How the 2005 Budget affects business

With many analysts predicting large tax rises after the election, and with a budget deficit dangerously close to breaching the Chancellor’s own ‘Golden Rule’, we were expecting only relatively simple tweaks from this Budget.

So what has the Chancellor actually said in this, his ninth Budget?

• The economy grew by 3.1% in 2004, in line with predictions from last year and the growth forecast for the economy has stayed the same as the prediction in the last budget – 3% to 3.5% for 2005 and 2.5% to 3% for 2006.
• Corporation tax, the Climate Change levy, the Insurance Premium tax and Company Car tax have all been frozen
• New rules to encourage incapacity benefit claimants into work and changes to housing benefit to help create jobs
• £65 million made available in 2005 for employer training schemes
• No further assessment of whether the UK would adopt the Euro in this budget

But where does all of this leave the average British small business? While certain groups should benefit from the Chancellor’s pre-election sweeteners, small businesses have generally felt rather hard done by when the budget is announced.

This article focuses on the small business owners and the self-employed – groups which currently make up 52% of business turnover in the UK and 55% of private sector employment.

The main changes are as follows:

- The single European currency
- Company tax changes
- The Red Tape burden
- Support & advice for small businesses
- Procurement in the Public Sector
- Maternity & Paternity Leave
- Company vehicles
- Research & Development
- Commercial property
- Local & Regional development
- Personal Finance

The single European currency
In the last budget speech, the treasury were charged with reviewing the Government’s progress on achieving the ‘right economic conditions’ for joining the single European currency in time for this budget. In what could be seen as a pre-election sweetener, the Chancellor has ruled out any further assessment on whether the UK would adopt the Euro in this Budget.

Company tax changes
Most of the taxes imposed on businesses have remained unchanged from last year. Corporation tax, the Climate Change levy, the Insurance Premium tax and the Company Car levy have all been frozen.

As part of the ongoing process of simplifying corporate taxation, business owners should now be moving towards the 2010 deadline for compulsory electronic filing of accounts. Even so, there is sure to be a continuing need for a good accountant (more in the next topic) for small business owners. Unfortunately consultation into the reform of many other taxation areas has only just been completed, missing this Budget although clarification of some of the more immediate issues such as payment of dividends in small family-owned businesses should be forthcoming fairly soon. The Government are also planning to raise another £1,100 million over the next year from North Sea area companies, who seem to be the hardest hit, with the remaining tax rates staying the same.

The Red Tape burden
Before the Budget, the Better Regulation Task Force had urged the Government to focus on cutting the burden of the dreaded ‘Red Tape’ on UK businesses. The report also suggested that the right measures could save businesses as much as £7.5 billion and could increase the gross domestic product (GDP) by as much as 1%.

The Chancellor appears to have taken this advice on board, announcing a range of reforms aimed at reducing the cost of regulation on businesses;

• Ensuring that regulation is only used where necessary and that all Whitehall departments strengthen their focus on removing outdated and unnecessary regulations.
• Adopting a risk-based approach to inspection and enforcement and reducing the number of inspections each year by 1 million for companies with a good record.
• Simplifying the tax return form for 500,000 of the smallest businesses.
• Introducing new options for making and managing VAT payments online.
• Increasing the VAT registration threshold from £58,000 to £60,000

Support and advice for small businesses
The Government does now seem to be starting to improve its support of small businesses in the UK and has set out its plans for fostering small business entrepreneurship.

• A ‘Framework for High Growth Business Coaching’ aimed at helping both start-up and existing businesses in high growth industries as well as high potential entrepreneurs in the pre-start-up phase.
• Plans to increase the proportion of UK businesses owned and run by women, including specialist support and advice for women on routes to financing their business.
• Improved incentives for ongoing investment in SMEs both in high growth industries and in deprived geographical areas.
• Easier access to both public and private capital for small businesses via the proposed launch of Enterprise Capital Funds (ECFs)

Procurement in the Public Sector
With the public sector becoming an increasingly large part of the economy and employment market, many smaller businesses have bemoaned its reliance on big businesses for their key supplier contracts.

The Government has again stated their intention to open up procurement to SMEs, although whether this actually happens remains to be seen. There does, however, seem to be some measures in this budget which may pave the way for better SME representation in public sector contract tenders;

• The Office of Government Commerce (OGC) and the Small Business Service (SBS) will launch a national portal for low-value contracts in the summer, encouraging SMEs to compete for this business.
• At least 2.5% of public sector extra-mural R&D spend must be with SMEs.

Maternity & Paternity Leave
No specific new information was given on the proposals to increase maternity leave to 9 months in 2007, and no clarification on the plans to increase this to 1 year if Labour get re-elected. Statutory maternity pay has been increased to £106 a week with effect from April 05 which could have a huge effect on the wage bills for small companies.

