Budget 2007 tax changes shows Government does not understand small businesses

The Federation of Small Businesses (FSB) has responded to a Government consultation on tax changes in this year’s Budget by saying that the Government demonstrates a lack of understanding of small businesses.

The consultation, which closes today, looked at the increase in small business corporation tax – from 19% to 22% - and new capital investment tax allowances for small businesses that were announced in the March 2007 Budget.

The FSB believes that the capital investment tax allowances in no way off-set the corporation tax increase because to get the full benefit from them a business would would need to make an annual capital investment of £50,000.

For 42% of FSB members £50,000 is half of their annual turnover. Clearly, for small businesses this is not a realistic level of capital investment. Also, claiming the capital investment tax allowances requires a lengthy form-filling exercise, whereas all small businesses enjoyed a lower corporation tax rate, without any additional administration.

The Government claims to want to encourage enterprise and reduce the amount of red tape for businesses, but by increasing corporation tax for small businesses and introducing new capital investment tax allowances, it is clearly doing neither.

Bill Knox, FSB Tax Chairman, said, “Small businesses continue to feel let down by the Government with regard to tax. Increasing the corporation tax on small businesses by three percentage points, while reducing it for large firms, was a kick in the teeth.

“Complicated tax allowances, with their bureaucratic processes and unrealistic spending thresholds have in no way made up for that tax hike. A local hairdresser is not going to spend £50,000 per year on hairdryers but will be subject to higher taxes.

“On top of the draconian change in capital gains tax announced in the Pre-Budget Report, these changes clearly demonstrate that the Government does not understand the needs of entrepreneurs. A seismic shift in the approach taken to small firms by the Government is needed in next year’s Budget to redress the balance.”