Business tax impact a key factor

Simon Burton
Director of Specialist Tax at Johnston Carmichael

There will be interesting changes for businesses, says Simon

From a business perspective, followers of Gordon Brown's previous Budget statements will be familiar with a number of recurring themes.

Alongside a fondness for using statistics to support his claims and his weakness for using those dreaded words 'prudence' and 'fairness', he has laid great emphasis on using the tax system to encourage enterprise.

He also used recent Budget statements to rail against what he sees as the tax avoidance industry and those who do not pay 'the right amount of tax'.

While the headlines will focus on the cut in income tax from next April, in this his eleventh and most likely final Budget statement, he once again picked up on these two themes.

While the main focus of his statement was, as had been widely expected, increased spending on education and support for families, there were some very interesting changes announced for both small and large businesses.

For large businesses, he announced a cut in the rate of corporation tax from 30% to 28% from April 2008.

The intention here, of course, is to help to persuade the very largest, international businesses to stay in the UK, following speculation that high tax rates were leading many to consider setting up shop - or bank - elsewhere.

There has been much criticism of the existing system of capital allowances, primarily because of its complexity Budget reaction in Scotland

But the rate applies not just to large companies but to all companies with significant profits. So this will be widely welcomed.

At the same time, there are to be significant changes to capital allowances.

These are the allowances that businesses can set off against their tax bills when they spend money on capital expenditure - a new machine, for example.

There has been much criticism of the existing system of capital allowances, primarily because of its complexity.

Under the banner of modernising capital allowances, he proposes to simplify the system - so that allowances for spending on plant and machinery will be a standard 20% each year, for example - while at the same time introducing enhanced allowances for environmentally friendly assets.

Mr Brown announced a cut in the rate of corporation tax

There will also be increased help for company spending on R&D, seen as the foundation of the innovative Britain that Gordon Brown has placed such emphasis on fostering.

But tax avoidance was sure to appear in some form. Under the heading of 'artificial incorporation of small business' there are to be measures to tackle what he sees as illegitimate tax avoidance.

In recent times many thousands of small businesses have converted to limited company status, taking advantage of the low rate of company tax of 19%.

This rate will now increase each year by 1%, taking it to 22% by 2009 - not far below the new large company rate of 28%.

A reference to aligning National Insurance rates also seems likely to be targeted at those same tax avoiders.

The vast majority of UK companies, however, are small companies.

So they will all see an increase in their tax bills, just when the fall in income tax comes into effect.

Once the dust settles and we all have a chance to digest the detail behind the Budget speech, I suspect that the extra tax burden on small businesses will be the focus of a great deal of attention.