Summer Budget: Business taxes
Firms welcome corporation tax and NI cut
The chancellor unveiled a package of tax cuts and reforms for business but there was some concern that the benefits will be offset by his new national living wage and an apprentice levy on big firms.
Corporation tax to be cut again – and again
Having already slashed corporation tax from 28% to 20% over the last Parliament, Chancellor George Osborne surprised the Commons by promising two further cuts over the next five years.
The rate will be cut to 19% in 2017, and then trimmed again to 18% in 2020. Mr Osborne said that although the rate was already the joint lowest in the G20, it was necessary for the UK to ensure it stayed competitive in years to come.
He said: “This country cannot afford to stand still while others rush ahead. I am not prepared to see that happen.
“We’re giving businesses the lower taxes they can count on, to grow with confidence, invest with confidence and create jobs with confidence.”
Mr Osborne said an 18% rate of corporation tax sent out a message to the world that “Britain is open for business”.
In order to make the corporation tax cuts, the Chancellor had to make significant adjustments to the current system of taxes on dividends, because the lowering of the rate had already created incentives for people to self-incorporate in order to pay the lower rates of tax due on their payouts.
As part of what Mr Osborne called a “major and long overdue” simplification, 85% of those who receive dividends will see no change or be better off, but those earning – or paying themselves – £140,000 or more will see their tax rate go up.
Small firms get bigger NI relief
For smaller firms, and growing start-ups in particular, the key news was a generous increase in the National Insurance employment allowance.
The NI allowance for small firms, currently at £2,000, is to be increased by 50% to £3,000 from 2016. The measure was presented at the end of the Budget, and appeared designed to offset concerns by the UK’s smallest firms that the new National Living Wage will make it harder for them to employ people.
Mr Osborne said that means that a business can employ four people full time on the new National Living Wage and pay no national insurance at all.
Annual Investment Allowance pinned at £200,000
The Chancellor today allayed fears in the farming and manufacturing sectors over a fall in the Annual Investment Allowance by setting it permanently at £200,000.
The allowance, which allows small and medium-sized enterprises (SMEs) to offset capital expenditure immediately rather than having to phase it over several tax years as depreciation, is seen as a key measure in helping smaller firms invest for growth.
The allowance was raised in the years following the financial crisis and currently stands at £500,000. It had risen from £100,000 in 2010 but was due to fall to just £25,000 in 2016 as special measures ran out.
In his Budget statement, George Osborne said the drop would have especially hit “middle-sized companies in areas like manufacturing and agriculture that we want to do more to build up in Britain”.
“If Britain wants to produce more, it needs to invest more,” he said.
“I can confirm that the Annual Investment Allowance will not fall to £25,000 but be set at £200,000 – this year and every year. A major, permanent boost to the incentives for long-term investment by small and medium sized firms in Britain.”
Business reacts to tax changes
Alex Docherty, tax director at Johnston Carmichael, said the move on the annual investment allowance would be especially welcomed in the farming sector, as well as by smaller manufacturers. She said the current £500,000 level was more than most farmers would spend in a year, but there had been concerns over the level of the planned reduction.
“It certainly makes a difference in terms of the agricultural sector,” she said. “Buying something like a tractor is a significant cost and to have to pay a tax bill in that same year as well, when you have spent all your cash reserves, is difficult.
“Certainly, in the farming and small manufacturing sectors, the higher allowance has been aiding cash flow for many firms which have been investing in their future, and a permanently higher level is very welcome in those sectors.”
Bryan Buchan, Chief Executive of Scottish Engineering, the support group for the industry in Scotland, said: “On the face of it, the Chancellor has given some positive help to manufacturing engineering SMEs in Scotland. Scottish Engineering members will benefit from the increase in annual investment allowance to £200,000 each year and small companies specifically will benefit from the increase in National Insurance employment allowance for small firms by 50% to £3,000 from 2016.
“We are pleased that companies who train apprentices will be rewarded. While large companies will pay an apprentice levy, the Chancellor announced that companies who take on apprentices will get more back than they are paying out.
“We hope that by cutting the rate of corporation tax to 19% in 2017 and 18% in 2020 Scottish companies will see a benefit and the level of tax could attract further foreign investment with an increase in job opportunities.”
John Cridland, CBI Director-General, said: “The further reduction in corporation tax is a welcome surprise but tax reductions for employers don’t appear to match the businesses most affected by a rise to £7.20 in the National Minimum Wage next April – a 7% increase.
Jim Duffy, founder and chief executive of Entrepreneurial Spark, the business accelerator, supported the increase in National Insurance Employment Allowance, but raised concerns around unintended consequences for start-ups being forced to increase minimum wages to £9 per hour by 2020:
“We have seen a number of start-ups benefit from the NI Employment Allowance, which has reduced burdens on smaller businesses and allowed them to bring in staff they may have otherwise have been unable to afford. However, plans to force employers to pay a minimum wage of £9 per hour by 2020 could present a major challenge to those smaller businesses we support.
“These businesses account for almost all the new jobs being created but moves to prescribe wage levels present could present an additional burden to growth, especially at such a critical time in a business’ growth journey. One of our biggest metrics we report on is job creation and as part of that we strongly encourage start-ups to pay fair wages. We hope to see further announcements from government on how they will support smaller businesses to meet this increase of almost 50% over five years.”
Martin Bell, tax partner at BDO, said: “The Chancellor described this as a ‘big budget for a country with big ambitions’ but it largely bypassed medium sized businesses, the backbone of the Scottish economy.
“On the one hand the surprising reduction in the headline rate of corporation tax to 19% next year and 18% by 2020 was a positive move for businesses, as was the increase of the NIC employment allowance from £2,000 to £3,000. However, this will largely be offset by the introduction of the national living wage which may well have a significant impact on small businesses, along with auto-enrolment costs which will hit all businesses by the end of next year.
“We were pleased to see that the annual investment allowance for plant and machinery was set at a long term level of £200,000 per annum. The allowance is currently £500,000 but was due to reduce to £25,000 from 1 January 2016. Although we would have liked to see a more generous allowance this is still a significant incentive for businesses to invest in their future and hopefully go some way to addressing the UK productivity conundrum. The changes to the taxation of dividends will simplify tax returns but could result in higher taxes for shareholders.”