MT Expert - Legal: How will the PBR impact your business?

The good news in Wednesday's Pre-Budget Report was outweighed by the bad news on NI.

With a general election looming, it is perhaps not surprising that the Pre-Budget Report delivered by the Chancellor on Wednesday 9 December contained some good news for smaller businesses and entrepreneurs.  Deferring the proposed one percent increase in the Small Companies corporation tax rate until April 2011, the continuation of both the Business Payment Support Services, allowing businesses more time to pay their tax bill, and the Enterprise Finance Guarantee, enabling smaller businesses to access finance, and no change to the rate of CGT are all to be welcomed.

The announcement that the Government will create a Growth Capital Fund to invest in small and medium size businesses targeting those companies seeking amounts of between £2 and £10 million will hopefully help the around 3,000 SMEs that the government estimates each year struggle to access capital. In addition, for those businesses who receive income from patents, the announcement of a proposal to apply a reduced rate of corporation tax to such income from April 2013 is good news, although the three year wait for implementation and the fact it will apply only to income from patents granted after the legislation is passed will certainly reduce its impact.

However, and it is a big however, the good news will almost certainly be outweighed by the bad news for most businesses.  The proposed 1% increase in national insurance rates from April 2011 will have a very real impact on employer costs. Although Darling's speech referred rather obliquely to an increase of 0.5% in the rates of national insurance contributions (NIC), employers will have worked out by now that this is in addition to the 0.5% increase he had previously announced in the 2008 Pre-Budget Report. Employers' NIC rates are now proposed to climb to 13.8 % and employee rates to 12% and, for those over the upper earnings limit, to 2%.

National insurance is again being used by the Chancellor as an easy means of raising tax income from employers and employees. I would suggest that everybody, save for perhaps politicians, would benefit from the amalgamation of NIC and income tax so that there is real clarity and everybody can clearly see tax changes. In everything but name, this is a 1% increase in income tax.

In addition to the proposed NIC rise, the Chancellor confirmed that the VAT rate will return to 17.5% from 1 January 2010.  Whilst widely expected, this will have a significant impact on smaller businesses.

Although perhaps of less concern to most smaller businesses, the changes to the income tax rates and pension tax relief regime for higher earners will nonetheless affect some SMEs and entrepreneurs.  From 6 April 2010, higher earners with taxable income in excess of £150,000 will pay a  new income tax rate of 50%.  In addition, the Chancellor announced in the 2009 Budget that from 6 April 2011 tax relief on pension contributions would be restricted for those earning more than £150,000 a year (which will now include the value of employer pension contributions).

Michael Carter is a partner and head of the Employee Incentives Group at Addleshaw Goddard LLP
0207 880 5679

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