Summer Budget 2015 - an attack on small businesses

The following are the reasons why I believe that the Summer Budget on 8th July 2015 was the worst Budget for small businesses in the 21st century and one that discourages entrepreneurship. I very much hope that campaigning by the business community will lead to a number of measures being amended before April 2016.

1 Many small businesses will struggle to pay the new National Living Wage to its employees because they will not be able to afford it. This will not only lead to job losses but in some cases businesses will be forced to close. Furthermore, the new wage level coupled with the cost of the Auto-enrolment pension will deter small businesses from employing staff and so inhibit business growth. I believe that the Government's estimate of 60,000 job losses arising from the imposition of the National Living Wage is grossly understated, and it fails to take into account the number of jobs that will no longer be created because small businesses will be deterred from employing people.   

2 The new dividends tax appears to be a breach of the Government's pledge not to increase income tax and so business owners have every right to feel they have been let down and somewhat misled. Owners of small businesses who operate through limited companies and who receive a large proportion of their income from their company as dividends will suffer substantial new tax bills. Based on what we know so far, basic rate taxpayers will face new liabilities of up to 2,000 per annum from April 2016, an increase in their overall tax bill of over 20%, and the bills for higher-rate taxpayers will be even higher. The Government have sought to justify the new tax by stating that they are concerned that many businesses incorporate in order to save tax and avoid tax by paying dividends rather than salaries. They thus fail to appreciate that most businesses incorporate for commercial reasons rather than to save tax. Further, they could have redressed the balance by reducing the tax liabilities of unincorporated businesses rather than increasing the tax burden of incorporated businesses.

3 The reduction in the corporation tax rate of 1% to 19% does not take effect until 2017/18 and the further reduction of 1% to 18% does not take effect until 2020/21. In addition this measure is of greater benefit to larger businesses which generally make larger profits than small businesses. For example, a large company that makes a profit of 2m per annum will see a reduction of 20,000 in its 2017/18 tax bill, whereas a small company that makes profits of 20,000 per annum will see its tax bill fall by just 200. 

4 Whereas the Government announced reductions in corporation tax rates for limited companies there was no similar help given to the approximate 3 million sole traders who represent around 60% of businesses in the UK. Sole traders and partnerships continue to suffer the unfair tax called Class 4 National Insurance which is at a rate of 9% on a large portion of the business's profits. The Government merely stated its intention to consult on the reform of Class 4 National Insurance this autumn, but there is no indication that the overall rate will be reduced.

5 The increase in the Employment Allowance to 3,000 from April 2016, although helpful, is not enough to encourage small businesses to make a long-term commitment to take on employees because we do not know how permanent this allowance will be. Instead, there should have been a commitment to significantly reduce the Employer's National Insurance rate of 13.8% (the grossly unfair 'jobs tax') over the lifetime of this Parliament.    

6 From April 2016 companies where the director is the sole employee will no longer be able to claim the Employment Allowance against the Employer's National Insurance cost on the director's salary. In my view it is unjust for one director companies to be targeted in this way.

7 There is still no firm date for the abolition of Class 2 National Insurance contributions for the self-employed, the Government stating that they will consult on this in the autumn.

8 There is no longer tax relief on the amortisation of the goodwill cost on new business acquisitions.

9 From 1st November 2015 the rate of Insurance premium Tax will increase from 6% to 9.5%, a rise of 58%.

10 One of the largest complaints of small businesses is that the tax system is too complex. In spite of the existence of the Office of Tax Simplification this Budget adds further complexity to the tax system (eg the new dividends tax rate of 7.5%) rather than simplifying it.

Neil Phillips FCA

12th July 2015

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