What the small business can expect in the Budget?

Andrew Green, tax partner at Mazars, an international firm specialising in audit, accounting, tax and advisory services, discusses what small business owners can look forward to in Wednesday’s Budget.

In the past three months, the economic numbers have improved for Gordon Brown, which is probably good news for small businesses. It is now more likely that this Budget will be tax neutral rather than one that will increase taxes on small businesses.

However, saying that the Budget will probably be tax neutral is not the same as saying there will be no winners or losers.

One potentially big group of losers are family companies who currently pay dividends.

This stems from the possible reaction of the government to the Court of Appeal decision against the HM Revenue and Customs (HMRC) in Jones v Garnett. The decision basically confirmed that Mr. and Mrs. Jones could pay themselves equal dividends, although Mr. Jones did the majority of the work for the company.

It is clear HMRC do not like this decision and it is likely that new rules will be introduced to try and reverse it, so Mr. Jones would become taxable on the whole of the income. Any such rule is likely to create additional liabilities for the owners of many companies that currently pay dividends to members of the family.

The very small company may be affected by the details to be announced regarding the abolition of the £10,000 nil rate band and the non-corporate distribution rate. In particular, it may turn out to be advantageous to delay paying any dividend until after 5th April 2006.

The chancellor may well announce further changes to the research and development tax credit rules, with a particular eye to the smaller company. The existing rules are perceived as being a burden for smaller companies and so some relaxation in the rules or increase in relief may be forthcoming.

The only measure he should confirm in the Budget which is explicitly aimed solely at small companies, is the increase to 50% in first year allowances on plant and machinery.

This increase by 10% probably won’t be confirmed until April 2007, if only to give the chancellor the option of reducing it again. It is also likely there will be further extensions to the 100% allowances for environmentally friendly and energy efficient equipment, although not specifically aimed at small businesses.

I expect there to be further announcements regarding road transport which will impact on some small businesses. It has already been announced that most of the fuel duty rates are to be frozen but the chancellor still needs to consider the road infrastructure. Further movement towards the use of toll roads may be announced and more details of the lorry road-user charging rules emerge.

The government has also been looking closely at its interaction with medium-size businesses (those between 20 and 500 employees). Following its recent review, we may see changes in the Budget intended to reduce the burden on them, and giving greater access to HMRC and the Treasury.

It remains to be seen what affect this process has on the service for small businesses, but, in a world of limited resources, there is a risk that better service for medium size businesses will be at the expense of the service to small firms.

As far as VAT is concerned, I expect there will be a modest increase in the registration threshold of £60,000. Small businesses may find that they are saddled with a further administration burden as a result of the Governments fight against missing trader fraud.

This could mean the introduction of increased paperwork or even self-supply rules, for types of goods perceived as being at particular risk.

In recent years we have seen a slow attack on the smaller business owner’s ability to pass on his business to successive generations.

In the last budget there were further restrictions on use of capital gains hold, over relief to shelter gifts of business assets and shares.

This attack seems likely to continue. In particular, the draft clauses covering trust reform imply that from 6th April, it will cease to be possible to put business assets into trust for children, without incurring an immediate capital gains tax charge.

One can hope that the chancellor will give a clearer steer on the tax deductibility of company contributions to pension funds.

The particular issue for owner-managed companies being the recent pronouncements from HMRC, raise the question whether contributions, in respect of controlling directors, are for business purposes.

The hitherto statutory deduction is being withdrawn and without clearer rules it seems likely that uncertainty in the area will last for some time.

The Budget is likely to be a mixed bag for small businesses. A minority may obtain benefits or suffer additional liabilities, but most will probably find that it will have little impact.

Any new measures announced are not going to involve giving away much money in the current economic climate.