Darling offers helping hand to business
Chancellor Alistair Darling has attempted to smoothe over the damage the credit crisis has wreaked on smaller businesses.
Struggling small and medium businesses received a much-needed lifeline of measures in the 2008 pre-Budget report that aim to keep them afloat as cash flow and credit problems continue to bite.
The UK’s 4.7 million small and medium sized businesses (SMEs) have been given a reprieve from the planned increase in corporation tax, set to rise from 21% to 22% in April next year. The move could save businesses as much as £400 million at a time when they are struggling to cope with the economic downturn.
Some 75,000 previously profitable businesses which have since slipped into the red were also given a lifeline with losses of up to £50,000 for one year now allowed to be offset against profits from the last three years.
Those that are facing difficulty meeting their business taxes, including VAT, corporation tax, income tax and national insurance, have also been given the option of spreading their payments “for as long as they need”.
Sue Bonney, head of tax at KPMG Europe, says: “Smaller businesses will welcome extra time to pay tax bills and will be relieved to see the rate rise deferred. At a time when they may be struggling to get funding from banks, this could really make a difference."
But she also warns: “Many of the measures for business announced today have been targeted at SMEs – although with £3 billion of measures to go around 3.6 million companies, it won’t be exactly a bonanza as this works out at less than £1,000 per company.
“Anything that comes wrapped up in red tape is always unpopular and the detail on many of these measures is yet to emerge. And overall the lack of detail is disconcerting.”
In the day–to-day running of businesses, Darling announced a temporary increase in the threshold for empty property relief to £15,000. Around 70% of all empty properties for the coming tax year will be exempt from business rates.
Funding issues came back into the spotlight with multi-billion pound cash injections available for small businesses. Around £1 billion will be made available by the end of the year through a £4 billion deal between UK banks with the European Investment Bank while the government is also to offer credit through a temporary Small Business Finance Scheme.
Darling said: “It should allow small businesses to borrow sums from a thousand pounds to a million pounds at more flexible terms than before, making lending more affordable and easily accessible.”
Smaller exporters are also in line for a £1 billion boost through Export Credit Guarantees. But larger businesses were celebrating after Darling confirmed the launch of a tax exemption on the dividends paid on their foreign subsidies which have led to a host of businesses leaving the UK.
Chris Sanger, head of tax policy at accountancy giant Ernst & Young, says: “Following a spate of high profile corporate departures from the UK over the last 12 months, the chancellor has now set out a new controlled foreign companies regime focused on protecting the UK from diversion of profits rather than taxing profits otherwise unconnected with the UK.
"This should help to stem the tide of companies leaving these shores and may even make the UK more competitive for the future."
Peter Cussons, tax partner at PricewaterhouseCooper, adds: "At long last we have a commitment to introduce the foreign dividend exemption from 2009. This is most welcome, subject to us seeing the details regarding eligibility and companion revenue raising measures."
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.