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Emergency Budget 2010: business response

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Business groups have given a largely positive reaction to the emergency Budget.

The Federation of Small Businesses (FSB) welcomed many of the measures that the Chancellor announced in the emergency Budget but expressed concern that rises in employer national insurance contributions had not been completely reversed.

The FSB gave its backing to the new 28 per cent rate of capital gains tax rather than a higher figure. The business group also welcomed moves to increase the Entrepreneurs Relief threshold to £5 million from £2 million.

Cutting the rate of small company corporation tax to 20 per cent got the thumbs up, as did the decision to extend the Enterprise Finance Guarantee.

However, the FSB criticised the increase in insurance premium tax (IPT) from five to six per cent, describing it as a tax on responsible business.

John Walker, the FSB’s national chairman, commented: “The measures announced in the emergency Budget will go a long way to reducing the deficit and will please the 93 per cent of FSB members who called for a clear plan on tackling the country’s debt.

“We welcome moves to give a national insurance holiday to start-up firms, but are concerned that with 70 per cent of firms operating below capacity, those businesses already trading will not be helped. We need to see a full reversal of NICs increases to fully offset the ‘tax on jobs’ which the previous administration initiated.”

David Frost, the director general of the British Chambers of Commerce (BCC) said he believes that the government’s decisive moves to cut the deficit will have positive effects on business and investor confidence.

He continued: “Even more importantly, the Chancellor’s message that Britain is ‘open for business’ will be welcomed by companies the length and breadth of the country – and across the globe.”

Commenting on the main economic points in the Budget, David Kern, the BCC’s chief economist, said: “If successful, the Chancellor’s plan could put the UK on the path toward a sustainable recovery. The huge scale of the spending cuts, and the decision to implement them at an accelerated pace, could increase the risk of a double-dip recession.

“But, given the threats to our credit rating, the government is right to proceed at this stage with a bold and aggressive deficit-cutting programme.”

Addressing specific issues, David Frost applauded the reduction in the rate of small company corporation tax and the four-year plan to reduce the headline rate for large companies to 24 per cent.

Although the BCC opposed any changes to capital gains tax, it considered that the government had made some sensible compromises in its approach, such as the significant increase in Entrepreneurs’ Relief and the maintenance of capital gains tax allowances.

The BCC had lobbied hard to roll back the rise in employers’ national insurance planned for next year and, while pleased that the government has taken the sting out of the rise by raising payment thresholds, expressed concern that some employers across the country will still be worse off from April 2011.

The decision not to impose any further cuts in capital expenditure won the BCC’s support. While the UK still faces an important infrastructure deficit, the BCC said investment in regional projects is vital.

Mr Frost also saw value in extending the Enterprise Finance Guarantee: “Adding £200 million to the Enterprise Finance Guarantee for the rest of this year will help a number of companies get the vital credit they need to grow.”

For the Forum of Private Business (FPB), the Budget represented a victory for smaller firms.

The FPB regards the 1 per cent cut in small companies’ tax, together with the new £5 million threshold for entrepreneurs’ relief on capital gains tax (CGT), as positive measures which contributed to a small-business-friendly Budget overall.

Plans to extend the Enterprise Finance Guarantee scheme, abolish back-dated business rates and continue tax breaks for holiday lettings further demonstrated the new government’s appreciation of small-business-related issues, the group argued.

Pledges to review all employment law, outlined in the full Budget document and forcing each government department to review the employment regulations for which it is responsible, were also welcome to the FPB.

Phil Orford, the FPB’s chief executive, commented: “Not only did the Chancellor make all the right noises about supporting enterprise and smaller businesses, he backed it up with concrete, tangible policies.

“The rise in CGT had proved controversial with business owners ever since the idea was first put forward, but the 28 per cent rate is a gentler increase than many people were expecting. More importantly, the rise in the entrepreneurs’ relief threshold to £5 million is more than we could have hoped for and it should ensure that most small business owners aren’t penalised too heavily when they come to sell their companies.”

Mr Orford continued: “The pledge for a wholesale review of employment law – quietly announced in the full Budget document – is also a highly welcome one.

“Our members frequently cite employment law as one of their main areas of concern so any moves to simplify and rebalance the regulations affecting smaller employers have got to be welcomed.”

Mr Orford added: “What we will be calling for now is a guarantee of genuine private sector input into the white paper on local economic growth Mr Osborne mentioned. We want to see it focusing on smaller business-led innovation and jobs in regions that are likely to be affected by public sector job cuts.

