Chancellor Darling unveils economic survival and recovery package

24 11 2008 United Kingdom

In today’s Pre-Budget Report, Chancellor Alistair Darling cut the standard rate of VAT by 2.5 percentage points as part of a £20bn package to boost the UK economy

The Chancellor announced that his objectives for businesses are to help equip them for the challenges of the economy, to improve access to credit and ease cash flow and to reduce their financial burdens in the downturn. He said the package of measures would give real help to businesses through the current difficulties and enable them to invest for opportunities as the global economy recovers.

The main highlights for small businesses

Cut in the rate of VAT from 17.5 to 15 per cent from Monday, 1st December
£1bn loan guarantee scheme plus £1bn to back loans for exporters
Firms in difficulties to be allowed to spread their tax payments
Small enterprises will be able to offset losses of up to £50,000 against profits in the past three years, instead of just the previous year
1 per cent increase in small companies’ Corporation Tax due next April has been put back to 2010
National Insurance contributions to be raised in 2011.

Cut in VAT

A temporary reduction in VAT from 17.5 to 15 per cent will come into effect on Monday, 1st December, and will last until the end of 2009.

Duties on petrol, tobacco and alcohol will rise to offset the reduction in VAT on these products, so the overall prices will remain at their current levels this year.

National Insurance Contributions

Instead of reducing National Insurance contributions, as expected by many, the Chancellor announced that the rate for contributions made by employees and employers will rise by half a percent from April 2011.

This is intended to help pay for the measures he outlined in his ‘mini budget’ statement.

The starting rate for National Insurance will be raised to align it with that of income tax, so no one earning under £20,000 will pay any more in NI contributions as a result.

Empty property relief

To help small firms meet their running costs, there will be a temporary increase in the threshold for empty property relief.

For 2009/10, empty commercial properties with a rateable value below £15,000, will be exempt from business rates. Mr Darling claimed this exemption covers 70 per cent of all empty properties.

Extended times to meet tax bills

The Chancellor recognised real difficulty for many small businesses to pay their tax bills on time. So, from today, HM Revenue & Customs will enable firms facing difficulties to spread their tax on a timetable they can afford – “not for six months but for as long as they need”.

This will cover “all business taxes - VAT, corporation tax, income tax and national insurance”.

Small Business Finance Scheme

The Government will offer credit through a temporary Small Business Finance Scheme for small firms experiencing short-term cash flow problems. “This should allow small businesses to borrow sums from a thousand pounds to a million pounds at more flexible terms than before,” Mr Darling said, “making lending more affordable and easily accessible.”

From January 2009 the Export Credit Guarantee Department will offer a temporary facility to support the availability of short-term working capital for smaller exporters.

Reactions to the Chancellor’s statement

Conservative shadow chancellor George Osborne criticised the government’s plans for increasing taxation in two years’ time. He accused Mr Darling of creating "a huge unexploded tax bombshell, timed to go off at the time of the next economic recovery".

The Confederation of British Industry welcomed the measures announced by Mr Darling and gave the overall package a score of ‘6 out of 10’.

Lib Dem treasury spokesman Vince Cable questioned whether the cut in VAT would give a lift to consumer spending. "It would be much more sensible to put money directly in the pockets of low paid workers by cutting their income tax," he said.

The cut in VAT appears to have been an expedient move by the Chancellor, moving from HM Revenue & Customs the headache and costs of implementing a tax cut at extremely short notice.

The Guardian reported that retailers, such as Marks & Spencer, who price their goods in whole pounds are unlikely to reduce the price to consumers. Other prices are likely to remain unchanged by retailers as well. 'They will not, for instance, reduce a £39.99 dress to £39.14 . . . . any more than they would cut a £1.99 item to £1.948', said the Guardian.

Some retailers have not yet decided how they will pass on the cut in VAT and others might not reflect the full amount in reduced prices to customers.

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