This will be George Osborne’s best opportunity in years to introduce any unpopular tax-raising measures, given that the first Budget of the new parliament is far from the next general election.
SMEs and entrepreneurs could therefore face a raft of tax changes, which will inevitably give rise to winners and losers.
Rebecca Combes, partner and head of corporate tax, Southampton, at Smith & Williamson, the accountancy and investment management group, considers what might feature in the Chancellor’s Summer Budget this Wednesday.
Where can tax rises come from?
Although the Chancellor has committed to maintaining the rates of income tax, VAT and National Insurance – he has made little comment on corporation tax – the fourth largest tax generator, which brought in just over £42 billion in the year to March 2015.
While unlikely to amend the headline rate we expect an announcement around the reduction in the annual investment allowance, but urge the Chancellor to leave it at a reasonably high level to encourage investment and stimulate growth.
So corporation tax and a raft of ‘minor’ taxes remain at his disposal, which could hit SMEs and the entrepreneurial community.
The total contribution of these so called ‘minor’ taxes (excluding corporation tax) represented more than £60 billion during 2014/15*. So a small increase across the board could quickly generate substantial funds, though the Chancellor needs to have an eye on the potential impact on business growth.
Take a risk on tax simplification
On simplification we would like to see some more radical thinking – why not take the brave step to merge NIC and income tax and use the opportunity to drive out the peaks and troughs of marginal income tax/NIC rates?
Abolishing ATED-related gains (now all such gains can be taxed in other ways) would help property-owning companies, which contribute significantly to the economy.
And cutting away the raft of share scheme and share option scheme rules for SMEs and replacing it with a simple capped allowance for companies to allocate shares and options as they feel commercially fit would have huge attractions.
Other simplification could be around further reducing red tape for employers such as in the strict rules around RTI and auto-enrolment, which have been partly accepted by Government through a relaxation in the RTI penalties.
Cutting tax avoidance
SMEs and entrepreneurs should also be mindful of the Chancellor’s commitment to clamp down on unreasonable tax avoidance and evasion, although the ultimate challenge will be to ensure that anti-avoidance measures do not make the UK a less attractive place to do business.
Restrictions on Entrepreneurs’ Relief were also introduced by the last government to cut out some more aggressive use of this tax, but it has hit entrepreneurs’ commercial business joint ventures. These rules need to be refined where the beneficial interest in a business is in step with Parliament’s intention.
Balancing tax reliefs
Tax reliefs are clearly under the spotlight, with pressure from the National Audit Office and the March 2015 Public Accounts Committee report for HMRC to monitor the effectiveness of tax reliefs. Yet tax reliefs exceeding budgeted costs can be indicative of success in driving behaviour that helps the economy grow, eg EIS relief means growing companies; BPR/APR means handing businesses onto the next generation rather than breaking them up.
The Government will need to ensure it does not reduce its costs with one hand and stifle growth with the other.
Any changes must be practicable. I would urge the Chancellor to recognise that entrepreneurs SMEs and business in general need certainty and not layers of interminable rules, where clarity can only be achieved through the courts system.
Boost HMRC’s workforce
SMEs and entrepreneurs have, for years, suffered from HMRC’s diminishing workforce. But for every £1 spent on HMRC compliance salaries, it can generate a multiple in terms of revenue. Response times have been worsening, with reports of HMRC taking weeks – and sometimes months – to answer anything from basic queries through to complex clearances, which ultimately means it’s more difficult for taxpayers to determine the correct amount of tax.
Clearly, HMRC needs to boost receipts and a better functioning HMRC would help HMRC and business. It has recently announced a welcome increase in call centre staff, but this is reminiscent of a Mars bar ‘new bigger size’ promotion, which still struggles to meet expectations. HMRC would do well to develop its workforce in areas such as clearances, where bottlenecks continue to occur.
*revenue figures from HMRC, published June 2015.
