Gordon Brown’s decision to raise tax on the profits of companies making up to £300,000 a year could cost Britain the creation and expansion of small business.
Kicking off the first day of his group conference, David Frost, of the British Chambers of Commerce, said that the chancellor’s hike sends the wrong message to entrepreneurs.
Although Mr Frost welcomed the tax cut for big business, and acknowledged the chancellor understood the enterprise agenda, companies, he hinted, were being sent conflicting signals.
He asked: “What sort of message does he send out when, in the Budget, he increased the small-firm rate of corporation tax?”
In line with the Budgetary verdicts of business advisors, the chamber supported the reduction to mainstream corporation tax, yet it agreed with most small company owners, by saying:
“But this good work was undone with the increase in the small firms rate.”
The tax hike (to 22%) by 2009 will earn the Treasury an extra £820million, before it costs businesses an initial £370million in 2008.
When asked about the implications of the increase, seven out of ten company owners said that their business would be worse off as a direct result, according to a BCC members’ survey.
A similar response came from a post-Budget poll by the Forum of Private Business: 80% of its members said the hike was harmful, while other measures were ‘detrimental’ or ‘irrelevant’.
Mr Frost believes special enterprise zones should be created, to offer start-ups in poor areas exemption from business rates, employment law and National Insurance.
Already the government appears to be moving in such a direction: the small print of the Budget floated the idea of some firms having “complete or partial” exemption from red tape.
The prospect compliments the government’s renewed effort to ensure ‘impact assessments’ of policy give more consideration to micro firms, as part of a ‘think small first’ approach.
Yet speaking yesterday, one of Gordon Brown’s closest allies hinted that the government was already ‘thinking small first’, as evidenced, he claimed, by last months’ Budget.
Ed Balls, the Economic Secretary to the Treasury, said that the revenue raised by the higher SCR would be returned to small firms through bigger investment allowances.
According to The Times, he told the conference: “You will know of the problem that has arisen in recent years, where many of those paying the small companies’ rate were, in fact, individuals incorporating to avoid paying their due share of tax.
“Without addressing this, this trend would have continued at a cost to the rest of the taxpaying population of billions of pounds.”
The claim is similar to the minister’s comment on the evening of the Budget, published in the Wakefield Express.
“To tackle tax avoidance the chancellor has had to raise the small companies tax rate, [but] all the extra revenue is being put back to small business with generous allowances for investment and research and development.”
The argument is one that irks Robert Peston, the BBC’s business editor.
“I am uncomfortable about the Treasury’s attempt to compensate companies by effectively bribing them to invest through enhanced tax breaks on investment,” he wrote on his blog.
“If it does lead to incremental investment, much of that new kit will be unnecessary, white-elephant stuff, the equivalent of gold taps.
“Ideally, investment should only be made following a hard-nosed assessment of whether the discounted cash-flow returns likely to be generated by the investment exceed the cost of capital. And a sensibly designed tax system shouldn’t distort that assessment.”
Peston said there is “some logic” on the Treasury’s part to hiking the tax on small businesses to head off “individuals gaming the tax system.”
“But genuine discomfort will be caused to perfectly legitimate businesses,” he added, “– which seems an odd thing to do, given the years of rhetoric from Brown that small companies are the lifeblood of a growing economy.”
Apr 19, 2007
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