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Budget 2007

The Chancellor's decision to raise tax rates for small companies has left many businesses feeling glum. But the budget was not all bad news and a little planning will help to deaden some of the pain.

"It's the best time ever for a small business to reinvent itself, to do new things," according to Richard Farnsworth, a tax director in the entrepreneurs and private companies team at accounts PricewaterhouseCoopers.

"Look at research and development, look at where you can spend money on plant and machinery that drive efficiencies and savings. If you're a go-ahead, dynamic business then over all it's pretty good news - even given the increase in tax rates."

The bad news

From April 1 tax rates for companies which make profits of up to £300,000 will jump from 19 to 20%. The rate will increase by a percentage point each year to 22 per cent by 2009. By closing the gap between rates for companies and the self-employed the Chancellor hopes to make it less attractive for sole traders to become limited companies purely to cut their tax bill.

The tax increase is one area where you don't have many options. For what Farnsworth describes as a "marginal" saving you might consider, for example, moving stock provisions to the current year so that profits are higher in the lower tax period.

There is more bad news for owners of industrial buildings used for manufacturing who will no longer be able to claim four per cent tax relief each year. The change will hit a range of businesses including those operating in factories, workshops and hotels.

The Chancellor is also cutting the business rate relief on empty buildings such as office blocks and factories. At the moment owners of vacant industrial property can claim 100% rate relief. The relief on retail and office properties is 50%. From 1 April next year relief will be cut to three months for offices and shops and six months for factories and workshops. After this period, full rates will be payable.

The change is designed to encourage businesses to work harder at finding occupants for empty premises. The European Union supplied a further incentive to bring derelict buildings back to life by agreeing that Britain can offer tax relief on renovations.

The good news

Most of Gordon Brown sweeteners were aimed at encouraging small businesses to invest - especially in technology.

The tax credit for investment in research and development will rise from 150% to 175% from April next year. Ironically, this means that it would be sensible to delay investment until you can claim the higher tax break and at a time when the company tax rate will have increased.

"It's bizarre because in effect if I had a small company with a big R&D project in the pipeline," Farnsworth points out. "I would probably be saying to them why not hold off a year?"

Small businesses will also be able to claim 100% tax relief on £50, 000 invested each year on plant and machinery. What exactly qualifies for investment has yet to be agreed and Farnsworth says companies should "hold fire but be aware there's scope for investment".

You should also talk to your tax advisor about changes to capital allowances. You can now opt for money to buy something that is only expected to last three or four years to be dealt with in a separate "pot" for tax purposes. By making this "election" you will receive the tax relief much sooner. This is most likely to affect IT products like computers but you may have another piece of specialist equipment that you've got your eye on.

The Government is also offering training grants of up to £3,000 to small businesses who take on staff who lack basic skills. But the fine print has yet to appear and Farnsworth warns that recruitment is always time-consuming and risky for a small business.

"You've got to have a good commercial reason to take someone on. If you can get a grant on top - all well and good."

Making the most of the budget means looking to the future to see how you can invest in your business without putting it at risk.

HM Treasury
HM Revenue & Customs
PricewaterhouseCoopers
Businesslink

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