Darling’s tax proposals anger small businesses
10 10 2007 United Kingdom
The Chancellor of the Exchequer, Alistair Darling, provoked frustration and rage among small businesses over the Pre-Budget Report he presented yesterday.
The new Chancellor opened his Pre-Budget Report in the House of Commons pointing to the rewards from a successful economy and record levels of employment, including extra money for strategic road schemes and £1.3 billion a year for improving local and regional transport.
Chancellor Darling forecast a reduced rate of 2 to 2.5 per cent growth in the economy for next year. He predicted that the government’s current budget will be in surplus over the period up to 2012.
Simplification of National Insurance
Turning to business taxes Alistair Darling said, “I am announcing three reviews proposing simplification to the tax system that will let 3 million self-employed people pay their tax and National Insurance contributions more easily and 500,000 businesses reduce their paperwork by removing a separate payroll.
“Taken together with other measures I am proposing today, this will save British business up to £100 million a year,” he said.
Capital Gains Tax
He recognised that CGT has been used to encourage investment and enterprise and proposed reforms to make the system more straightforward. CGT taper relief, introduced as an incentive to long-term investment in businesses, will be abolished from next April.
This means CGT will be charged at a flat rate of 18 per cent for big and small investors, including private equity investors who provide finance for larger enterprises. The Chancellor said his intention was to make the system more straightforward.
John Cridland, Deputy Director-General of the CBI, said it will adversely affect the balance between risk and reward, both for entrepreneurs and for the UK's vital private equity industry.
“This move is disappointing,” he said, “and may lead to a reduction in investment in start-up and growing businesses.”
Corporation Tax
Darling confirmed that the main rate of corporation tax will be cut by 2p to 28p next year. This is the reduced rate pre-announced by Gordon Brown eight months ago.
For smaller businesses the tax rate remains at the level set by his predecessor, Gordon Brown, who raised CGT last March from 19 per cent to 22 per cent.
The Federation of Small Businesses (FSB) said this comes as a big let down for smaller enterprises.
Business Rate Supplement
Chancellor Darling announced that he proposed giving local authorities the power to set a business rate supplement for investment and local economic development to give opportunities for business expansion.
Businesses are very concerned that a supplementary local rate will be used to finance projects such as improvements in public transport infrastructure that have little benefit for local enterprises. They are also alarmed that business rate supplements will add more to the tax burden in some areas than others.
‘Married Couples Business Tax’
New measures were also proposed by Chancellor Darling to combat ‘income shifting’ and tackle ‘the exploitation of National Insurance exemptions’. This is a reference to the Arctic Systems case, where the House of Lords blocked the tax authority’s attempt to make a company director pay income tax on his wife’s dividends, as though they were his personal income.
He said, “I therefore propose to close a number of loopholes which have allowed some people to avoid taxes that everyone else has to pay”.
The new anti-avoidance rules are expected to apply to couples who own and share the profits of the business, either as dividends or as profit from a partnership. Tax experts also say that the new rules will apply not only to married couples but also to family members who work together.
The Chancellor said, “I believe that it is right that everyone who lives and works here should pay their fair share”. Experts say that documents published by the Treasury show that in the next year about £260m is expected to be raised in tax from small businesses.
Business reactions
The Federation of Small Businesses criticised Alistair Darling’s first Pre-Budget Report for adding to the tax burden of small businesses.
John Walker, FSB Policy Chairman, said, “Overall, this Pre-Budget Report looks set to increase the financial burdens on small businesses at a time when they are contributing more than ever to the UK economy. The Government has again failed to recognise that contribution.”
Analysis by the Confederation of British Industry showed that the 2008 budget will actually increase the overall tax burden on business by £1.6bn next year.
John Cridland, Deputy Director-General of the CBI, said, “The CBI was hoping for a statement for enterprise with encouragement for small businesses. There was no such statement and many small businesses will be hit again by the increase in the Capital Gains Tax rate.”
The FSB and CBI both we
lcomed the Chancellor’s commitment to business tax simplification, but emphasised that business will want to see action as well as words.
John Walker of the FSB said, “The test will be for it to actually happen in practice.”
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