The Budget: getting behind small business
While most people watched the new coalition government’s debut budget from behind the sofa, in fear of tax hikes and public sector pay freezes, Britain’s small business community actually had something to smile about.
Chancellor George Osborne started to follow through on his party’s pre-election manifesto promise to recognise the importance of small businesses in Britain, and the vital role they must play in the country’s economic recovery.
Finally, it would seem, a government is offering the support that small businesses have been crying out for, says Penny Power, founder of Ecademy, the online networking site for small businesses.
“The important thing for us is that the government has put their money where their mouth is, and the overriding feeling that I get from the budget is that nothing negative is in there, strategically, fiscally and tactically they are getting behind small businesses,” stresses Power.
Tax cuts and reviews
The chancellor revealed a cut in Small Companies Tax from 21 to 20 per cent, something that Labour intended to increase to 22 per cent. He also announced a review of the IR35 tax rules. This legislation ensures that, if the relationship between a worker and a business would have been straightforward employment had it not been for an intermediary, the worker pays tax and NI contributions on a basis which is comparable to what an actual employee of the client would pay.
Power argues that contractors are the lifeline of small businesses, offering them flexibility and opportunities to spread cost and risk.
She explains: “A lot of small businesses grow on a contractor basis, and if we [Ecademy] employed everyone that worked for us we’d need a huge office space. We, and other small businesses, simply don’t need to spend time and money managing internal resources. The previous government noticed a move towards the contractor model and they put this tax on small business, so I support the abolition of IR35.”
The VAT rise and the consequences
Another key tax change that the chancellor announced was the rise in VAT from 17.5 per cent to 20 per cent. Although it was expected as part of the government’s plan to reduce debt across Britain, small businesses will feel the rise acutely.
According to Ecademy’s Power, the increase will probably be borne by small businesses that are keen to hold on to their customers while the country continues to haul itself out of the economic downturn.
“The VAT increase is interesting. I think most small companies will have to absorb that, which means a reduction in profit by 2.5 per cent as you’re not passing the increase through to the customer,” says Power.
She adds that most small businesses will have enjoyed the recent VAT reductions to 15 per cent, so to hike it up now would be a difficult step to take.
“As a company we’ll have to absorb that cost, as I think most small businesses will, and we wouldn’t pass on the increase to customers. It’s important to remember that when VAT was decreased for a short period, many didn’t reflect that in their charges, so there is a certain element of taking the rough with the smooth for small businesses,” she explains.
National Insurance holiday
The chancellor also made provisions for small businesses outside London and the south east with the announcement of a National Insurance (NI) holiday. For the first ten staff they employ, they will be exempt from £5,000 of NI Contributions. In addition, from April 2011, the threshold at which employers start to pay NI will also rise by £21 per week.
For many it is probably a case of ‘so far so good’ for the new government because while some might not support their policies at least the headline manifesto points appear to have been confirmed.
For small business leaders the future looks positive at the moment, but it remains to be seen if the cuts in Small Business Tax outweigh the cost of the VAT rise.
