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The effect of the Budget on SMEs

On 22 June 2010, as expected, the new Chancellor George Osborne had the unenviable job of telling us spending would be slashed and taxes would rise as he announced the new coalition Government’s emergency budget.

Firstly the bad news and then the not so bad news, that should be of particular interest to SMEs (small/medium enterprises) and OMBs (owner managed businesses).

The increase in VAT from 17.5% to 20% from January 4 2011, will be viewed by many SMEs as an extra expense with minimal benefits. The change will arguably hit smaller businesses disproportionately as larger businesses may be in a stronger position to absorb the 2.5% increase.

National Insurance
Plans by the ousted Labour government to levy a higher rate in National Insurance Contributions from April 2011 have unfortunately not been scrapped and many companies will see this as a penalty for retaining or hiring staff through increased payroll taxes.

Tax rates
On a more positive note was the announcement that small companies’ tax rate would be cut to 20% for firms outside London and the South East. The intention is to encourage growth and expansion of SMEs, which have in recent years been heavily dependant on public funding and investment. It is anticipated 850,000 companies will benefit from this. SMEs will also benefit from an increase in the National Insurance Threshold, which will rise by the rate of inflation plus £21 per week (or in English from £110 to £131 a week).

New employees
SME start-ups are to be offered a £5,000 tax break on National Insurance Contributions for each of the first 10 employees hired by new employers. This may appear encouraging but there with it runs the risk that Southern SMEs will relocate North, economically penalising the South and increasing competition in the North. Established Firms, that may want to expand, will gain no benefit from the initiative. It has been forecast this may be up and running by September 2010.

Enterprise Guarantee Scheme
There will be an extension to the heavily criticised Enterprise Guarantee Scheme that should provide a welcome boost for 2,000 SMEs. The government guarantees 75% of loans made to SMEs with a turnover of less than £25m, thus allowing companies to spread potentially crippling tax payments over a longer tax period.

A long term goal of the new government aimed at SMEs will be to lower the cost of hiring people on incomes lower than £20,000 – some SMEs may be taken out of national insurance tax altogether. Increasing personal allowances by £1000 has been designed not only to give employees more cash in their wallets but will also alleviate some of the pressure of wage demands on SMEs.

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