Emergency Budget Breakdown 

It's generally agreed that SMEs emerged largely unscathed from the Emergency Budget. Here we pick out the main points for owner-managers.

It was billed as the emergency Budget. In his speech, George Osborne called it an unavoidable Budget and a progressive Budget. But was it a business-friendly Budget? From the dreaded VAT rise to the public spending curbs, we’ve asked businesses and their advisers for their views on the key measures announced by the chancellor last month.

VAT up to 20 per cent

While tax rises are never popular, the planned increase in VAT from 17.5 to 20 per cent split opinion between those who felt it was the “least bad” option and others who feared it would have seriously damaging consequences. Kate Craig-Wood, founder of IT company Memset, is in the former camp. She says, ‘Taxation at the point of spending is one of the fairest methods since people still have the ability to choose [whether to pay]. Also, as we saw with the VAT reduction [last year], a change of 2.5 per cent in the headline price of consumer goods has little impact on consumer spending.’

However, Martin Chapman, group head of business development at Debt Advisory Line, says even a small change in VAT, combined with the government’s freezing of benefits, could have a ‘devastating effect’ on some families’ finances.

For many businesses, the VAT hike on 4 January 2011 will have a greater impact on cash flow than it will on profits. Gary Davies, financial director of electronics recycling company ShP, says, ‘Although [the rise] won’t affect our profitability it will impinge on cash flow, which is already very tight. An extra 2.5 per cent will make it even tighter.’ This is because businesses often pay VAT when they invoice their customers, rather than when those customers pay up.

Businesses that do not pass on the rise face a bigger hit. Consultancy firm Simon-Kucher calculates that a business with a profit margin of 5 per cent that swallows the VAT rise would need to increase sales by 42 per cent to maintain profitability.

Corporation tax cuts

There was widespread acclaim among businesses at Osborne’s decision to cancel Alistair Darling’s planned hike in the lower rate of corporation tax from 21p to 22p, and instead reduce it to 20p. The higher rate, paid by companies with profits of more than £300,000, is being brought down even further, from 28p to 24p over the next four years.

Mary Monfries, head of private business at PricewaterhouseCoopers, says the reductions are ‘a welcome recognition of the need to maintain the UK’s competitiveness as an international business centre’. Paul Webb, a tax partner at accountant Robert James Partnership, points out that one effect of the changes is to narrow the gap between the lower and higher rates from 7p to 4p over four years. In his view, that could ‘eradicate the tax planning of companies between the two rates’, making life simpler for businesses.

Capital gains tax rise

The suggestion that capital gains tax (CGT) might be raised to levels similar to the top rate of income tax had the investment community up in arms, with private equity investor Jon Moulton and Conservative MP David Davis joining the outcry. Osborne hoped to deflect criticism in three ways: leaving CGT for basic rate taxpayers unchanged at 18 per cent; raising the higher rate by less than expected, to 28 per cent; and extending entrepreneurs’ relief, which Alistair Darling had already doubled in his last Budget, from £2 million to £5 million. However, there was no leniency when it came to timing: the CGT hike was brought into effect less than 12 hours after the Budget speech.

Neil Sutton, head of corporate finance at PricewaterhouseCoopers, says, ‘There will be some relief that the top rate of CGT has been raised to only 28 per cent, but what is disappointing is its immediacy. There was some hope in the UK dealmaking community that any rises would be introduced next April.’

The extension of entrepreneurs’ relief, which allows business owners to pay CGT at 10 per cent on their profits when they sell their company, was unsurprisingly welcomed by entrepreneurs themselves. Jonathan Straight, founder of the AIM-quoted recycling company Straight Plc, says, ‘It’s right that capital gains tax increases shouldn’t be applied to entrepreneurial business. If people haven’t taken a risk, then they should be taxed a reasonable amount.’

