Friday, 2 July 2010

UK 2010 (Emergency) Budget: Impact on SMEs, Investors and Entrepreneurs

Conservativism is associated with smaller government and reduced state-dependance, which, coupled with classical liberal beliefs in market forces and privatisation, would probably make one expect the coalition's Emergency Budget to have a positive impact on small and medium enterprises (SMEs), investors and entrepreneurs. Despite the government's claim that the British economy is a prolific environment to harness and expand enterprise, it seems that last week's Budget's token gestures to the small-business community has fallen short of providing genuinely far-reaching concessions. The highlights include the increases in Value Added Tax (VAT) and Capital Gains Tax (CGT), a reduction in the headline rate of corporation tax, and National Insurance Contribution (NIC) relief schemes.

For start-ups, the increase in VAT to 20% – charged on most goods and services in the UK – may make it harder to generate sales. The VAT increase hurts SMEs who, unlike large businesses, cannot absorb price increases but have to pass them on to their customers. Perhaps the VAT rise is overstated, afterall the increase equates to a mere extra £2.50 on every £100 spent on most goods and services, but draws in a significant amount of tax revenue for the government in order to reduce Britain's deficit in the hope that our economy will become stronger and more stable for investors.

Small businesses will, however, benefit from the Chancellor Osborne's decision to cut the small company's tax rate from 21% to 20%. There is an even greater stimulus for start-ups outside London, the South East and East of England, who will be able to pursue new ventures with a £5000 employers national insurance holiday on their first 10 employees hired in the first year of business. Yet the strain remains on existing small businesses who are already trading. John Walker, national chairman of the Federation of Small Businesses (FSB) suggested in BusinessWings that a full reversal of NICs increases is required to renege on the previous government's 'tax on jobs'. Such a change would enable SMEs to drive their business potential by attracting more employees, he argues. There has also been a reduction of the headline rate of corporation tax over 4 years from 28% to 24%, promoting the UK's international competitiveness as Danvers Baillieu, an associate at Winston & Strawn, argues.

On the other hand, the increase in CGT to 28% – a tax on the gains made from selling assets that have increased in value – will penalise long-term investors and renders the UK uncompetitve for Private Equity (PE) by international standards according to Simon Walker, Chief Executive of the British Private Equity & Venture Capital Association (BVCA). While the increase is somewhat reserved in contrast to the predicted 40%, it nevertheless remains to be a controversial move that discourages long-term investment and saving. Nils Pratley writes in the Guardian that a far more clear and fair method of removing the incentive for wealthy individuals to turn income into capital with the aid of clever accountants, who would thus pay a lower rate of tax, would be to distinguish between profits made on investments held for 5, 10, 15 years and profits made from trading derivative instruments for short-term gain.

For entrepreneurs, the Chancellor has endorsed the Entrepreneurs' Relief and increased its lifetime allowance. The 10% rate now applies to the first £5 million of capital gains made by the sale of a qualifying business over one's lifetime, benefiting those who build businesses. Once again, however, criticism can be made in Osborne's failure to change the qualifying definition as PE and Venture Capital (VC) funds are still excluded. While a significant avenue of raising capital for SMEs is through bank loans, a bank levy of 0.04%, rising to 0.07% after the first year will be introduced, potentially increasing banks' cost of lending and hurting enterprise. In any case, the Enterprise Incentive Scheme (EIS) and Venture Capital Trust (VCT) schemes have been maintained and, coupled with the cumulative concessions above, the Emergency Budget appears to nurture emerging companies.

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