Emergency Budget - the implications for business

Publication: Growing Business
Date: 26/07/10

George Osborne’s austerity Budget causes concern for many entrepreneurs.

Rumours of a hike in capital gains tax (CGT) to 40% or even 50% were rife following the coalition’s vow to bring it into line with income tax levels. And in the weeks before Osborne’s debut at the Dispatch Box, the government’s refusal to elaborate on exactly what “generous exemptions for entrepreneurial activities” would be available did nothing to allay business owners’ fears that the worst was to come.

On the whole, though, the general consensus of the entrepreneurs we spoke to seemed to be ‘it could have been much worse’. The CGT rise to 28% (from 18%) was nowhere near as bad as expected, while the extension of Entrepreneurs’ Relief, giving entrepreneurs a rate of 10% on their first £5m of qualifying gains over a lifetime (up from £2m), certainly sugared the pill for business owners.

Osborne’s acknowledgement of the key role the private sector will play in driving the economic recovery also went down well with the entrepreneurs we canvassed, as did the news that the small firms’ rate of corporation tax will be lowered from 21% to 20% from April 2011 (instead of the 1% hike planned by the previous Labour government).

However, the mooted rise in VAT to 20% was confirmed, along with significant cuts in public spending.

The chancellor called his first Budget “unavoidable” and “tough but fair”, insisting that it “pays for the past and plans for the future”. Osborne said he wanted to put a sign up announcing that the UK was “open for business”, and that the recovery had to be “enterprise led”. The current deficit of £149bn would fall to £20bn in 2015/16, he stated.

At the same time, the CBI said Osborne had achieved his twin objectives of “setting out a credible plan for the public finances and producing a convincing growth strategy for the longer term”.

Here, entrepreneurs, investors and advisers examine some of the key changes, and how they will affect entrepreneurial firms.

Edward Rimmer

UK chief executive of business finance provider Bibby Financial Services on measures to boost working capital

“Access to finance remains a key concern for small businesses looking to raise capital to fund growth, and the extension of the Enterprise Finance Guarantee (EFG) by £200m means businesses will continue to receive support when seeking finance. However, it is vital that the government communicates the accessibility of this scheme to the small business community, which has not been made fully aware of the support. This is timely, as the introduction of a bank levy may force UK lenders to take a risk-averse approach and limit funding to small and medium-sized businesses, so firms will struggle to raise finance.

“Broadly speaking, Osborne’s pre-Budget pledge to be ‘tough but fair’ is what has been delivered. Our clients are reassured by the new government’s appreciation of small business-related issues. In fact, our recent straw poll reveals the majority of UK firms (90%) feel the new leadership will bring about an improvement in trading conditions. It appears many are looking to the future with cautious optimism.

“That’s not to say we are out of the woods yet; economic growth remains at a marginal level. The most successful businesses will be those that plan ahead and tighten up their processes. Cashflow and survival are intrinsically linked and this is still the number one priority for entrepreneurs.”

Jos White

Co-founder of email management and security business Message Labs and partner at investment and advisory vehicle Notion Capital on the impact of the CGT rise

“Overall, the Budget provides some nice protections and incentives for entrepreneurs. The main problem is that successful entrepreneurship and small business growth doesn’t just come from the entrepreneurs; the investors who enable their businesses to come to market are just as important for recovery.

“The government has been far more restrained than everyone expected on CGT. However, it hasn’t done a great deal to improve things for entrepreneurs. Putting the lower rate of lifetime earnings at £5m may be a good headline and a sweetener for entrepreneurs themselves, but I’m not convinced it will do much to drive business growth. Entrepreneurs will still focus on the CGT rise rather then the exemption as they are very ambitious, so will look beyond the £5m figure when they weigh the UK against other markets as a venue in which to start a business.

“How the government treats investors is a huge part of the equation because investors have a vital role in the ecosystem in which entrepreneurs and small businesses operate. If you sweeten the pill for entrepreneurs but punish those who invest in them you aren’t going to help businesses grow; in fact you are more likely to stifle them. This is the second CGT rise in three years, hitting investors with an overall tax rise of 18%.

“Combined with the strict rules coming out of Europe, there is a risk that investment will be directed into other areas or the funds will move elsewhere. We keep seeing venture capital and other forms of early stage investing, which provide important fuel to growing businesses, being lumped with private equity and hedge funds that are about financial engineering.

