What was most interesting was the apparent tactical switch away from supporting multinational businesses to targeting SMEs and UK business owners. The cynics may say this Budget was drawn up with the imminent EU referendum firmly in mind: SMEs and their owners will have a greater say in the Brexit debate than “faceless” corporations. If this was the aim, will the Chancellor have succeeded in getting SME UK onside?
Firstly let’s consider large business. The reduction in the headline rate of corporation tax to 17% in 2020 will, at face value, seem attractive (despite the cries from the EU that the UK is behaving like a tax haven). However, there were a number of measures announced today that will almost certainly raise taxable profits and most likely increase the cash tax paid by these companies. These measures include a restriction on tax allowable finance costs and the use of tax losses against taxable profits.
The UK remains open for international businesses, but only for those who want to pay the correct amount of tax here. The chancellor was keen to reinforce the UKs position as an early adopter and promoter of the OECDs BEPS project.
A further reduction in the UK headline corporation tax rate to 17% from 2020 is another advertisement for UK investment but that ‘give away’ will be quickly be swamped by additional tax costs for those large business who have existing tax losses or large debt balances as the chancellor has announced restrictions to relief in both cases.
There was also an announcement on changes to the rules on hybrid instruments and withholding tax on royalties. As the Chancellor was rushing to throw out tax giveaways for UK businesses and investors, large corporates doing business in the UK were left empty handed. Maybe millennials don’t invest in large multinationals….?
The reduction in corporation tax rates and capital gains tax are both, no doubt, good for SME’s and business owners. The Chancellor certainly wasn’t shy in promoting this good news. However, the Chancellor failed to mention a number of measures already planned which will be of concern, particularly to owner managers. We already know that dividends will carry an additional 7.5% effective tax rate increase and that pension changes (although recently watered down) still will likely encourage business owners to save less. Now we have an additional tax rate increase for directors’ loan accounts. These have historically been taxed at 25% but will now be taxed at the same rate as dividends (32.5%). Many SMEs have overdrawn directors’ accounts for many reasons and will be hit by this charge.
It was encouraging to hear George Osborne setting out early in his Budget speech that his priorities included fundamental reform and simplification of business tax, combined with a policy of lower taxes on businesses. This was then followed by details of reliefs targeted at micro businesses which, whilst clearly valuable and welcome, created some concern that larger Mittelstand-esque companies might lose out. These larger private businesses are crucial to the UK economy, particularly by creating significant employment opportunities in towns and cities all across the UK.
So, the announcement of steps being taken to remove the competitive advantage enjoyed and exploited by large multinationals at the expense of UK SMEs will have been widely welcomed by this sector. However, there then seemed to follow contradictory messages – on the one hand expressing commitment to a simpler tax system, taking on board the input from the Office of Tax Simplification and then on the other introducing a whole range of new measures that SMEs will have to take on board. Many business owners are already feeling that tax is becoming a bigger and bigger factor for them in running their business – both in terms of compliance burden and absolute cash impact – at times distracting them from commercial and entrepreneurial aspects and today will have done little to alleviate that.
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