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Last Updated: Thursday, 2 December, 2004, 16:02 GMT
Small-firm focus from Chancellor
The Chancellor wants to promote scientific R&D
Small businesses have come under the spotlight in the pre-Budget report with measures to boost research and development and ease regulation.

Gordon Brown said he would re-examine tax credits for mid-sized firms and create a new small-business unit which consider creating a simpler tax return.

Business organisations broadly welcomed the Chancellor's proposals for boosting investment in research and skills.

But there was dismay over the planned increase in maternity leave.

Better research

Gordon Brown said in his pre-Budget speech that to succeed in the global economy Britain had to "invest long term and establish world leadership in science, education and skills, and enterprise".

He said that as part of the government's plan to encourage scientific research and development he would:

  • re-examine tax credits on research and development (R&D) for mid-sized science firms;

  • remove tax barriers to the formation of university spin-off companies;

  • establish an industry-led Science Forum chaired by AstraZeneca chief executive Sir Tom McKillop;

  • via the northern Regional Development Agencies promote "Science Cities" for the north of England, starting with Manchester, Newcastle and York.

Intellect, a trade association for the UK IT, telecoms and electronics industry, welcomed the emphasis on encouraging R&D.

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But it also said more help should be given to large companies.

"If R&D is to increase within the UK then this reviewing and benchmarking process must take place across the board, and not focus solely on the medium sized enterprise."

Nina Amin, tax partner at KPMG, also questioned whether small businesses were getting too much attention.

"The question is does he need to focus on the larger firms as these are the firms that will drive research forwards," she said.

Easing the burden

The Chancellor also announced that a new small business unit was being created, headed by David Varney, the new executive chairman of the integrated Inland Revenue and Customs & Excise.

The proposals on maternity leave have clearly been made with a general election in mind and with little thought to the impact on small employers
Federation of Small Businesses

The unit will look at creating a single tax return for small business that will bring together all taxes.

"Any move to remove the regulatory burden for small business is welcome," said Kevin Nicholson, tax partner at PricewaterhouseCoopers.

"But we wait to see if this is the wide-ranging review of small business tax that we hoped for," he added.

The interim Hampton report into cutting red tape and regulatory burdens on small businesses was also published.

The study concluded that, outside high risk areas, the emphasis should be on advice rather than inspection, proposing a more collaborative approach between businesses and regulators, with fewer and more simplified forms.

The CBI business organisation said that overall businesses would be "pleased" with pre-Budget report.

"He is right to equip the UK for the serious competitive threats this country now faces," said CBI director-general Digby Jones.

"If we don't invest more in innovation and skills, as well as stimulate the success of small businesses, frankly we will get left behind by economies that have a much lower costs."

Maternity leave 'headache'

Although business welcomed most of the pre-Budget measures, the Chancellor's measures to extend maternity received a cool response.

From 2007 paid maternity leave will be extended to nine months from six with the aim of a further increase to 12 months by the end of the next parliament. Mothers will also have the right to transfer their entitlement to paid leave to the father.

Small business wants to break free of red tape

"We have concerns about the impact the extensions of paid parental leave will have on business, particularly small businesses," said the British Chambers of Commerce.

"A business with limited resources and staff who multi-task will find this very tough."

The Federation of Small Businesses (FSB) was more blunt.

"The proposals on maternity leave have clearly been made with a general election in mind and with little thought to the impact on small employers," the FSB said.

"All absence from work comes at a cost and small firms are hit the hardest from the increases in costs associated with providing temporary cover.

"The administration of maternity leave is already a headache for small firms and the proposed transferability of maternity leave will make this worse."


Many tax experts had been expecting the pre-Budget report to clarify the tax situation for small firms.

The 2004 Budget saw the introduction of a 19% tax rate on the dividend profits of incorporated firms.

This had been introduced after a previous government decision to reduce the rate of corporation tax on profits up to 10,000 from 10% to 0%.

However, this move led to a surge in sole traders incorporating their business to take advantage of the zero tax rate, which is why the government acted earlier this year.

In a discussion paper released with the pre-Budget report, the government made no further proposals but said it would "continue to monitor this area".

It also asked for comments on how the taxation system for small businesses should develop.

Tax experts said firms were being asked to consider a trade off.

"At the moment we have a complex tax system which if you know what you're doing you can avoid paying a lot of tax," said Anne Redston, tax partner at Ernst & Young.

"The debate is over whether it is better to have a simpler, more coherent system, but with fewer tax planning/avoidance opportunities."

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