Chancellor Gordon Brown’s third budget sounded good. There was lots of encouragement for the small business sector, personal tax cuts and lower national insurance for employers. Unfortunately, when the small print is read, the reality is somewhat different. It is very much a “jam tomorrow but very little for now” budget.

Indeed, most people probably feel more relieved about what was not there than grateful for what is. In particular, a reform of inheritance tax was widely anticipated, which many feared would severely limit business property relief. This is probably now safe, at least until after the next General Election.

Apart from the already announced reduction in the rate of corporation tax to 30% and 20% for small companies from 1 April next there is not a lot in the budget for businesses.

The most significant change for small businesses was the 10% starting rate. However, that is not as attractive as it first appears. It does not apply until 1 April 2000. It applies only to the first £10 000 of taxable profits with marginal provisions to phase out the benefit over the next £40 000. Also, it does not apply to unincorporated businesses. Whilst many small businesses may see that as an incentive to incorporate, there are hidden regulatory costs, in particular in relation to PAYE on the owner’s salary, that the unincorporated form avoids.

The extension of the 40% first year allowance on plant and machinery by SMEs for a further year to 1 July 2000 is helpful but one year extensions are too short to allow effective investment decisions to be made.

The imposition of tax on “reverse premiums” where a landlord pays a capital sum to a prospective tenant to induce him to take on a lease will increase the effective cost of new premises, although it has been difficult to justify such receipts escaping tax in the past. So will the 0.5% increase in stamp duty on purchases over £250 000.

Many people will welcome the reduction in employer’s national insurance contributions (which goes up to 12.2% from 1 April) back down to 11.7% albeit not until 6 April 2001. However, this is far less welcome when it is realised that this reduction is intended to be paid for out of a new “climate change levy” on gas, coal and electricity used by business.

There will be an exemption for fuels used by “the transport sector”, but it is unclear what this means. As the levy will not apply to petrol, diesel or other mineral oils in any event, it is hard to envisage what the transport exemption will cover.

Furthermore employers’ (but not employees’) national insurance will be imposed on all benefits in kind from 6 April 2000. Not only does this increase the cost of providing staff benefits but imposes additional burdens on businesses, particularly small businesses.

Although benefit payments do of course need to be identified for P11D purposes, it does not entail judgements on the dividing line between business expenses and benefits, whereas the national insurance charge will require employers to do this.

The changes to the taxation of employees are a mixed bag. The scale charge for company cars is increased from 6 April 1999 for all cars (other, curiously, than those used mainly for private use) but impacts most heavily cars over four years old. There is also, as forewarned last year, a roughly 20% increase in the petrol scale charge from the same date. The “green” changes to discourage the use of private cars are attractive to large companies but could make it more difficult for small companies to attract staff. The new individual learning account is likely to be a damp squib.

The proposed new all-employee share scheme to be introduced next year looks fairly generous, but it seems likely that businesses attracted to the concept of such schemes will already have them. If the change does prompt the setting up of many new schemes it will prove to be another measure that will make life more difficult for the small business in attracting staff.

In practice all-employee share schemes are not viable in small companies where an artificial market has to be created for the shares, which in itself can create some significant tax problems, and they are not possible for unincorporated business.

Apart from an increase in the registration threshold of £1000 to £51 000 from 1 April, the VAT changes are largely anti-avoidance provisions.

The budget headline grabbers—the new 10% personal tax rate from April 1 and the 1p reduction in the basic rate of tax from 6 April, 2000—are likely to make people feel good, so will give a boost to consumer spending which will benefit the retail trade.

However, when people get their April pay packets they will find that they are themselves paying for 55% of the tax reduction because of the abolition of the 20% tax band.

Realisation of the consequences of the abolition of mortgage tax relief, the married person’s tax allowance and tax relief for maintenance payments, from 6 April 2000, will mean that people are effectively paying for the reduction themselves. This will undoubtedly offset any “feel good” factor, reducing the effects of any consumer spending boost.

Overall, the budget saw a shifting of spendable income away from the middle classes—a policy unlikely to give a boost to an economy on the brink of recession.

  • Robert Maas is tax partner of Blackstone Franks & Co, chartered accountants and is chairman of the technical committee of the tax faculty of the Institute of Chartered Accountants in England & Wales.

TSA gives lukewarm reception

Though broadly welcoming many of the budget’s headlines, the Textile Services Association is concerned at much of the detail.
“While few could criticise the headline measures in the budget-reduction in personal and corporation taxation; commitment to research and development; focus on lifelong learning and Individual Learning Account -the devil is in the detail,” commented TSA chief executive Murray Simpson.
Reductions in corporation tax-and particularly the new starting rate of 10p for profits of up to £10 000-are welcome (particularly for small businesses) but do little to off-set the accelerated payment arrangements for corporation tax announced last year.
And while the news on personal taxation appears good enough to stimulate (or at least not depress) consumer demand, its effect is largely off-set by increases in the consumer tax burden elsewhere in terms of allowances, insurance premiums and mortgages.
Of greater concern, however, is the optimistic forecasts for growth on which the Chancellor has based much of the arithmetic, and on the complex and potentially flawed calculation that the budget has done enough to maintain downward pressure on interest rates-without stimulating inflation.
The announcement of an energy tax or ‘climate change levy’ is of real concern. While theTSA is relieved at claims that the tax will be revenue neutral, and at promises for ‘significantly lower’ rates of tax for energy efficient operations, the entire concept and implementation of the tax must surely place British companies at a disadvantage compared with their European partners.
Investigations into the competitiveness of water companies is long overdue, and must be welcomed. The spectre of a national tax on discharges of effluent appears to have abated following strong industry concern that this was not the best way to tackle pollution. But the industry’s guard must not slip on this key issue.
Mr Simpson felt that small business members of the TSA will feel a little disappointed at the budget. He commented: “What was needed was real and radical change to reduce the burden on business from Government regulations such as the Working Time Regulations-not more tinkering with the engine.” The promised agency for smaller business appears to have few real powers and thus little real impact although changes to the PAYE regime for small companies are overdue and thus welcome.