Many small to medium sized businesses around the UK are more than a bit miffed about the March 2007 budget. They are simply going to have less after-tax income after April 2009, as the small firm tax rate increases to 22%.
Take a company that is making the upper limit of profit allowable in the small company tax bracket, £300,000 a year. The government will be taking £66,000 of that, up from £57,000. That means the company will be paying over 16% more corporation tax than they are currently.
On the plus side, the government has introduced a new Annual Investment Allowance. Under this new scheme, any business can offset against pre-tax profits expenditure up to £50,000 on equipment, plant & machinery. Sure, if you were able to claim the maximum available, you would pay £1000 less in corporation tax in the example above.
But to be realistic, how many firms of this size spend £50K a year on plant and machinery? Certainly, not too many consultancy and service businesses. Let's say the company invests in a new server, half a dozen PCs and a couple of printers, spending around £15,000 on new equipment. It is still going to worse off by about £5,700 for the year.
There was also an increase in the Research & Development tax credit allowance from 150% to 175%. While this was applauded in some quarters, the reality is that getting this allowance is too complicated and time-consuming for many businesses.
Research conducted by business advisers DTE Group across a range of industry sectors including manufacturing, chemicals and health showed that 65% of companies found the R&D tax credit difficult or very difficult to claim with over half of those who did actually claim waiting more than 12 months to get a response.
The tax credit for larger firms rose to 130%. However, Intellect, the UK trade association for the IT, telecoms and electronics industries, maintains this is too low for the UK to compete internationally. Moreover, many costs involved in an R&D project are not eligible for the credit and corporation tax is still applicable, creating a real value of the tax credit of about four percent.
The chancellor's assertion that the effective small business tax rate has dropped to 15 per cent is patently misleading.
The Budget reaction from larger businesses was far rosier. The Institute of Directors had for some time been calling on the government to reduce corporation tax by 2%, and thanked the Chancellor in its press release "for listening to the voice of business and our concern that tax was becoming a 'tipping point' for international companies. Business will end the day happier than it started".
However not all larger businesses are so sanguine. One of the groups most affected are those companies holding unoccupied premises.
At present, most empty property receives a 100pc relief from taxation for the first three months, and 50pc thereafter; with warehouses and factories receiving 100pc at all times.
But Gordon Brown intends to change Empty Property Relief from next April, to a total of six months for factories, and three months for all other types of property. After the initial period is up the owners of all types of properties will have to pay full business rates.
Hardest hit by this will be developers with large land banks either waiting for planning permission or development to begin, large retailers who have bought old buildings but not started to develop them, and manufacturers who may have moved to new premises but have been unable to sell their old premises.
Also adversely affected in the budget are companies in the gaming sector. Budget changes increase the effective rate of duty on the majority of casinos to 15 % in line with the rate applied to other parts of betting and gaming, and a new 50% top rate of tax was also applied.
It seems clear that Gordon Brown made the decision that the baggage that came with Britain wanting to become a world leader in the field of gambling, was too hot to handle, in the event that he were to become Prime Minister.
Other Budget legislation possibly affecting readers of this Report include:
- amendments to the current rules on capital loss and gain buying by companies. This is to prevent them from being sidestepped by means of arrangements involving the purchase of a company together with its subsidiaries. Changes are also being made to simplify the conditions relating to relief for losses on deemed disposals of assets arising before the 2005 Pre-Budget Report. The relief will now not necessarily be lost after a takeover of the original group or where the company which incurred the loss is sold or liquidated (measures took effect from 21 March 2007).
- VAT on transfer of a going concern. Where a business is transferred as a going concern the acquirer takes over the vendor's VAT history (but not his VAT liabilities unless he opts to take over his VAT number too) and the transfer does not constitute a supply. The law requires the vendor to pass his business records over to the purchaser unless HMRC give permission for him to retain them. From 1 September 2007 the law will be amended to allow the seller to keep his business records "in all but a few specified cases".
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