Blair's new sales tax under fire

Business cool towards `unfair' idea of taxing turnover instead of profit

Labour Party proposals to tax small businesses on turnover rather than profits have been branded unfair and unworkable by accountants and commerce.

Although the Labour Party stressed that the proposal was merely being considered and had not been adopted as policy, there is concern that Tony Blair may choose to single out a turnover tax as the only specific fiscal measure to encourage small businessmen.

Answering a question on tax initiatives in the autumn newsletter of Aims, the Association of Independent Accountancy Practices, Blair said: "Specifically we are examining the possible reform of corporation tax to levy it on turnover rather than profits."

Otherwise Blair's answer was couched in general terms. He said taxes should encourage work, be fair and promote long-term investment. He said the party was looking at measures to avoid creating unnecessary cashflow difficulties for firms.

The London Chamber of Commerce said a turnover tax was "unfair" and that it would oppose any proposal.

Peter Wyman, a tax partner at Coopers and Lybrand, said the proposal would create severe practical difficulties.

"There are several problems to be dealt with such as the definition of a small business and the transition to a new regime," he said. "If the aim was to make the proposal compulsory and tax neutral it would create a huge number of winners and losers. If the tax was optional then it would be costly to the Exchequer since only those companies with low turnovers and high profits would choose to be taxed on that basis."

Barbara Roche, Labour spokesman on small businesses, said the proposal had stemmed from consultations with small firms and was an idea generated by them.

"This is not ruled in and it is not ruled out," she said. "At the moment we are consulting widely as part of of the process of setting a growth agenda."

The Labour Party's aim is to reform taxation in a way which assists small and medium-sized enterprises by providing a stable and predictable system against which to plan and which is simple in order to keep down costs.

Mr Wyman said: "It would have some attraction if it took away the need to maintain accounts but on a deregulation basis those attractions are marginal."

The rationale behind a turnover tax is that over the long term it is a more stable figure. However, a turnover tax could also act as a disincentive for small businesses since a new company generates sales in its early years, but not profits.

As Blair himself pointed out, one survey had found that fewer than one in five of small business start-ups survive more than six years. That implies heavy losses, which would be increased by a tax on turnover.

A new turnover tax would be extremely complex if it was made compulsory yet designed not to disadvantage new enterprises. That would run contrary to the Labour Party's intention to make the tax system more simple.

Answering the same question on tax initiatives in the Aims newsletter, Prime Minister John Major renewed his pledge to abolish inheritance tax and capital gains tax when it is safe to do so.

"I have made it clear that I have inheritance tax and capital gains tax in my sights," he said. "People who have worked hard to build up a business should be allowed to enjoy the fruits of their labour and pass on more of it to their children."

Paddy Ashdown, the Liberal Democrat leader, said his party would seek to integrate and simplify employees' National Insurance contributions and income tax in the long term.