Pre-Budget Report 2009 - How much has it affected your business?
Chancellor of the exchequer Alistair Darling delivered his annual Pre-Budget Report recently facing almost unprecedented economic pressures. The lingering effects of the global credit crunch - including a sharp downturn in the real economy leading to recession, rising job losses, bank bailouts and declining tax revenues - have had a devastating impact on the public finances. The government is expected to build a record deficit of £178 billion - well over 10 per cent of GDP - this year and to rack up further big debts over the years to come.
In the Pre-Budget Report, the chancellor had to tread a careful line between promoting future growth and reducing national debts over the long-term. However, these problems generally require very different remedies. In order to cut deficits, governments can reduce public spending and increase taxes - both moves which can dampen down economic growth by decreasing the spending power of consumers and businesses alike.
The resulting report, delivered to Parliament on December 9th 2009, reflects this dilemma. Should the government maintain spending and keep taxes low, promoting economic recovery from the current recession but building up debts still further? Or should they cut spending and raise taxes to reduce deficits, with the possible consequence of further dragging out the recession?
Either way, the latest Pre-Budget Report has profound consequences for the UK tax regime as a whole and for small businesses in particular. Mr Darling said in the Pre-Budget Report speech that he would "protect" front-line public services from cuts to funding, but reiterated his commitment to reduce the UK's deficit over the next four years in an "orderly" way, instead of introducing radical immediate action on tax and spending. "The choices are between going for growth or putting the recovery at risk," he added.
Promoting growth
One of the main pieces of good news for small firms contained in the Pre-Budget Report is the extension of the Business Payment Support Service, otherwise known as 'Time to Pay'. This scheme allowed firms facing financial hardships to renegotiate their tax obligations, such as arranging with HM Revenue & Customs (HMRC) to spread their payments of a bill over a longer term period. Government figures show that around £4 billion of tax has been renegotiated through the scheme since its launch in 2008, involving over 160,000 firms.
The planned 2010 increase to smaller firms' corporation tax from 21 to 22 per cent has also been scrapped - a move which has been welcomed by industry group the Federation of Small Businesses (FSB). A survey conducted by the organisation suggests that more radical action on corporation tax in the Pre-Budget Report would have proved popular. Around 26 per cent of firms agreed with the FSB's statement that a reduction in the tax would "improve" their prospects.
There is also a one-year extension to the higher £15,000 threshold at which businesses begin to pay rates on empty properties contained in the Pre-Budget Report. It is thought that this move alone exempts 70 per cent of empty premises from being taxed. Therefore, the extension will benefit firms who are waiting until the economy returns to growth before opening new outlets or offices in premises they have already bought.
Reducing debt
Despite this good news, many small businesses are set to suffer as a direct result of changes introduced by the Pre-Budget Report. Apart from the one-off 50 per cent super-tax on bonuses for wealthy bankers announced by Mr Darling, all UK workers earning over £20,000 will also suffer from changes in the National Insurance (NI) regime to take effect from April 2011.
Employers' NI contributions are also to rise by 0.5 per cent at this time, boosting government tax revenues by increasing the burden on firms. This tax reform could prove to be a major contributor to the debt-reduction strategy. However, business groups strongly attacked the change.
Richard Lambert, director general of business group the Confederation of British Industry, said: "The Chancellor has made a serious mistake imposing an extra jobs tax at a time when the economic recovery will still be fragile. Increasing NI contributions will hold back job creation and growth."
Meanwhile, high earners are also to be hit by an increase to income tax from 40 per cent to 50 per cent in April 2010, in a change originally set out in the Budget earlier this year. The same group (those with incomes of over £150,000 per year) is also to be hit by a restriction on tax relief on pension contributions from April 2011 - and the Pre-Budget Report confirmed that these earnings would include pension contributions made by employers.
Small business concerns
Elsewhere in Mr Darling's report, there was better news for the UK's entrepreneurs. Mr Darling said that he was planning to apply a ten per cent rate of corporation tax for income from patents from 2013, in a move which could encourage small business owners to innovate rather than follow the crowd. The Enterprise Finance Guarantee scheme, incorporating £1.3 billion of funding for businesses seeking out credit, will also be extended.
Possible ways in which contractors might be affected is the restriction of tax relief on free or subsidised meals from employers. The issue of "income shifting" - where business-owning spouses move income from one partner to another to increase their tax advantages - could still be on the agenda and the subject of a future crackdown.
Income-shifting is not the only issue on which the government might toughen tax rules in future - particularly if economic growth remains stagnant and national deficits remain high. The threats of continued recession or even a downgrade to the very credit-worthiness of the UK are likely to play on ministers' minds, regardless of who assumes power following next year's general election.
Future debt-reducing tax rises seem certain. What these will be, and how steep, remains open to question.
The Pre-Budget Report may have impacted on your business already and if you feel you are not being kept up to date by your accountant then please call 0800 0523 555 to be put in contact with your local TaxAssist Accountant or complete our contact form.
