The Chancellor has had a turbulent time since he delivered his Budget last week, and while he has made a u-turn on plans to severely cut disability benefits, some of his other measures have been welcomed and applauded by the business community.
This Budget was certainly a good one for small business, with major changes that offered them reductions in rates and taxes, and it is important for companies to make the most of them.
So, to make life easier, The Business Powerhouse editorial team has put together your quick guide to the changes in the Budget:
Rates down for small business
Business rates have been the bane of an SME’s life as they have reached record levels – but thankfully, the Chancellor has listened to the groundswell of complaints and business rate relief has been more than doubled from £6,000 to £15,000. This – according to the Government – will mean more than 600,000 small businesses will pay no rates at all.
Another bugbear was the linking of business rates to the retail price index (RPI) rather than the historically lower consumer price index (CPI) – again, the Government has been listening, and in future CPI will be used to set the rate rises each year.
Corporation tax cut
A ‘business road map’ has been outlined by the Chancellor, and he is proposing that the level of corporation tax is cut from the current 20% to 17% by 2020.
While this sounds good, there is a little more to it and it appears that businesses could be paying more than £7 billion more as a result of the Budget changes, with an additional £1 billion each year even after the changes announced, according to the Chartered Institute of Taxation.
John Cullinane, Tax Policy Director, at the Chartered Institute of Taxation, said: “Rumours of the death of corporation tax have been much exaggerated. There has been much talk recently of problems with corporation tax and whether it can be sustained in today’s global economy. The announcements show that the Chancellor is still confident he can increase the tax base to more than offset planned rate reductions in the years ahead.”
Extra flexibility on offsetting past losses
Many companies have different divisions that do slightly different things, and in the past it has not always been possible to offset losses in one area of the business against profits in another, even though the profits and losses were all part of the same firm. This, for example, might have been the case in an agricultural business.
Now, from April 2017, these rules are changing, and there will be fewer restrictions on a firm’s ability to use losses created within different parts of the business being offset against other profits.
Tina Riches of accountants Smith & Williamson, said: “It is welcome news to hear that the UK will bring its system more into line with its G7 neighbours, so that some of these restrictions will fall away from April 2017. It means that far fewer SMEs will end up with trapped unusable losses in the future. For companies with profits over £5m there will be some restrictions on this, but the Government only expect this to affect about 1% of UK companies.”
Loans to small company shareholders will see a tax rise
Not great news for small business – close companies, which are considered to have five or fewer shareholders. They already have to pay a tax charge of 25% on loans made to shareholders, but as of April 1, 2016 this will rise to 32.5%, and is most likely to affect family-run firms.
If this is something that you think may affect you, then you would be wise to speak to, or find an accountant sooner rather than later.
Extension to CGT Entrepreneur’s Relief
To date, to benefit from Entrepreneur’s Relief, you have had to not only invest in the company in question, you have to work for it as well. But these rules are changing to expand the reach of this relief to business angels who do not deal with the business day-to-day.
Michael Steed, President of the Association of Taxation Technicians, said: “Until now ‘external investors’ (business angels) in unquoted trading companies have been able to obtain both income tax relief on their investment and CGT exemption on the subsequent disposal of their shares by using either the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). Both can work well in the right circumstances but both are governed by very tight qualifying conditions.
“[The Budget] announcement opens up an alternative route for prospective investors. By enabling investors to qualify for Entrepreneurs’ Relief (previously only available to individuals who worked in the company in which they were investing), any gains (within a £10 million lifetime limit) on qualifying share disposals after three years will be subject to a CGT rate of 10% instead of what will, from April 6, 2016, be the new 20% rate.
“It will be interesting to see whether this extension to Entrepreneurs’ Relief for external investors prompts a shift away from EIS and SEIS. Much will inevitably depend on the how the legislation is structured and on the complexity of anti-avoidance provisions. If the provisions can be kept simple, they have the potential to provide a very attractive alternative to EIS and SEIS.”