In today’s Budget announcement, the chancellor Gordon Brown unveiled a new tax that will affect thousands of small business owners. However, in a bid to balance the scales, a series of measures aimed at easing red tape and encouraging investment were also revealed.

As predicted and feared by many small business lobby groups, the chancellor moved to stem the flood of business owners that have incorporated purely for tax purposes over the past two years since incorporation tax was reduced to zero rate.

On a brighter note, Brown reported evidence of a stable and growing economy and unveiled new plans to ease the regulatory burden tackled by small businesses by merging the Inland Revenue and Customs & Excise. New measures to encourage greater levels of business investment, both nationally and regionally, also featured heavily.

Here’s a round-up of Budget announcements affecting small businesses:

Corporation tax:

Frozen.

Distributed profits tax of 19 per cent

This is a new tax aimed at closing the loophole exploited by some business owners that have incorporated for the purpose of reclassifying their incomes as dividends. All distributed profits will now be taxed at 19 per cent.

Brown explained: “There are those who have proposed that to tackle this avoidance we should abolish the zero and reduced rates altogether. Instead I propose to retain the zero rate and also the reduced rates for retained profit and indeed do more for investment. But I will close the loophole by taxing distributed profits at 19 per cent, bringing the tax on distributed profits for those small companies into line with other companies.”

Encouraging investment

Brown announced that encouraging greater investment was the government’s new priority for business. He said: “My priority for enterprise at this stage of the economic cycle is to encourage rising levels of investment”

As a result, Venture Capital Trusts will secure tax relief for investments of up to £200,000 a year an increased doubled rate of 40p.

In addition:

  • From 1st April, firms with turnovers under £58,000 will not have to register for VAT – the most generous VAT threshold in Europe.
  • From 1st April, 13,000 more businesses will be eligible to benefit from simplified VAT accounting.
  • From next year, 2000 enterprise areas will further increase the tax incentives to invest.
  • Local councils in all parts of the country will be allocated with an additional £1 billion of resources for the next three years to improve services and encourage more businesses.

The economy

Stability was the key word. Brown claimed the UK now has its most stable economy since the Industrial Revolution. The British economy grew by 2.3% in 2003, meeting Treasury forecasts. The growth forecast remains at 3-3.5% for 2004 and 2005 and at 2.5-3% for 2006.

Since 1997, there have been 100,000 extra businesses. Every day 600 new businesses are started.

Brown said: “I can report a British economy strengthening through 2004.”

Cutting red tape

Confirming pledges made in December, Brown said the government would be “working with business” to “identify further reforms both in Britain and in Europe” to reduce the burden of regulation.

This will include:

  • Reviewing the burden of inspection and the overlap between enforcement regimes.
  • Tackling, sector by sector, unnecessary regulation starting with chemical, construction and retail.
  • Allowing the Inland Revenue to pay the working tax credit direct to employees.
  • Submitting the European Union with detailed proposals for tackling EU regulation.

Merging of Inland Revenue and Customs & Excise

Brown announced plans to merge the Inland Revenue with Customs and Excise to tighten the Treasury's grip on tax policy and to further cut down on red tape. Brown said this will also provide an economy drive aimed at raising £20 billion for frontline services by 2008.

Investment allowances

Capital investment allowances for small businesses will be extended from 40 per cent to 50 per cent, initially for the next 12 months.

Brown said: “So, overall, a small company making pre tax profits of £25,000 and investing £10,000 in plant and machinery who paid over £5000 pounds in tax in 1997 will pay £2,375 – almost £3,000 less, as we maintain and improve the incentive for small company investment.”

Regional control of Business Links

All services provided by Business Link, the government’s official support service for startup businesses, will be devolved out to the regions in a bid to provide services more understanding of local environments.

Tax inspection rights

The government will review all tax inspection rights.

Manufacturing

Steady growth in manufacturing has been recognised and is expected to continue.

Brown said: “Manufacturing output is expected to grow by just under 2% this year and over 2% next year. And imports and exports are both expected to grow by more than 5 per cent this year.”

Skills

Brown reiterated the government’s commitment to education, including vocational training with the extention of regional Employer Training pilots and Junior Apprenticeships.

Capital gains tax

Frozen

Stamp duty

Frozen

The Euro

Brown ruled out reconsidering the five economic tests he set for the Euro until the next Budget.

Find out what the leading small business organisations and lobby groups thought of the Budget, by clicking here