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Last Updated: Wednesday, 17 March, 2004, 16:39 GMT
Brown moves the goalposts
Analysis
By Anne Redston
Tax partner, Ernst & Young

Anne Redston

It was not a headline writer's dream. Gordon Brown's eighth Budget concentrated on stability and economic growth. But the small print revealed its usual dose of nasty surprises for British taxpayers.

Top of the list is the change to small business taxation.

This will affect thousands of family-owned small enterprises, from hairdressers to taxi drivers, up and down the country.

What it means is incorporated businesses who pay a dividend will be taxed at 19% instead of paying no tax at all on the first 10,000 of profits.

Many businesses over the last two years have incorporated to take advantage of this zero rate band, only to find that the chancellor has now snatched back what he gave them so generously two years ago.

This new tax regime comes into effect from 1 April, so businesses have little time to prepare themselves for the extra cost involved.

Company threat

For many this could have a devastating effect, and some may not be able to meet their existing financial commitments such as hire purchase loan agreements and mortgage payments.

It is ironic that a chancellor who champions enterprise and small business should have reacted so suddenly and harshly. It looks like he has panicked.

The sad irony is he may be endangering that enterprise culture he so desperately seeks
Anne Redston

Expectations that this new regime would supersede the much hated IR35 and Section 660A rules have been dashed. Small businesses will now have to deal with all three tax measures.

Businesses are going to need legislation very quickly in order to understand how profits and dividends will be matched, and exactly how the rules affect them.

However, perhaps we should be grateful for small mercies.

There was speculation that this new regime would be harsher still, and involve national insurance on dividends and catch more companies.

Gordon is also sweetening the pill by increasing first year capital allowances from 40% to 50%.

This means if you invest your profits in equipment you will get your tax relief faster.

He is also relaxing the rule on research and development so that businesses, including small businesses, can claim for more types of expenditure.

Inheritance tax

The other area where we are waiting for more detail is on the rules for "pre-owned assets".

There were concerns that the chancellor was going to tax people who had helped their children buy a house or transactions between married couples.

It is good news that the government has now confirmed that the new rules will not affect what they have called "legitimate transactions" between family members.

There are still worries that the new tax will be effectively retrospective, as it will catch arrangements, such as trusts, which were set up long before the chancellor dreamed up these new rules.

The whole irony of the chancellor's general crackdown on tax avoidance is that it coincides with cutbacks in the Inland Revenue.

This is a time when small businesses and taxpayers need more help than ever.

The chancellor's merger of Customs & Excise with the Inland Revenue, although there to increase efficiencies and streamline customer service, will cut more than 10,000 jobs in the Revenue.

It would be surprising if this has no effect on the availability of accurate, and timely advice for taxpayers - especially smaller enterprises confused by new tax changes.

The chancellor began his speech by saying there were 600 small businesses starting up every day.

But after his tax changes this number is likely to decrease. The sad irony is he may be endangering that enterprise culture he so desperately seeks.




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