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Give smaller firms supportive tax cuts

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The government should lighten the tax burden on smaller businesses if it wants to promote economic recovery, a business group has argued.

The Forum of Private Business (FPB) has said that the prospects for sustained economic recovery could be jeopardised unless small businesses are provided with an environment in which they can survive and grow.

To help achieve this, the Chancellor’s pre-Budget Report should introduce substantial tax reliefs for SMEs.

The FPB’s latest survey of its members found that 22 per cent think that the easing of tax burdens should be the main focus of government policy.

Of those, 31 per cent listed changes to business rates as a top priority, while a quarter (23 per cent) put a cut in the headline rates of tax (national insurance and payroll, VAT and corporation tax) at the head of their agenda.

Phil Orford, the FPB’s chief executive, said: “There is still a long and difficult road ahead of us, but small businesses are key drivers of the economy and the government must create a tax environment in which they can thrive.

“That means tax relief in specific areas that would help to foster cash flow, innovation and employment opportunities so that small businesses are able to seize the opportunities that will emerge as the economy emerges from recession.”

Specifically, the FPB has urged the Chancellor to take action in a number of tax areas.

The FPB wants a reversal of plans to raise small firms’ corporation tax, to be replaced with a cut to 20 per cent.

With profits still low and margins tight for many small businesses, the FPB argued, a reduction in corporation tax could benefit a large number of businesses in exchange for a marginal cost to the government.

There should also be a year-long reduction in national insurance contributions for businesses with fewer than 10 employees that take on new staff. The 0.5 per cent increase in employer’s NICs, penciled in for April 2011, should be delayed.

Given the approval for reductions in VAT rates granted by the European Commission in May, the FPB called on the government to investigate VAT cuts for some business sectors.

The business group said that pulling VAT down to 5 per cent for labour-intensive services, including hairdressing and home renovation and repair, would stimulate demand and lead to an increase in trade. An added benefit for pubic finances would be to bring a significant number of small businesses over the VAT threshold.

The date set for the reversion to the old standard rate of VAT – 31 December – will require a difficult set of administrative changes, the FPB added. The re-introduction of the 17.5 per cent charge should, therefore, be delayed for a reasonable period of time to help small businesses cope.

Smaller firms should be enrolled automatically for the business rate relief to which they are entitled rather than having to apply for it, the FPB concluded. Research from the Local Government Association (LGA) suggests that fewer than half of the 870,000 small businesses across England which qualify for the scheme take part in it.