The Chancellor delivered one of the most business-focused budgets of recent parliaments earlier this week and in one of his usual “political” budgets, the focus was placed on UK business owners. Quantuma believes many of the measures were announced to rally support amongst those who have a greater ‘say’ in the Brexit debate, and George Osborne did not waste the opportunity to link the OBR’s downgraded, yet comparatively optimistic forecast to the Governments’ argument that the UK is better off remaining in the EU.
Cuts in Corporation Tax and Capital Gains Tax, more flexible use of losses, taxation of Directors’ Loan Accounts and changes to Business Rates were announced in a Budget mainly trying to encourage confidence in small businesses and to provide a glimmer of sunshine in an otherwise gloomy outlook for the UK economy.
Managing Partner at Quantuma, Carl Jackson notes “The FSB has said this week that confidence in small businesses is at its lowest in three years – most noticeably in London and the South East, which is traditionally the area felt to be least hit by recession. Small businesses will therefore have been hoping that the Budget would deliver a much-needed boost to them, so the message is a very timely one”.
The Budget abolished business rates for many small businesses – 600,000 properties are now eligible for 100% relief. Carl Jackson points out “Over half of British properties will now be exempt or see rates reduce and this represents an instant saving for a lot of small businesses, many of whom will be struggling”.
Corporation Tax will be reduced further from 2017 but Quantuma asks whether these measures are as good as they seem when considered with other previously planned changes. “We already know that directors’ loan accounts, which have historically been taxed at 25%, but will now be taxed at the same rate as dividends (32.5%) – effectively a 7.5% tax rate increase – and with so many SMEs having overdrawn directors’ accounts, this is likely to counteract any reduction in Corporation Tax or personal tax bills for many”.
Furthermore, it is likely that restrictions on Entrepreneurs’ Relief (“ER”), which are expected to be introduced next month, could put paid to any benefit seen from an 8% reduction in Capital Gains Tax.
Carl Jackson continues “This calendar year, we have seen a massive increase in the number of Solvent Liquidations, as business owners rushed to take advantage of the efficiency that capital distributions in Members’ Voluntary Liquidation (“MVL”) can provide. In fact, the numbers grew so much, there was even a suggestion that the changes would be introduced earlier – from the day of the Budget – in an effort to stem the tide of tax savings”.
But Quantuma does not expect the MVL market to disappear completely in April. Carl Jackson advises that savings can still be made. “In the right circumstances, MVL can still save shareholders a significant sum, even if ER does not apply. The comparison of a 20% rate on capital distributions with the increase in dividend income Tax rates to 32.5%, or 38.1% on amounts over £150,000 speaks for itself”.
So will small businesses be convinced that the new measures are enough to make a big enough difference to their situation and boost them sufficiently that enough of them help kick-start a real recovery, or will we continue with the status quo? Carl Jackson doesn’t think so. “The recovery will be led by enough small businesses being confident in their position to expand and seek new opportunities and markets. A Budget that gives with one hand but effectively takes with the other is not going to do it. What we have seen is a safe, uncontroversial Budget with a political message that the Chancellor hopes will be seen to help key voters in the EU Referendum.