Last November’s Pre Budget Report (PBR) has proved a damp squib for small businesses. Business loan schemes have been subject to delays and the reduction in VAT has been harshly criticised, particularly for its dubious macro-economic benefits. Moreover it now seems that the proposed future tax increases already announced will increase the burden on business, at a time when the economy will still be weak. Following his PBR forecast that the economy would return to growth by mid-2009, the Chancellor will now have to concede that the UK will continue to contract through 2009 and possibly into 2010. Even if next year does see growth, it is likely to be unsteady and anaemic at best.
Darling’s proposed increase in the rate of Employers’ National Insurance Contributions by 0.5 per cent from April 2011 is therefore alarming for SMEs. This increased tax on jobs will come at a time when unemployment is likely to be over 3 million and rising. If this is to be a ‘Budget for Jobs’ featuring proposals to support employment, this hike on Employers’ National Insurance Contributions will risk the Chancellor losing credibility. Businesses should expect the Chancellor to execute a swift U-turn, deferring the increase until 2012.
The Chancellor may also want to go further and introduce a new lower rate of Employers’ National Insurance Contributions for the less well-paid. Currently, employers pay a flat rate of 12.8 per cent regardless of the pay of the individual employee. However by introducing a new lower rate of Employers’ NICs at 5 per cent for employees earning up to £20,000 for 2011, he could benefit employment opportunities across Middle England, lowering the cost of staff for SMEs dramatically, particularly those employing part-time workers.
The Chancellor may also make concessions where he can, and with business profits declining, the SME community may well see Darling defer the planned increase to 22 per cent in the small companies’ rate of Corporation Tax (which has already been deferred until 2010), keeping it at 21 per cent for another year.
However, small businesses must expect to cough up money later - the Chancellor will have no choice but to introduce tax increases for future years, as he attempts to put in place a credible plan to restore the public finances over the medium term.
Yet there are very few options open to him. Only income tax and VAT are big enough to raise the revenue required, and the Chancellor already plans to introduce a new 45p top rate of income tax. This leaves VAT. A staggered increase in the rate of VAT over a number of years is likely, restoring the standard rate of 17.5 per cent in 2010, and then perhaps increasing this to 20 per cent in 2011 and 22 per cent in 2012. Although the primary aim is to put money in the Treasury’s coffers, it may also motivate consumers to go out and spend before each higher rate kicks in. Nevertheless, this will mean further administrative changes for the majority of SMEs.
Nigel May is a Tax Principal at chartered accountants and business consultants MacIntyre Hudson. Visit their website on www.macintyrehudson.co.uk.
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