Just like buses, you don't see a Finance Bill for ages and then three come along almost together. In April we had the first Finance Bill of 2010, a second in July and a third that arrived on 30 September, was immediately withdrawn and then came back again the next day. But what do they really mean for SMEs?
The second Finance Bill of this year was all about tax rate changes. Capital gains tax went up so that for those who are higher rate taxpayers the rate is 28%. Corporation tax rates went down, albeit a staged reduction over the next four years so that the mainstream rate will end up at 24% by 1 April 2014 and the small companies rate at 20% from 1 April 2011. Standard rate VAT increases to 20% in January 2011.
The third Finance Bill has some worthwhile changes such as those that help carers, but there is little there for SMEs other than some minor improvements to venture capital schemes. The more interesting piece is outside of the Finance Bills.
The new Coalition Government is making it clear that it wants to return to lower taxes for business but with a broader base, although the economic conditions may prevent this happening swiftly. Those of you with good memories will recall a previous Conservative Chancellor, Nigel Lawson, following a similar approach and his mantra in terms of tax breaks was around doing less, but doing it better.
This approach can be seen in the first tasks set for the newly set up Office of Tax Simplification (OTS). Given the rush of new tax legislation you may wonder how in almost the same breath the Government can launch a simplification initiative but it is an interesting first step towards trying to tackle the proliferation of complex tax rules.
The Rt Hon Michael Jack and well respected tax adviser, John Whiting, have been appointed to lead the Office on an interim basis. The official remit of the OTS is: 'To provide independent advice to the Chancellor on simplifying the UK tax system, with the objective of reducing compliance burdens on both businesses and individual taxpayers.' (See the framework document here.)
The first two big tasks for the OTS are right in the heartland of how SMEs are taxed:
1) Review a list of all reliefs, allowances and exemptions within the taxes and duties administered by HMRC and identify those reliefs that should be repealed or simplified to support the Government’s objective for a simpler tax system. A report is due this autumn with a view to possible legislation in the Finance Bill 2011.
2) Suggest ways to simplify small business taxation including the much maligned IR35 rules that primarily affect those who work through personal service companies and to recommend priorities. This will result in a report probably around the Budget 2011 next Spring.
These are very worthwhile tasks. They are also extremely difficult as they bring with them the law of unintended consequences. Just look at the furore over withdrawing child benefit to those on higher incomes. Imagine what businesses may think if they begin to see reliefs removed but taxes not falling quickly. It is no surprise that both the above items have languished on the 'too difficult pile' for so long.
The big test for the OTS will be to see if the Government is willing to back what may prove to be tough recommendations with potentially many losers as well as some winners.
In the meantime here are three quick wins that SMEs and their owners might be considering to minimise their tax bills:
1. If they are likely to make a capital gain in the near future, ensuring that where possible they put themselves in a position to claim entrepreneurs' relief and obtain a tax rate of just 10%.
2. Maximising all reliefs and exemptions, especially where married couples, who may have different tax rates, are running a business.
3. Thinking ahead and accelerating expenditure on plant and machinery that will get capital allowances to reduce the amount and availability of these reliefs before the rules change in April 2012.
Francesca Lagerberg is head of tax at Grant Thornton UK LLP