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 Wednesday, 17 April, 2002, 16:47 GMT 17:47 UK
Brown smiles on small firms
Small firms have once again been the main target of tax breaks announced by Chancellor Gordon Brown in his Budget.

However, a sharp increase in payroll costs will hit UK industry with a billion-pound bill.

Key measures announced by Mr Brown are a simplified VAT regime, a lower tax rate for small companies and a cut in the starting rate of corporation tax to zero from 10%.

"This is now the most favourable corporation tax regime for small companies in any of the advanced industrial countries

Gordon Brown
And big business will receive the widely trailed tax credits for investments in research and development (R&D) - a measure affecting about 1,500 firms.

The key points of many of these measures had been pre-announced at the end of March, as the government was keen to highlight its pro-business stance ahead of a Budget day focusing on taxes and public services.

Paying for the NHS

Business organisations like the Engineering Employers' Federation welcomed the tax breaks for small firms, but nonetheless had few kind words for the chancellor.

They calculate that the raise in employers' National Insurance contributions will cost business about 4bn a year from 2003.

"The last thing manufacturers needed from the Budget was a major hit to their cost base", said Martin Temple, the organisation's director general.

NI contributions will go up by one percentage point to 11%, and now extends to benefits.

David Lennan, director general of the British Chambers of Commerce, said the cut in the small companies corporation tax would "not compensate for the higher national insurance contributions small businesses are being forced to make".

From micro business to big business

Boosting small business has been a recurrent theme of the chancellor's Budget, with his wish to "see a more enterprising Britain".

Back in 1997, when Labour came to power, he cut the small companies tax rate, and again in 1998. It will now be trimmed again - with immediate effect - by one percentage point to 19 pence in the pound.

And from the beginning of this month, small firms with taxable profits of less than 10,000 will not have to pay any corporation tax at all.

Mr Brown sees this as helping companies up the ladder "from employment to self-employment, from micro business to growing business".

Push for e-government

Potentially the biggest boost, though, will be a simplification of the VAT regime for companies with a turnover of up to 100,000 by introducing a flat rate calculation of payments.

Mr Brown believes that this will cut administrative costs for about 500,000 UK firms with immediate effect.

He also promises to extend the scheme in April next year to cover an additional 200,000 firms with a turnover of up to 150,000.

The push for e-government continues, with 420m spent over eight years to help small firms bring their payroll systems online.

Capital gains tax will be cut as well - to 20% for assets held for one year or more, and 10% for those held for more than two years.

According to Mr Brown, this will result in the "most favourable corporation tax regime for small companies in any of the advanced industrial countries".

Boosting deprived areas

In previous budgets, Mr Brown had repeatedly tweaked the tax regime to help small firms doing business in poorer areas.

This budget gave them yet more help, with stamp duty on commercial properties in selected areas abolished altogether.

A new community investment tax credit and a 40m venture capital fund for deprived areas - both trailed extensively in previous statements - provide additional help.

R&D boost

When the business measures were outlined three weeks ago, industry leaders had broadly welcomed the measures.

Investment in R&D
1999 - % of GDP
UK 1.8%
Germany 2.4%
US 2.7%
France 2.2%
Japan 3%

Source: Economic Trends 2001

Small firms already enjoy tax breaks for R&D investment, and in last November's pre-Budget speech Mr Brown promised to extend it to big business.

The rate will be volume-based - a key demand of investors - and be set at 25%. According to Mr Brown this will give firms a boost of 400m.

When the Treasury confirmed the extension of the R&D tax legislation in March, it had not announced the exact level of the tax rate.

The move will benefit about 1,500 large UK companies, with total R&D spending of more than 11bn.

Enterprise culture

Nurturing an "enterprise culture" in Britain is one of the chancellor's favourite themes, and he hopes to boost it by promising generous tax breaks for firms that have to restructure.

To make sure they do so for commercial rather than tax reasons, capital gains taxes on sales of "substantial shareholdings" - probably stakes of more than 10% in a firm - will not be taxable, a saving for them of 150m a year.

Different tax treatment for intangible assets such as the value of brands or patents is being promised as well - a tax break worth 200m in the long term - all part of the government's drive to support the emerging "knowledge-based economy".

The early announcement of the Budget's business measures had been criticised by some opposition politicians, but pleased industry, which had feared its cause might be overlooked in the general tax debate.

The tax burden

Foreign firms operating in the UK but paying little or no tax will have to brace themselves for a visit from the taxman. From next year they will face similar corporation tax rules as in the US and EU countries such as German and France.

The Treasury hopes to raise about 350m a year through this.

And despite the government's avowed pro-business stance, not all of UK industry is happy with the overall tax regime.

"Red tape" and the cost of administering government regulation is an often-heard complaint.

And industries are still smarting from a raft of tax measures introduced in recent years.

The climate change levy - punishing polluters and high users of fossil fuel - continues to be contentious.

  • Firms are also complaining about the abolition of dividend tax credits.
  • The construction industry is still vocal about the new aggregates and landfill tax, which kicked in on 1 April this year.
  • The recent spike in oil prices has made road and fuel duties an issue yet again.
  • Stamp duty on housing is hitting the construction industry.
Overall estimates of the tax burden for business are subject to much dispute, but the Conservatives say the Labour government has introduced an "extra 5bn worth of taxes on business" and an "extra 5bn worth of red tape since 1997".

Long time coming

Some of the measures now announced in the Budget have been on the agenda for a fairly long time.

R&D tax breaks had been under consideration for more than a year.

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  The BBC's John Moylan
"This is a big boost for the public finances"

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