The Budget confirmed an overarching review of the way SMEs will be taxed in the future, which may provide some much needed improvements. For example, the much disliked IR35 rules which potentially affect those who work through their own personal service companies, are up for review. Few contractors will mourn their passing. But in the short term there were several tangible measures that will help SMEs immediately. A reduction in the small profits rate from 21% to 20% will start in April 2011 and for larger entities the mainstream rate of corporation tax will fall in stages from the current 28 to 24%.
An NIC regional 'holiday' will be implemented for new businesses only which are outside of the London, South East and East regions, as part of a three year scheme. The scheme will exempt employers from up to £5,000 of Class 1 employers' NIC per employee, in relation to the first ten employees to be hired in the first year of business. This could be worth up to £50,000 in tax relief. It is hoped that the scheme will be established by September 2010. However, any qualifying businesses set up from 22 June 2010 will be able to benefit. This is intended to encourage the creation of more jobs by helping SMEs with the costly decision to take on more employees.
Less helpful are changes to the capital allowance rules which will mean that it will take longer to receive full relief on expenditure on items like plant and machinery. The rate of writing down allowances (WDAs) for most general items goes from 20% to 18% and the WDA for assets in the special rate pool (eg integral features, long life assets and cars acquired after 1 April 2009 with carbon emissions of more than 160g/km) will also be reduced from 10% to 8%.
The Annual Investment Allowance, which broadly entitles businesses to claim 100% of the cost of qualifying plant and machinery (except for cars) as a deduction from their profits will be slashed to £25,000 from April 2012. This was increased from £50,000 to £100,000 only months ago in the April 2010 Budget by the previous Chancellor.
Capital gains tax
For the entrepreneurs who drive the success of many SMEs, all eyes were on the capital gains tax (CGT) increases which will affect any chargeable gains they may look to make on a sale of their business. An unusual mid-year increase took effect from midnight on 22 June 2010, with the CGT tax rate increased from 18% to 28% for individuals whose income and gains exceeds the basic rate band (currently £37,400).
The annual exemption remains at £10,100 but the background material does say that CGT rates for 2011/12 will be decided in the 2011 Budget, raising the spectre of further increases.
However, business owners who can meet the qualifying conditions saw the lifetime limit for Entrepreneurs' Relief being increased from £2 million to £5 million from midnight 22 June 2010. As a result, an individual who qualifies for the relief should only pay CGT at a rate of 10% on the first £5 million of qualifying gains. Taking into account the increase in the highest rate of CGT to 28%, the relief which started in April 2008 as a modest £80,000 tax saving is now potentially worth £900,000.
A mixed affair
Overall SMEs can find some glimmer of hope amongst the budget gloom. A commitment to help funding and encouraging banks to lend will be welcome. The fall in corporate tax rates will bring some cheer, as will the knowledge that many business owners will still be able to sell with only a 10% CGT charge.
The review of how SMEs are to be taxed will be watched with interest. Will this bring simplification? Or will it mean the loss of some reliefs and exemptions to fund headline tax rates? The elusive but long overdue overhaul of the corporate tax system could potentially prove to be the defining moment for SMEs during the term of this Parliament.
Francesca Lagerberg is head of tax at Grant Thornton