“We will also be lobbying the government to make sure the ‘fuel price stabiliser’ Mr Osborne referred to becomes a reality. Extortionate petrol and diesel prices represent a huge inflationary problem for smaller firms and could threaten recovery if left unchecked.”

Richard Lambert, the director general of the CBI, said that, in the Budget statement, the Chancellor 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.

Mr Lambert continued: “Mr Osborne is close to achieving his 80:20 ratio of spending cuts to tax increases, which is so important to sustaining long-term growth. He has struck a sensible balance on capital gains tax, limiting the impact of the increase on entrepreneurial activity and business investment.

“The 5-year road map for corporation tax provides much-needed consistency and certainty. Taken together with consultation on foreign profits and intellectual property, these will help prevent and could even reverse the flow of companies overseas.”

The CBI saw a clear recognition in the Budget of the role that business needs to play in getting the economy back into shape, and generating the jobs and wealth needed to sustain economic recovery.

Mr Lambert added: “This Budget is the UK’s first important step on the long journey back to economic health. The autumn spending review, and the re-engineering of public services, will be equally challenging.”

Looking at particular measures, the CBI argued that protecting capital expenditure from further cuts will prevent the damage to the economy’s long-term growth potential that was the mistake of previous cycles.

Reforms to corporation tax would deliver a regime fit for a globalised world, in which the UK is more competitive and the system more simple and stable, the CBI insisted.

On capital gains tax, the Budget balanced the need for fairness in CGT with a recognition of the need to support entrepreneurship and keep the system simple. The CBI believes that raising the entrepreneurs’ relief will help those who create and build small businesses, and maintaining the threshold should avoid hurting small investors in company savings schemes.

The planned increase in the threshold for employer NICs would reduce the overall burden of the increase in the rate from around £4.5 billion to around £1.4 billion, the CBI calculated.

The employers’ group also backed the government’s decision to leave the R&D tax credit unchanged until it has undertaken a wide consultation with business.

While acknowledging the need for banks to contribute to the restoration of the public finances, the CBI nevertheless voiced concern that the new banking levy will be imposed on balance sheets rather than profits. This will mean, the group warned, that the government must take great care over the detailed implementation so as not to inhibit the ability of banks to finance the recovery.

As for the tax treatment of pensions, the CBI described the move to an annual tax relief allowance for higher earners’ pension saving as a big step forward for business and savers. While retaining the revenue-raising goals of the previous regime, the new approach will cut £400 million of bureaucracy for firms and make it easier for savers to know where they stand.

The CBI supported a promised review of the low-carbon economy, saying that the government is right to explore ways of incentivising investment in low-carbon generation.

For the manufacturers’ organisation, the EEF, the Budget only went so far in its plans to help rebalance the economy, citing the reduction in investment allowances as a problem.

Terry Scuoler, the EEF’s chief executive, said: “The Budget may have given manufacturers much-needed clarity on how the government will go about reducing the deficit, but the short-term pressure to start tackling the deficit means the Chancellor has only done part of the job of rebalancing the economy.

“While businesses will welcome long-term reform and predictability of corporation tax and, have been spared the worst impact of changes to capital gains tax, predictability has come at the cost of competitiveness.

“In recent weeks, manufacturers had been encouraged by strong commitments from the Prime Minister and the Chancellor on the role of manufacturing in a better balanced economy. They will now be left wondering where the necessary growth and investment will come from, given the cuts to investment allowances and capital budgets.”

On reforms to the corporate tax system, the EEF’s chief economist, Lee Hopley, said: “The UK’s tax system needs reform to keep it modern and internationally competitive. Manufacturers will see the plan as a useful first step towards improving competitiveness and predictability after the drift in tax policy and strategy during the past few years. Hopefully this more deliberative process should stop the legislative churn that has added to complexity.”

Closing the gap between income and CGT rates was right in the EEF’s view because the wider the gap between the two, the greater the incentive for tax evasion. Increasing the lifetime cap for the entrepreneurs’ relief will provide a significant boost for entrepreneurs and investors, the EEF added, while maintaining the annual exemption will be vital for employees.

On corporation tax and allowances, EEF senior economist, Jeegar Kakkad, said: “Reducing the corporation tax rate over time was in principle the right course of action. But financing it, in part, by cuts to investment allowances will be a heavy price to pay, especially for smaller companies. It might be a positive signal for large companies, but not for their suppliers.”

Roger Salomone, the EEF’s energy adviser, said that proposals for a Green Investment Bank and the consolidation of disparate sources of support for the low carbon economy into a single institution is a step towards more effective and strategic use of limited public funds. But he warned that the acid test will be the new bank’s ability to attract private finance.