But Tom Elliott, private client tax partner at accountancy firm Horwath Clark Whitehill, thinks it’s a pity that entrepreneurs’ relief is still limited to those with shareholdings of more than 5 per cent in a business. ‘The government could have better aligned the interests of entrepreneurs and their employees by extending the qualifying conditions to include all employee shareholders,’ he points out.

Public spending slashed

The fact that health and international aid budgets have been ring-fenced means that other government departments face cuts of as much as 25 per cent of their budgets over the next four years.
That equates to savings of £40 billion over and above what was announced by the previous government. However, we won’t know where the axe will fall until October’s spending review. Martin Hesketh, MD of accountancy firm Brookson, argues that it’s inevitable ‘any business trading with the public sector ‘is bound to see a reduction in demand’.

Straight is keeping his cool despite his company’s list of public sector clients. ‘The cuts are about reducing waste, and that’s something we are in favour of. Having dealt very closely with [the public sector], we are aware that it is not as efficient as it could be.’ Thomas Coles, MD of MSM Software, goes further: ‘State spending is 53 per cent of GDP in this country… In 1997 the figure was 37 per cent and smaller businesses would benefit far more if the coalition government had pushed us back in that direction rather than increasing taxes.’

National insurance changes

The Conservatives fought the election on reversing ‘the most damaging part’ of Alistair Darling’s planned hikes in national insurance contributions (NICs). Darling had planned to raise employees’ and employers’ NICs by 1p from April 2011. The new chancellor has increased the threshold for employers’ NICs by £21 a week above indexation, which means that employers across the country will pay no NICs at all for an extra 650,000 staff. There is also an exemption from NICs for start-ups outside London and the South East, who could save up to £5,000 for each of their first ten employees.

Victoria Pooley, managing director of direct marketing specialist The Data Partnership, calls the exemption for start-ups ‘a great idea’. She adds, ‘Taxing businesses for employing staff – which thereby boosts the economy and reduces the unemployment rate – was always a nonsensical idea.’ Edward Rimmer, UK chief executive at business finance provider Bibby Financial Services, says the ‘creative’ move should ‘stimulate business start-up rates in regions that have previously been fairly stagnant’.

Overall verdict

The overarching message of Osborne’s first Budget was “we’re all in this together”, with an effort to reassure people that the burden of tax rises and spending cuts will be shared fairly.

Charlie Mullins, founder of Pimlico Plumbers, accepts this message at face value, declaring, ‘From the Queen, the bankers and the civil servants to the benefit scroungers, everyone will have to deal with a hit to their pocket and purses.’

However, this view is not endorsed by a majority of the 150 businesses surveyed by the Forum of Private Business. Only 37 per cent of respondents believe the Budget is fair, while 39 per cent say it supports enterprise. Worryingly, even fewer (29 per cent) agree that it creates a ‘stable and certain business climate’.

Howard Archer, chief UK and European economist at consultancy IHS Global Insight, says the Budget’s ‘bitter pill’ is made no easier to swallow by the ‘few small sweeteners’ offered or the claim that we are all in this together.

He adds, ‘The government has maintained, and acted on, its belief that the best way forward for the UK economy is to dish out serious fiscal medicine now rather than hold back – although there are obviously serious concerns that too strong a dosage could kill the still frail economic recovery.’

John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development, takes up this theme. Calling Osborne’s fiscal squeeze ‘unprecedented’, he says unemployment will continue to rise, adding to public borrowing and debt rather than reducing it. ‘The 2010 emergency Budget is not the beginning of the end of the UK’s post-recession economic difficulty but the start of a period of painfully slow growth, falling living standards and prolonged high unemployment.’

Whatever the cost, the government has certainly persuaded the world that it is serious about tackling the UK’s deficit. Archer points out that markets reacted favourably to Osborne’s speech, while 84 per cent of respondents in the FPB’s survey believe that the chancellor’s measures will be successful in reducing the national debt. Whether the effects of the ‘unavoidable Budget’ on economic growth will be positive or negative is less certain, and the government will ultimately be judged on whether all the pain was worth it.

Leave a comment