24/03/2011

By John Crawford, Managing Director of The Vat Consultancy

This was billed as a Budget for growth so small and medium sized businesses were looking for concrete measures to cut costs, get rid of red tape and encourage investment in skills and job creation.

But against a downgraded growth forecast for the year and record borrowing in February, there was precious little room for manoeuvre to deliver good news and the smart money was always on a fiscally neutral outcome.

The headline-grabbing reduction in the price of a litre of petrol and the scrapping of the fuel duty regulator will be welcomed by business owners of course and are probably political necessities. To give growth a chance, it was absolutely vital to respond to the simple truth that rocketing fuel prices are hampering businesses.

So will the Chancellor’s other measures ease the burden on business and encourage enterprise?

Mr Osborne said small businesses were the “innocent victims of the credit crunch” and so his announcement of a 15% increase in the availability of credit is a step in the right direction.

Likewise, few would argue with the bigger than expected reduction in corporation tax or the extension of the rate relief holiday for small businesses for another year to October 2012.

Start-ups and small businesses can also earn more before they have to register for VAT with the turnover threshold going up from £70,000 to £73,000.

On red tape, most businesses will be glad to hear that £350m of business regulation is to be scrapped, albeit with scant detail announced in the Budget speech itself.

It will be interesting so see just how firms with fewer than 10 staff for three years will not experience any new regulation, as the Chancellor wishes.

The jury will also remain out on the practical impact of new rules requiring planning authorities to prioritise growth and jobs.

Merging income tax and National Insurance should cut down on payroll administration over time but it is not an easy thing to do practically or politically. There are huge complexities in rationalising the two taxes, with many losers as well as winners. On current figures, it’s a huge political risk because it means the basic rate will be 32p instead of 20p, and the higher rate (up to £150,000) will be 52p instead of 40p. Changing the rules is a historic step as businesses have been operating two different systems for decades, so this needs careful, comprehensive research and is one for the long game.

Businesses undercut by the flood of DVDs and cheap goods imported from the Channel Islands will be underwhelmed by the decision to reduce but not entirely close the loophole that has enabled mail-order traders, including multinational firms, to sell goods over the internet free of VAT.

This dodge, while legal, has cost the government hundreds of millions of pounds in unpaid tax and made it difficult for many stores to match the prices of goods sold out of warehouses on Jersey and Guernsey.

On the bigger picture, this Budget alone was never going to create a miracle recovery. Businesses still need clearer lending processes and easier access to cash from banks. Overall, SMEs will continue to walk a fine line between recession and recovery for some time to come.

For more information from The VAT Consultancy, visit www.thevatconsultancy.com

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