies from this government. These began with the abolition of ACT in 1997 and culminated in the 2002 zero tax rate on the first £10,000 of profits.

A small incorporated company with profits of £15,000 can now extract the whole of that sum as a combination of salary and dividend, and pay only £91 in tax, while retaining the right to a basic state pension and the option of paying into a stakeholder scheme. This government has thus created a small, but perfectly formed, tax-avoidance vehicle.

But accountants are a cynical bunch. One chartered accountant wrote to his MP, who passed the letter to paymaster general Dawn Primarolo. He asked whether the government would wait a while and then announce that their ‘altruistic measure to help small businesses had been abused by ingenious accountants’ and use this to justify ‘punitive new measures, such as charging national insurance on dividends’.

Primarolo reassured him, and said in the Commons, ‘surely small businesses will not look a gift horse in the mouth’. Armed with this comfort, accountants put aside their doubts and helped thousands of businesses to incorporate.

Then, out of the blue, came paragraph 5.91. This obscure paragraph in the pre-Budget report announced a change of policy ‘to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company’.

Again accountants found themselves besieged by clients, concerned about the implications of the paragraph. The government will not reveal who will fall within 5.91, what tax will be paid or when it will come into force. There has been no consultation, so the legislation is likely to be both burdensome and badly targeted. Some clients may go bankrupt, others may see their businesses fail and most will suffer unnecessary costs.

But we have learned something. The government’s gift horse was a trap, a Trojan Horse. Those who trusted in it have been betrayed. Anne Redston is a tax partner at Ernst & Young.