By Mark Sismey-Durrant, Chief Executive Officer of Hampshire Trust Bank
The general election bought with it much promise for the UK economy, not least a Conservative commitment to triple the number of start-up loans to businesses to 75,000. If that wasn’t welcome news enough for the UK’s estimated 5.2 million small businesses and potential start-ups, details announced in the Chancellor’s Summer Budget recently bought more good news; an increase of the Annual Investment Allowance (AIA) and a drop in corporation tax.
But what does this mean for those businesses seeking investment for growth? Here, I will provide advice on what these changes mean for the small and medium-sized enterprise (SME) community.
Geared for growth — benefits of the AIA
Annual Investment Allowance (AIA) is the amount of tax businesses can claim back on investment in equipment or other development capital. The amount had stood at £100,000 since around 2010, however was increased to £500,000 from 1 April 2014 until 31 December 2015 and was due to reduce significantly in 2016 to £25,000.
The Summer Budget saw an announcement that the level of maximum AIA would be set permanently at £200,000 for qualifying investment in plant and machinery on or after 1 January 2016. While this reduction from the temporary figure of £500,000 may disappoint some small businesses who might argue that an increase would have been more beneficial, this change does afford the security of having a fixed rate that is significantly higher than the £25,000 it was set to reduce to going forward.
What does this mean?
This generous increase and commitment to a long-term rate may well be a relief to the business community, and the catalyst which small businesses need to invest and grow their companies. Indeed, recent research carried out by Hampshire Trust Bank found the average SME has £230,000 sitting in their current accounts and nearly half (42%) were planning to invest some of this money in the near future.
I would recommend that small businesses begin the process of taking advantage of this tax relief now by speaking to your financial and banking advisers in order to make the most of the benefits this affords, and to leverage the current increasingly positive economic environment.
Cuts to corporation tax
Also announced was that the corporation tax (CT) rate is set to be cut to 19% in 2017, with a further reduction to 18% for the financial year beginning 1 April 2020. While this may not be welcome news to large organisations with profits of more than £20m a year that are required to pay their tax early under the new regime, it is good news for small businesses.
This cut will help those small businesses who want to invest, grow and pursue job creation, offering them increased confidence to do so, and coupled with the AIA increase, is an additional reason for SMEs to be upbeat.
I would recommend small businesses evaluate all their options on how to make the best investment decisions, whether that be simply seeking advice from experts, or moving their cash in to a savings account which offers the most attractive return.
Our SME research found that a balance of £230,000 with interest compounded over a five-year period in a business savings account with a 1.50% gross interest rate would earn approximately £17,098.90. Suffice to say, those types of figures when considering long-term growth ambitions would offer a crucial opportunity to make great strides in business development. Now is the time for small businesses to act.