Stephen Herring: For most entrepreneurs the tax system has just got more complex and costly

Against a background of worldwide economic stagnation and the concluding acts of the war in Iraq, Gordon Brown was anticipated to struggle to keep to his self-imposed fiscal rules in this year's Budget. Instead he claims to be well within these over the economic cycle and points out that the UK economy has outperformed other G7 Nations.

He argued that this was the result of the Government's efforts to boost flexibility in the UK economy. But for most entrepreneurs the feeling will remain of an increasingly complex tax system where so-called incentives are costly to evaluate and administer. This review shows there were measures that may offer some assistance but many proposals will only serve to increase the tax compliance costs of small businesses for some very small savings.

Tax credits for research and development

A number of changes have been announced. Although not a major widening of the regime the changes are to be welcomed. Many entrepreneurs have found it has been difficult to identify the R&D expenditure that qualified as eligible for the tax credits. The new proposals envisage a widening of the definition of allowable expenditure and changes to ensure credits are available more easily.

Minimum expenditure has been reduced from £25,000 to £10,000.

Extension of enhanced capital allowances for IT expenditure

The Chancellor will have pleased many small businesses by extending the 100 per cent first-year capital allowances until 31 March next year. But it is unfortunate that this measure could not have been announced earlier.

Enhanced capital allowances for water technology

Businesses will be able to claim 100 per cent enhanced capital allowances on their spending on designated plant and machinery to reduce water use and improve water quality. This measure builds on enhanced capital allowances for certain types of energy efficient equipment.

Many small businesses find that the cost/benefit analysis of identifying the equipment and making a claim is often marginal. It should be remembered that the only advantage to business is the acceleration of tax relief into the first year; the total tax relief given does not change.

Increased incentives for venture capital investors

One of the more interesting announcements was the introduction of "Small Business Investment Companies". This proposal is based upon an idea from the United States.

Taken together with promised enhancements to the enterprise investment scheme, venture capital trusts, the small business firms loan guarantee arrangements and changes to the tax treatment for the incidental costs of equity finance, these proposals will be broadly welcomed. One wonders, however, why these cannot be introduced now and with a minimum of bureaucracy.

Cutting business 'red-tape'

The Chancellor announces measures to simplify taxation for small businesses and to cut "red-tape" every year but most businesses feel that the burden gets worse. Business will, however, welcome the proposals for VAT, including the higher turnover limits for registration (to £56,000) and the optional flat rate payments scheme (to £150,000), and the simplification of gift relief.

Residence and domicile rules

In last year's Budget the Chancellor announced a review because it was thought there were a number of high-profile individuals living in the UK who may have failed to pay a fair amount of tax due to special rules applying to non-domiciled individuals. The Government has published a paper which indicatesthat the Inland Revenue appears to favour taxing the income of non-domiciles on the basis of time. This would be a blunt instrument to attack a complex issue where the remedy may be worse than the illness. It does not address the substantial economic contribution many of these individuals (around 100,000 according to the Inland Revenue) make to encourage enterprise in the UK.

The Chancellor should remember that many of these individuals are willing to re-locate. We consider that there is more tax revenue to be lost in this area than there is to be raised. The impact on employment should also not be underestimated.

Anti-avoidance measures

The Inland Revenue indicates a number of so-called anti-avoidance measures will be brought forward some of which will increase the tax burdens on entrepreneurs many of whom will, inevitably, be innocently caught up in the increasing complexities. Efficient remuneration planning should be acceptable to the Inland Revenue where a small business seeks to reward its founders, directors and employees matching their remuneration to the success of business. There will be a real danger that the measures introduced catch not only perceived abuse but also appropriate remuneration incentives.

We find it difficult to award the Chancellor more than four out of ten for this Budget. The measures introduced need to be assessed in the context of the significant National Insurance increases which have now taken effect.

We accept that there is a reasonable list of detailed measures that will benefit certain businesses but most of these are small in their effect and many require time. On the debit side, there is no inducement to potential entrepreneurs and existing businessmen to increase investment or establish a new business. The Chancellor could have reduced the small companies rate of corporation tax providing a real incentive to small companies to invest.

Stephen Herring is a tax partner with BDO Stoy Hayward, specialist advisers to growing businesses.