Small Businesses Caught Up In Chancellor's Promise and Pillage Approach

3.39.03pm UTC (GMT +0000) Wed 17th Mar 2004

The Liberal Democrats have questioned the Chancellor's decision to tax the distributed profits of incorporated companies at 19%, suggesting that today's Budget announcement reverses part of the special tax status the Chancellor gave small companies when he introduced a 0% rate of corporation tax just two years ago.

Commenting, Liberal Democrat Small Business Spokesman, Brian Cotter MP said: "Many small firms signed up to take advantage of the tax sweeteners on offer, contributing to a 43% rise in the number of businesses incorporating, over the last year alone."

"Now Gordon Brown is raising their tax bills to subsidize his own headline grabbing policy, which has cost the Treasury around £1 billion a year in lost revenue."

"Having survived 18 years of 'boom and bust' under the Tories, small businesses are now living under Labour's tenure of 'promise and pillage.'"

"Today's announcement looks as though it will add further complications to small businesses solely in order to avoid a more obvious u-turn."

"It would be far better if the Chancellor kept his prying fingers under control and reduced burdens on business by implementing a fair and transparent system of taxation that taxed all forms of income equally."

ENDS

Notes

• Over recent years the Chancellor has offered incorporated companies various tax advantages that have not been made available to unincorporated firms. These included a zero starting rate of corporation tax for taxable profits under £10,000, which was introduced in the 2002 Budget. Today's Budget announcement effectively reverses part of the special tax status the Chancellor gave small companies when he introduced a 0% rate of corporation tax just two years ago.

• The Federation of Small Business consistently warned the Government that they were storing up trouble for themselves by creating a significant tax advantage for one type of business structure over another. As a result, many firms chose to take advantage of these tax advantages and the number of new incorporations rose from 67,761 in 2000 to 282,207 since 2000.

• The Treasury had not accounted for the fact that many of the newly incorporated businesses would choose to receive a large proportion of their income as dividend payments in order to reduce their tax liabilities. As a result, the Exchequer has been left out of pocket to the tune of over £1 billion a year (Institute of Fiscal Studies).

• In the Pre-Budget Report, the Chancellor therefore indicated that he would change the way that small incorporated companies are taxed. Paragraph 5.91 of the Pre-Budget Report 2003 proposed that the Government would "bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company."

• Today's announcement is therefore an attempt to recoup part of the loss the Treasury has made without publicly acknowledging that the Chancellor's own policy was responsible for this loss.

Case Study

• Core 10 Limited is a one man company, based in Bethnal Green, which provides specialist internet development services to a range of clients including private companies, public bodies and non-government organisations. The company's owner, Karl Bunyan, has been in business since June 2003 and is currently in the process of merging his business with a similar company. When Mr Bunyan took the decision to establish himself as a limited company a large part of his decision was based upon the tax benefits that were on offer to incorporated firms, including the 0% rate of corporation tax. He chose to take advantage of this because he expected his profits to be relatively low in his first year of trading. Investments in computer and other office equipment have meant that the company has only recently begun to enter into profitability. The original business plan had been written with the expectation of a low corporation tax bill offsetting this investment.

The Chancellor's refusal to outline details of his proposals until today has created a great deal of uncertainty for Mr Bunyan and has left him unable to plan ahead. Decisions including the ability to take on new staff have been postponed until the financial impact of the Budget on the businesses finances can been calculated. As a result, the merger between his business and a second company has been delayed, as neither party could determine how their tax liabilities might change as a result of today's Budget.

For further details please contact Karl Bunyan on 020 7613 2259.