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Budget 2011: business reaction (I)

24th March 2011

By and large, business groups extended a welcome to the Budget, but some expressed doubts about whether the Chancellor had done enough to stimulate a private sector led recovery.

The Federation of Small Businesses (FSB) thought some announcements in the Budget will help provide stability, but didn't believe it went far enough to incentivise job creation. 

With 70 per cent of respondents to an FSB survey saying that their car or van is crucial to their day-to-day operations, the FSB said it was pleased that the Government has decided to not only scrap the 1p increase in fuel duty and the fuel duty escalator, but also to reduce fuel duty from today.

The FSB has long called for the re-introduction of Enterprise Zones across the UK and the announcement that 21 are to be created the business group saw as good news. However, with unemployment at 2.5 million the FSB was disappointed that the Government has not extended its National Insurance Contributions (NICs) holiday to existing businesses.

The extension of the Enterprise Investment Scheme and the doubling of Entrepreneurs' Relief to £10 million would provide a much needed shot in the arm for entrepreneurship in the UK, the FSB added.

For small independent retailers struggling with inflation and other VAT rises, the extension to Small Business Rate Relief for properties with a rateable value below £6,000 would help.  

On training, the FSB pointed out that almost seven in 10 apprenticeships currently take place within small firms and so the plan to add an additional 50,000 apprenticeships is a significant development for the small business community and young people alike.  

The FSB also welcomed moves to reduce the main rate of Corporation Tax over the next three years, but expressed disappointed that there was no mention of how the small business rate of 21 per cent would be affected.

Also winning FSB approval was the decision to impose a three-year moratorium on new domestic regulation for micro-firms. But, the FSB continued, the Government should look at extending this to all small firms.

John Walker, the FSB's national chairman, commented: "The Chancellor has said that this Budget would be a 'Budget for Growth' and in part that is what we have - however, there are vital components missing for small firms to create jobs. 

"We are pleased that the Chancellor has introduced a fuel duty stabiliser, has committed to cutting fuel duty and has introduced 21 new Enterprise Zones. This will provide much needed stability for struggling small businesses. 

"The Government has committed to cutting red tape, but we believe new employment laws will still come into force in this year, which could hinder businesses from taking on staff. The biggest opportunity missing from this Budget is by not extending the NICs holiday nationwide to existing businesses, which would really have provided incentives for small firms to take on more staff."

Another small business group, the Forum of Private Business (FPB) followed a similar line by applauding several of the short-term measures in the Budget but arguing also for more long-term strategies.

The FPB said the measures on fuel duty should provide some cash flow relief for struggling small firms.

Equally, the FPB welcomed the decisions to increase the tax relief available under the Enterprise Investment Scheme and to keep Community Investment Tax Relief contrary to recommendations made by the Office of Tax Simplification (OTS).

However, there was dismay that small firms’ corporation tax bills are not being reduced by a similar rate to the higher level paid by big businesses, which the Chancellor is now slashing by 2% in April.

Questions were similarly asked by the FPB over a missed opportunity for real root-and-branch tax simplification and radical reforms, taking small firms out of tax wherever possible.

Another concern centred on Low Value Consignment Relief. The FPB argued that simply lowering from £18 to £15 the threshold price of goods shipped via the Channel Islands on which no VAT is payable will not stop large companies exploiting LVCR.

While acknowledging that a merger between income tax and national insurance, on which the Government is to consult this year, would be a step towards simplifying the UK’s complex tax system, the FPB said that NICs is still rising for most firms.

On business regulation, the FPB backed the Government’s announcement that all firms with 10 employees and fewer – both start-ups and established businesses – are to be given a three-year holiday on incoming red tape.

But the organisation was worried that the moratorium will not apply to red tape stemming from EU law, which creates the majority of regulatory hurdles for small firms.

Phil Orford, the FPB’s chief executive, said: “It was important a Budget heralded as being pro-enterprise focused on easing the dual burdens of tax and red tape – two of the biggest barriers to business growth and job creation facing small businesses. In that sense, we weren’t disappointed and this was certainly more than just a nod in the direction of UK SMEs.”

Mr Orford, though, qualified his approval: “However, while there have been some definite steps in the right direction the Government could have gone further in reducing taxes and making the tax and regulatory systems more proportional to all small businesses so that they incentivise to entrepreneurship rather than act as a barrier to it.

“In summary, there are some good short-term measures here but more radical changes are required over the longer term. The lessons of history show that you achieve rapid, widespread small business growth – and therefore economic growth – by removing entrepreneurs from the stranglehold of tax and red tape as much as is practically possible.”

The British Chambers of Commerce (BCC) described the Budget as containing some real pro-enterprise moves, judging the cut in the main rate of corporation tax by 2 per cent as a measure of real substance.

The group said that smaller companies in every corner of the UK will take heart from the Chancellor’s decision to cut fuel duty, maintain business rate reliefs for an additional year, and to exempt businesses with fewer than ten employees from new regulations.

Getting the thumbs up too was the re-introduction of Enterprise Zones in England, and the Government’s decision to reward those who invest in new businesses across the UK through the doubling of Entrepreneurs’ Relief.

On national insurance, though, the BCC thought that the Chancellor had missed an important opportunity to give employers greater confidence by cancelling the remainder of the planned employer national insurance contributions rise.

Commenting on business rates, the BCC highlighted the fact that, unlike larger companies, small businesses are hit disproportionately by changes to business rates.

Extending the small business rate relief holiday for another year will give many SMEs greater confidence and allow them to invest in growth rather than pay more to the Exchequer.

Unfortunately, in the view of the BCC, the Chancellor did not maintain the £18,000 threshold for Empty Property Rates and followed through on plans to drop this to £2,600.

While recognising the value of the increase in R&D tax credits for smaller companies as an important step towards compensating the high costs of technical innovation, the Government must follow up its action by ensuring that small businesses do not face complex bureaucracy when applying for the credits.

The merger of income tax and national insurance would, the BCC said, be a huge simplification for employers and save countless millions in administrative costs, and the group urged the Chancellor to pursue this aim.

The promise of more apprenticeships was good news, the BCC added, but insisted that the courses must be high quality and easy for businesses to access.

Commenting on the new forecast published today by the OBR, David Kern, the BCC’s chief economist, warned that, while the new, revised-down growth forecast is more realistic than the previous prediction in November, it is still too ambitious.

Mr Kern said: “If the MPC raises interest rates in the next few months, this could put the growth forecast at risk, and add to the obstacles facing Britain’s recovery. Although the forecast beyond 2011 is also ambitious, it is more achievable, providing the Government’s new growth strategy is successful in removing barriers facing businesses.

“However, we share the OBR’s assumption that Britain’s medium-term prospects will gradually improve over time, and that the rate of growth will increase in years to come.”