Women get better small business deal?

The chances of a prosperous new year for small businesses have already been dented by the Chancellor before 2006 has got underway. You can say goodbye to almost £2,000 for a start.

In his Pre-Budget Report earlier this month Gordon Brown announced the withdrawal of a lucrative tax break. Apparently as an anti-avoidance measure he is changing the rules that currently allow small limited companies to pay no corporation tax on profits of up to £10,000. Indeed, the capital gains tax payable on the first £10,000 in profits will be increased from 0% to 19%; that means a small company can kiss goodbye to £1,900.

Consistency an unpopular word for Gordon

Consistency is obviously not such a popular word as prudence with the Chancellor. As recently as 2002 he reduced the rate of corporation tax from 10% to 0% on profits up to £10,000, and businesses earning less than £50,000 in profits each year were eligible for relief.

The consequence of that announcement three years ago was thousands of sole traders and partnerships becoming limited companies in order to take advantage of the tax break. The likes of plumbers, electricians, private security outfits, small consultancy firms and freelance journalists were encouraged to incorporate; they are now all victims of a direct tax hit.

The Association of Chartered Certified Accountants has noted that this month's rule change was announced as a simplification. But it's only a simplification because the Government made it complicated three years ago. They have moved to close a loophole that they created themselves. It's no good crying wolf about a tax relief just because people use it.

Limited companies hardest hit

Obviously the smallest limited companies will be hit hardest by withdrawal of the 0% tax break. From next April all limited companies will pay at least 19% on all profits. Nonetheless there are still advantages to operating in this business way rather than as a partnership or sole trader. Notably, liability for any debts incurred by the company is limited (sole traders and most partnerships are fully liable for debts) and lower corporation tax rates apply.

Silver lining?

The Chancellor has said that as way of compensation for the 0% tax rate loss, he is increasing the small business investment allowance from 40% to 50%. This is a move that could be viewed as distinctly underwhelming given that small firms making less than £10,000 profit already benefit from 50% capital allowances.

Good news in the Pre-Budget Report?

However, there could be some good news in the Pre-Budget Report for the economic storm-tossed small business owner. First you will be allowed to offset the expense of new accounting rules that come into force this year. The cost of implementing the UTIF40 regime, which changes the way companies account for work in progress, can be spread over a three to six year period.

Second, Gordon Brown has pledged to try to reduce the complexity of VAT payments for more small businesses. At present only companies with an annual turnover of less than £660,000 are allowed to complete one VAT return a year (instead of the usual four) and to pay VAT only on received payments rather than all invoices.

If the European Commission grants permission, the Chancellor said he would introduce measures allowing this simplified VAT system to be used by firms with turnovers of up to £1.35 million. He has also earmarked £36 million to increase the supply of affordable loans for business-starters operating on low incomes, and another £38 million a year until 2008 to compensate for staff absence occasioned by training provision at companies with less than 50 employees.

Meanwhile, regional development agencies (RDAs) are to be scrutinised and be subject to performance assessments from 2006. The intention is to bring a level of consistency to the help offered by RDAs to small businesses, a service hitherto subject to conflict and dissatisfaction.

Women to get a leg up

Finally, small businesses run by women are to get a leg up. The Chancellor plans to launch a National Womens Enterprise Task Force to promote female enterprise. And being the better housekeepers women are probably not too fazed about losing £1,900 from the first £10,000 of profit.

21 December 2005 © Moneyextra.com

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