Budget blues for smaller business

INITIAL REACTIONS to Gordon Brown's third Budget were that - as far as business was concerned - it was "rather dull". But as time has gone on it has become clear that companies are going to pay a higher price than they had originally thought for the assistance the Chancellor says he is giving families and the low paid.

There continues to be a good deal of support for the measures aimed at supporting small and medium-size companies and enterprise.

For example, Sheena Sullivan, tax partner with accountants Pannell Kerr Forster, said: "The Chancellor was far more generous than we expected and he has put his money where his mouth is in encouraging an entrepreneurial culture in this country."

Geoff Edwards, tax partner with Grant Thornton, added that help in the form of research and development tax breaks would be welcome news to small innovative firms.

Alex Henderson, tax partner with Arthur Andersen, said that closer examination of many of the proposals showed them to be of minimal value. He was particularly disappointed by the suggestions that the rules surrounding such incentives as the enterprise management initiative and the relief for corporate venturing would be modelled on those for enterprise investment schemes and venture capital trusts, which were notoriously difficult to operate in practice.

The tax faculty of the Institute of Chartered Accountants in England & Wales went further. The proposals outlined by the Chancellor disguised the reality that for most small businesses this Budget would be of little or no help, pointing out the following omissions:

The Budget provided no incentives to the unincorporated businesses that make up the majority of UK enterprises;

The proposed all-employee share scheme would be impractical for entrepreneurs who will be unwilling to lose control of their fledgling enterprises by granting shares to all employees;

The proposed Small Business Service appeared to offer little more than is already being offered by such bodies as training and enterprise councils, and the small business advisory services;

The anti-tax avoidance measure targeting one-man companies would mainly hit the computer industry, contradicting the Chancellor's call to encourage the growth of information technology.

"This is a very disappointing Budget for the small and medium-size business," said Francesca Lagerberg, senior technical manager at the institute's tax faculty.

When it came to large businesses, feelings ran even stronger. One particular cause for concern was what one tax expert called "a swipe at the City" in the form of the proposals to end the VAT exemption for services that outsourcing specialists, such as EDS and Unisys, supply to financial companies.

Marc Welby, VAT partner in the financial services office of Ernst & Young, said that Customs & Excise's plan to charge VAT in relation to lending and card operations that banks and other financial institutions obtain from third parties could add hundreds of millions of pounds of extra costs, at a time when such organisations were struggling to compete and to overcome the effect of Britain being outside the single European currency.

Grant Thornton said the Budget threatened to make Britain a "nation of paper-pushers", pointing out that the combination of the measures and all the new legislation would result in a hectic and expensive year.

Mike Warburton, the firm's senior tax partner, said: "On top of having to cope with the introduction of the Working Time Directive, minimum wage, and the new corporation tax payment calculations, employers will now also have to contend with the National Insurance legislation and the commencement of yet another class of contribution - the new Class 1B, which takes effect on 6 April 1999."

Other accountants added that the increase in the number of tax bands was going to make life increasingly complicated for both individuals and their employers. "It puts a lot of extra burdens on companies," said a spokesman for PricewaterhouseCoopers.