“The reduction in corporation tax will go down well and some of the tax measures will incentivise budding entrepreneurs to take that first step. But the government has missed the opportunity to make the UK a hotbed for investment. It should have looked at the complete picture in order to build the ecosystem required to support growing businesses and drive the economic recovery. With a piecemeal approach that penalises early-stage seed and venture capital investors, it has sucked some life out of entrepreneurial growth and success.”

Alex Smith

Managing director of award-winning organic cereals company Alara Wholefoods on the support for green companies

“The government doesn’t seem to be supporting eco-focused businesses at all. In fact, the opposite seems the case. For example, it is still spending £500,000 to support the FSA’s consultation on GM foods, even after two members of the steering group resigned because of their pro-GM bias.

“Unlike every other country in Europe, it refuses to take part in an EU-funded organic food education programme (www.organicuk.org), leaving it to industry to pick up the tab for this. It has also appointed Caroline Spelman MP as secretary of state for DEFRA. She owns a biotech company, which seems rather unbalanced.”

Julie Meyer

Founder of investment firm Ariadne Capital on plans to abolish regional development agencies (RDAs)

“There’s a well-meaning layer of fat in the system at this level. I don’t think we need all that money and infrastructure to stimulate business because we’re quite good at that in the UK. It’s not as if we don’t create global leaders or lack informal networks of businesspeople. With all due respect to the RDAs, the people who create leading firms don’t say, ‘Thank God for government agencies’.

“The chancellor has rightly said we could probably lose a layer of infrastructure and business would be OK. By reducing the size of government you reduce the tax burden, so things like PAYE and NI start to move down-route. These are the big fixed costs most CEOs worry about and are directly linked to the size of the government. Let’s shrink the size of the state and that will have the biggest net effect to create more high-growth SMEs.”

Lindsay Pentelow

Tax partner at international accountancy firm Mazars on the implications of the key tax changes for entrepreneurs

“The best news was that CGT rises were not as bad as feared. In addition, the main rate of corporation tax will be cut from 28% to 24% over the next four years and the tax rate for small companies will fall from 21% to 20%. On payroll, as of April 2011, the threshold at which established companies will start to pay NI will rise by £21 per week above indexation. This raises the level at which employers’ NI arises from £110 to £131 per week.

“From September, anyone who starts a business outside London, the South-East and the East over the next three years will be exempt from employer NI payments of up to £5,000 for each of the first 10 employees hired. This is undeniably a move in the right direction, but it may not be as welcome as the abolition of the 1% rate increase next April.

“The VAT rise to 20% will undoubtedly depress demand and hit the retail sector. The hike will be introduced on 4 January 2011 and the delay could help to stimulate the economy in the short term.”

Shantha Shanmugalingam

Director of innovation, investment & growth at the National Endowment for Science, Technology and the Arts (NESTA) on what the Budget means for innovative businesses

“David Cameron recently argued that our fortunes were ‘hitched to a few industries in one corner of the country’ and the business secretary, Vince Cable, set out a role for science and research in an economic rebalancing. NESTA’s work on economic growth shows that only 6% of companies were responsible for over half of the UK’s employment between 2002 and 2008. These companies have one thing in common – they invest in innovation. Not just R&D but also design, organisational innovation and new customer offerings and brands.

“Ensuring adequate access to finance for these businesses was at the core of the government’s growth policies in the Budget. It confirmed the creation of the Growth Capital Fund for fast-growing small and medium-sized companies, which are still restrained by a lack of capital. Alongside last year’s Innovation Investment Fund, that should help the private sector to build a financial escalator of business angels, venture and growth capital, bank business lending and orders from lead users.

“But this is just the start. A green paper on business finance is being drafted, a banking commission will opine on reform and a review of IP tax are all planned. There is a real opportunity to develop intelligent sources of finance for innovative companies that could transform their landscape, and with it how the UK returns to growth.”

Bobby Lane

Partner at accountancy firm Shelley Stock Hutter on NI holidays for start-ups

“When you’re starting a business the first year is hard cashflow-wise and working capital-wise, so any incentive from the government to help reduce the cost of employing staff is going to encourage people to start businesses. We’ve always said a NI holiday would be great, so we were quite excited by this. What we were disappointed about (and can’t really understand) was why that wasn’t extended to the whole country. I don’t think that is very fair.

“We work with a lot of growing businesses, and a lot of start-ups at the moment aren’t getting any assistance anywhere, including in central London, the South-East and the eastern regions. If they could be given that sort of incentive as well, it would encourage them to employ more people, which in turn would generate wealth because the people employed won’t be on benefits. It’s an idea we would have liked to have seen extended to the whole country.”