[an error occurred while processing this directive]
BBC News
watch One-Minute World News
Last Updated: Thursday, 22 March 2007, 21:27 GMT
Budget impact for small companies
By Patrick Stevens
Tax partner, Ernst & Young

In outlining his commitment to business, the Chancellor introduced a number of extremely positive measures for businesses - but what do they mean for small and medium-sized companies?

The big headline in this Budget was the reduction in the main rate of corporation tax from 30% to 28% with effect from the financial year 2008.

This rate applies to companies with tax profits in excess of £1.5m and represents a real step in the drive to show the competitiveness of the UK in the global marketplace.

Disappointing move

However, small and medium sized companies (SMEs), particularly those with profits of less than £300,000, will not benefit from this reduction.

worker in UK manufacturing plant
Manufacturers are losing out in Brown's 11th Budget

Instead, the small companies' rate will be increased from 19% to 20% from 1 April 2007, with further increases to 21% in 2008 and to 22% in 2009.

The chancellor described this measure as a deterrent against tax-motivated incorporation as a company, but it represents a disappointing move for SMEs who are already struggling with high operating costs.

Significant changes have been proposed to the rates of capital allowances for expenditure on plant and machinery.

From 2008/09 the main rate of allowances will be reduced from 25% to 20% per annum on a reducing balance basis.

Additionally, the rate of allowances for fixtures integral to a building will be reduced from 25% to 10%.

For big companies, the reduction in plant and machinery allowances to 20% is the downside to set against the corporation tax rate reduction.

Winners and losers

These changes to allowances will cost taxpayers approximately £3.7bn over the next three years (more or less the same as may be saved through the reduction of the rate of corporate tax).

The new 10% rate for fixtures may lead to considerable debate on whether a fixture is ¿integral¿ or not.

For smaller businesses the increase in the tax rate and reduction of allowances is all bad news.

Manufacturing companies will be harder hit than service companies
In return, the chancellor extended by one year the 50% rate for first year capital allowances (FYA) for small business spending on plant and machinery, while the rate for medium-sized companies remains at 40%.

As a concession to SMEs hit by the reduction in plant and machinery allowances, FYA will be replaced in 2008/09 by a new annual investment allowance, which will be limited to the first £50,000 of expenditure.

It is unclear exactly how this new annual investment allowance will work, and it is to be the subject of consultation.

However, it is likely that this new relief will provide less relief than the current FYA for small or medium-sized companies investing heavily in plant and machinery, since there is no current monetary limit on FYA. The current definition of small and medium-sized companies is by size etc, rather than the amount being spent on plant and machinery.

Manufacturers hit

The capital allowances changes appear to reflect a failure to recognise that manufacturing companies, for whom investment in fixed assets is often considerable, will be harder hit than service companies.

This is surprising, particularly at a time when UK exports are falling.

On the plus side some of the conditions relating to enterprise incentives for investment in smaller companies have been relaxed, although two new conditions which must be met by investee companies have been introduced and may unduly restrict the size of companies qualifying for investment from these sources.

Maintaining the government¿s commitment to encourage growth through innovation, an extra £100m will be made available under research and development tax schemes.

R&D boost

SMEs directly undertaking qualifying research and development (R&D) activities are currently eligible for an enhanced deduction of 150% of the qualifying R&D expenditure, or the company can claim a cash credit if it is in a loss position and has paid sufficient PAYE.

The enhanced deduction will now be 175% from 2008. Added to that, from 2007 the current SME scheme will be extended to companies with up to 500 employees.

The R&D changes are generous, although they have been in the pipeline for some time.

One stumbling block is that we are still waiting to hear whether the increased criteria limits for SMEs meet State Aid rules approval.

So, on the whole, there was a mixed bag for SMEs.

But the overriding sense is that in his drive to demonstrate his commitment to global competitiveness for the UK, the chancellor has forgotten the importance of looking after the small and medium sized companies that form the majority of UK businesses.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

The BBC is not responsible for the content of external internet sites

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific