Small businesses: Good work cancelled out by NI hikes

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The Independent Online

Small businesses were offered a raft of measures designed to ease the pressure on firms struggling in the recession. However, the Chancellor was roundly slammed for risking thousands of jobs after he also announced an increase in national insurance contributions for employers.

Alistair Darling said he was planning to defer the 1 percentage point planned increase in corporation tax for small businesses, leaving the 21 per cent levy in place next year for 850,000 small companies. The Chancellor also hailed the decision to extend the so-called Enterprise Finance Guarantee (EFG) and the Time to Pay scheme as measures designed to help smaller firms.

The EFG, under which the Government guarantees 75 per cent of loans for companies with a turnover of less than £25m, was extended for 12 months and will secure up to £500m-worth of loans. The Time to Pay initiative is also being prolonged, allowing 160,000 businesses to spread the cost of tax payments over longer periods of time. Separately, the growth capital fund, which helps start-up businesses for five years, has been handed a further £500m.

However, while all of these measures were welcomed, the Government's decision to increase national insurance rates was attacked. Mr Darling said yesterday that contributions would increase by an extra 0.5 per cent by April 2011, on top of the 0.5 per cent hike he announced in the last Budget.

"This is generally a good Budget for small businesses, freezing the corporation tax rate, continuing empty property relief and Time to Pay," said Simon De Young, a tax director at PriceWaterhouseCoopers. "However the national insurance increases will claw back some of these benefits."

The Federation of Small Businesses, which represents the interests of 215,000 small firms, agreed, adding that the increase would lead to the loss of 57,000 jobs.

"All the good work on the EFG and corporation tax has been cancelled out by the increase in national insurance contributions," complained the Federation's chief spokesman, Stephen Alambritis. "It will affect not only employers, but 3 million self-employed people as well. Of course, everyone will face the national insurance increase, so there will be a knock-on impact on the high street too."

Others accused Mr Darling of offering little that was new, despite the Chancellor claiming that measures taken during the recession had saved countless small companies from closure.

"I think small businesses will find the Chancellor's speech a little lacklustre," said Phil Orford, chief executive of the Forum of Private Business, which represents smaller, unlisted companies. "It was essentially a list of recycled schemes. There were no new ideas in there of how to help small businesses, just extensions to the existing ones. Of course, we're glad that corporation tax for small firms wasn't increased, but these are limited measures which will help a relatively tiny amount of firms – only 6,000 small businesses have been given EFG loans."

A number of new initiatives were welcomed by analysts, however. While not specifically designed for small companies, the introduction of a "Patent Box", under which patent income will be subject to corporation tax at the reduced rate of 10 per cent, was praised, although experts did criticise the length of time it would take to introduce the changes.

"Industry will warmly welcome the decision to introduce the relief," said David Norton, a tax partner at Deloitte. "However, it is intended that the relief will not then come into effect until April 2013. Although the Chancellor said that he wanted to encourage research and development in the pharmaceuticals and biotech industries, it has to be said that it will almost certainly take many years before any impact is felt, even after the relief is introduced in three-and-a-half years' time."

The Liberal Democrats attacked the Government's record on small business support. Referring to a National Audit Office report, John Thurso business spokesman, accused the Government of "having no idea of what it wants to achieve," despite creating 28 different venture capital funds to help small businesses.