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Outlook: The Budget's hidden cost to business

HOW DOES the Budget look to business the day after the night before? Rather worse, is the honest truth.

Business has born the brunt of the Government's fiscal tightening over the last two years, so it might have been reasonable to expect, now that there is to be a pounds 6bn loosening over the next three, that business would benefit, at least correspondingly. No such luck. For most businesses, this Budget is pretty much fiscally neutral. But for a sizeable minority, it contains another little kick in the goolies.

The hidden tax this time is an apparently unilateral decision by Customs and Excise to start charging VAT on outsourced service provision. Most profoundly affected will be the City, where all kinds of back office services from billing to custody are outsourced between organisations in an effort to cut and share cost. Also affected will be specialist outsourcing companies such as EDS, Unisys and Andersen Consulting.

Presumably the Chancellor knew of this move - which was buried almost to the point of invisibility in the Treasury's pack of Budget press releases - when he said in his speech on Wednesday that there were no plans to increase the scope of VAT. Given that the extra revenue raised through the ending of this exemption could run to hundreds of millions of pounds a year, it would be odd if he didn't.

At a business breakfast yesterday with the Chancellor organised by Deloitte & Touche, there was guarded praise for Mr Brown's third Budget. If nothing else, it was being said by industrialists and company directors, there were no nasty surprises for business this time round, unlike the others, and we should at least be thankful for that. That judgement may need to be reassessed.

But there is a deeper concern about this Budget, one of whose themes was meant to be "enterprise" - of laying the foundations for the Microsofts of tomorrow. There were lots of gadgets, gimmicks and any number of business friendly noises. Plainly Mr Brown was intent on walking his talk; some of his measures were certainly better than a poke in the eye. But somehow or other, it all fell a bit flat.

This was not the stuff from which the next generation of Microsofts is going to spring, that's for sure. For that, a much more radically tax- cutting budget for business is required. Some of the tax breaks he did announce were not, in any case, all they seemed. The new 10 per cent starting rate for corporation tax doesn't, on close inspection, apply to the first pounds 50,000 of profit, but is tapered after the first pounds 10,000.

And while this plainly benefits that vast hinterland of small, generally family owned, businesses that provide the bulk of employment in Britain, these are not the sort of entrepreneurially driven, aspirational companies that have spawned the high-tech revolution of America's West Coast. Most of these businesses are quite happy to chug along with their fewer than 10 employees and profits of less than pounds 50,000 a year. They either can't be bothered with, or don't want to be, the next Microsoft.

Mr Brown is showing all the right intentions, but in the end he's bottled out of the radical measures necessary to create a fully fledged free market, enterprise culture. His other priorities too much prevent him from following those pro-business instincts to their logical conclusion.

There is, however, one measure which does seem to promise genuine progress - the proposed new employee share scheme. This is precisely the sort of radical approach that is needed, assuming the Government's proposals live up to their promise. The details of this scheme are at this stage deeply confusing, and what little literature is available on it, apparently contradictory. But on the face of it, the intention is to offer employers a major tax incentive to pay their staff in shares, as well as employees a big tax break in buying shares in their employers.

Such an approach, once again assuming it is not made impotent by its terms and conditions, offers the opportunity of real workplace reform, of genuine partnership between employer and employee, and of proper worker participation and involvement in the affairs of their companies. It is a splendid thing; ministers and industry must work hard to ensure the ideal is not undermined by the process of consultation and implementation.