Budget Special: Rates cheer for 400,000 firms

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Small businesses gave the moves to assist them announced in the Budget a cautious welcome, but criticised the Chancellor for not going far enough. They also warned that the phased abolition of profit-related pay (PRP) could increase their payroll costs.

The Budget announced four important benefits for small firms, the main one being the reduction in the rate of corporation tax paid by 400,000 small business from 24p to 23p, in line with the cut in the basic rate of income tax paid by three million self-employed people.

Mr Clarke froze the rates bills for small properties, claiming this would benefit 1.3 million small business properties in 1997/8. He also increased the registration threshold for value added tax (VAT) from pounds 47,000 to pounds 48,000.

The Budget introduced relaxations in the rules covering venture captial trusts (VCT) and enterprise investment schemes (EIS), which are used by small businesses and the self-employed.

But small companies expected to be hit by the hike in insurance premium tax to 4.0 per cent and lamented the lack of measures to encourage investment in plant and equipment.

Small businesses had hoped to see the rate of tax relief on investment in EIS cut to 20 per cent from its current level of 40 per cent and would have welcomed more progress on scaling back inheritance and capital gains tax.

Tony Bonner, chairman of the Confederation of British Industry's small and medium sized enterprise council, said: "We welcome the reduction in the rate of corporation tax for smaller firms, the decision to equalise the time limits on the recovery of VAT and the benefits to small businesses of the reductions in the uniform business rate."

But Mr Bonner added "The progressive abolition of profit related pay does not augur well for future payroll costs."

Simon Rees, senior partner at Rees Pollock, a London-based accountancy firm which specialises in small businesses, also warned of possible higher salary bills.

"There has to be some concern about the phased abolition of PRP. It's unlikely employees would accept a fall in take-home pay," said Mr Rees. "The PRP changes could hit small businesses quite badly over time."

He estimated a quarter of his small business clients used PRP, which Mr Clarke said would be phased out in three stages by 2000.

John Emmins, vice chairman of the Federation of Small Business which has 93,000 members across the country, said the Budget had done nothing to deter late payment of bills, estimated to cost pounds 20bn.. "I give it a cautious welcome but there's very little there. It hasn't done us too much damage."