Who wants to be an entrepreneur?

Alastair Hick and Danielle Jacobs on how to think small
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The Independent Online
When you realise that small and medium-sized enterprises (SMEs) employ more than half the UK's workforce, and produce 40 per cent of its GDP, it is easy to understand the Government's emphasis on encouraging entrepreneurship through improving the environment for small businesses.

When you realise that small and medium-sized enterprises (SMEs) employ more than half the UK's workforce, and produce 40 per cent of its GDP, it is easy to understand the Government's emphasis on encouraging entrepreneurship through improving the environment for small businesses.

This familiar theme was again a central element of this year's Budget, with Gordon Brown quoting encouraging innovation, investment and entrepreneurship as part of his "vision for the future of the tax system". These words were given additional weight by the issue of a short consultation paper on Budget day, entitled A Review of Small Business Taxation, available at the Inland Revenue's website (www. inlandrevenue.gov.uk/budget 2001). The paper states "the Government is committed to reducing the regulatory burdens on small businesses". The document's main thrust is a radical proposal to tax small businesses on the basis of their accounting profits. Fundamental issues must be resolved if the proposals are to be implemented but, if they are, a significant administrative head- ache will be removed.

Also up for discussion are proposals for a new optional flat-rate VAT scheme for businesses with taxable turnover of less than £100,000, which could elect to pay VAT as a percentage of taxable turnover. SMEs also benefit from proposals in last autumn's pre-Budget report introducing a consolidated taxable turnover level of £600,000 (up from £300,000) for eligibility for the cash accounting and annual accounting schemes.

But when a government continually emphasises how much they are helping enterprise, suspicion is raised that the commitment might be strong on "puff" but lacking in substance. So what could be said about the truth of Labour's track record in this area? Most SMEs need access to readily available and reasonably priced investment capital. The Budget further relaxed and extended the rules of enterprise investment schemes, corporate venturing schemes and venture capital trusts, all of which provide tax relief for investment in start-up and growing concerns.

SMEs frequently struggle to match salaries paid by larger employers, and offering employees options to buy shares in the company at a future date can be an important incentive. The last Finance Act allowed companies to grant share options worth up to £100,000 to a maximum of 15 employees on favourable tax terms. The Budget doubled that amount of share options and removed the limit on the number of employees.

Employers are no longer liable solely for administering PAYE and national insurance. Other burdens include student loan repayments and working families' tax credit, and more payroll-based credits are scheduled for 2003. The load is high for small employers, who cannot afford an army of specialists. They can suffer cashflow shortages and face potentially costly penalties if they fail to comply. The Government has considerably extended the scope of national insurance contributions, under the guise of aligning the PAYE and NIC treatment of pay and benefits. Though this is presented as a simplification, it has in fact created more problems.

For example, only when the extension of employers' NIC to share option gains on exercise came in, was the potentially devastating cost to growing companies fully realised. That prompted measures to allow some or all of the cost to be shifted to employees, or to allow the employer to cap and settle what was otherwise a potentially unlimited liability.

Conditions have to be worthwhile for people to set up their businesses. For most, this means knowing that they will see the financial fruits of their labour. A great step forward in this area was the introduction in 1998 of capital-gains taper relief, which allows business assets to be taxed at 10 per cent in the hands of a higher-rate taxpayer, if they are held for at least four years.

Those running SMEs often have little or no cushion, particularly with illness or other incapacity. Regulatory and compliance burdens weigh more heavily on the small business and pleas for a reduction in red tape are a perennial feature of their representations to the Chancellor.

To some extent, these pleas are being heard, with this year's proposals for an accounts basis of taxation and a flat-rate VAT scheme perhaps the most useful yet.

But while many of the initiatives of the past four years are to be welcomed, the common stumbling block is massive complexity.

Entrepreneurs must hope a Labour win of a second term might inspire more bravery in tackling this.

Alastair Hick and Danielle Jacobs are with Andersen in London, specialising in tax advice to entrepreneurs

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