Company vehicles
It’s nearly all bad news here with the Government hoping to fund an extra £425 million from transport taxes over the next year. Firstly it will cost more to have company vehicles, with the most notable increase coming for those who use company vans. Seemingly regardless of whether an employee uses a van for private as well as business use or not, a new tax of £3,000 will be levied, up from the current £500. However, this will not apply to self-employed van drivers.

Perhaps unsurprisingly, the Chancellor has held off on raising fuel duty until after the election, with an increase in 1.22p / litre effective from September 1st. Lorry owners are to be charged for UK road mileage in order to even the playing field somewhat between us and our lucky Continental counterparts who pop into the Tesco in Calais to fill up instead. At some point in the non-specified future UK lorry drivers should be getting a rebate on fuel duty which should be of more benefit. Sadly, even LPG (Liquid Petroleum Gas) has not escaped the taxman’s attentions.

While small businesses can’t avoid, or ‘make savings’, on these taxes, there are some savings to be made from getting the lowest quote for van insurance. Compare online quotes from leading insurers.

Research & Development
The UK’s investment in R&D has historically been low compared to other major developed countries – 1.9% of GDP in 2002 compared to 2.5% in Germany and 2.7% in America. Although the Chancellor did not include sole traders and partnerships in the R&D tax credit incentive scheme as expected, Mr Brown did announce some initiatives to increase the competitiveness of hi-tech manufacturing and service businesses in the UK;

• A mandatory requirement that at least 2.5% of public sector extra-mural R&D spending will be with small to medium enterprises (SMEs)
• Encouraging greater collaboration between business and academic institutions to improve the commercial exploitation of scientific research.
• Ensuring that the R&D tax credit better supports UK businesses with a high potential major innovative firms of the future
• A UK Stem Cell Initiative to create a 10-year vision for stem cell research in the UK

With the emphasis even for the downtrodden manufacturing sector now to focus on creating a leading competitive advantage through design, rather than more traditional methods, hopefully this move will be the start of more to come.

Commercial Property
Two bits of big news here. Firstly, a discussion paper is being geared up ready for industry comment on the Property Investment Funds scheme – in simple terms a pooled property investment (residential and commercial) which has tax advantages (see Tax Avoidance above). This should also prove of use to the increasingly popular self-administered company pension schemes. Secondly, a consultation has just finished about launching the Business Premises Renovation Allowance scheme, which would provide allowances on expenditure for the renovation or conversion of vacant properties in Enterprise areas, to bring them to a useable state. Sadly, this initiative seems to have been wiped out by the abolition of commercially disadvantaged area relief on stamp duty for commercial buildings. What he gives with one hand…

Get online quotes for both commercial and residential investment mortgages.

Local and regional development
With the current Government’s penchant for all things regional comes a new Local Enterprise Growth Initiative, worth £50 million per year now and rising to £150 million per year by 2008-9, aimed at boosting enterprise in the most disadvantaged areas of the country.

Various different local initiatives are being introduced in an effort to improve relations and interactions between local government departments and local businesses, including:

• Business Improvement Districts (BIDs) to encourage local government and local businesses to work together to improve their local areas.
• Local Authority Business Growth Incentive (LABGI) schemes to enable local authorities to apply for funding to reward, start and grow business projects in their area.
• Local Enterprise Growth Initiatives (LEGIs) to provide significant and flexible investment in some of the most underdeveloped areas of the country.

Much of the local and regional development laid out in this Budget is being supported by the Small Business Service (SBS) in the regional BusinessLink agencies. To find out more about BusinessLink and what they’re doing for small businesses in your region, click here (www.businesslink.gov.uk).

Personal Finances
While there are a number of measures announced in the budget that will affect businesses directly, perhaps of more immediate concern to small business owners are the effects of the changes to personal finances and taxation, including fuel price rises in September,

All these measures will have a direct effect on the purses and wallets of small business owners across the country and may well have a knock-on effect on the success of their business - less money in their pockets means less money to spend on the business.

In conclusion, there is nothing particularly unexpected in the Chancellor’s ninth budget, although the current Government still seems to be more concerned about squeezing every last available penny from smokers, drinkers, car drivers and middle income earners than making the UK a simple, cost efficient place for businesses, both large and small, to operate in.

Whatever the effects of this Budget, it’s always wise to check both your personal and business finance and insurance products on a regular basis.

Compare online quotes for a range of financial products and insurance cover for both yourself and your business:

Business -
Business loans and finance
Cash flow solutions
Business insurance
Commercial mortgages

Personal –
Personal loans (secured and unsecured)
Buy-to-let mortgages