Coalition Government: One Year On

 

Stewart Case, corporate services director at Moore and Smalley, gives his verdict on how the Coalition Government’s first year in charge has been for business.

 

It’s been a bittersweet year for the business community in terms of what the Coalition Government has delivered, or committed to deliver. At a time when the priority is balancing the books, it’s always going to be a case of giving with one hand and taking away with the other.

 

On the whole I think people recognise significant budget cuts have to be made to get borrowing under control and protect the UK’s credit rating.

 

What’s clear is that the coalition’s aim is to boost economic growth by encouraging business investment, particularly by SMEs. The Coalition has committed to massively increase rate relief on research and development as it looks to get small firms investing in new projects.

 

Also from next April we’ll see an extensive relaxation of the Enterprise Investment Scheme, which offers income and capital gains tax relief to investors in small businesses. Meanwhile, the lifetime allowance for Entrepreneur’s Relief has doubled to £10m enabling entrepreneurs to be taxed at a lower rate on the sale of business assets.

 

That said, we still have a punitive 50 pence tax rate for high earners introduced by the previous government and I think the coalition will have to address this within this parliament as it will eventually discourage more of our highest earners from working, ultimately lowering tax revenues. It’s been claimed the 50 pence tax rate has been used as a bit of a political tool to tax the well off, and I think we will see it withdrawn in the next couple of years.

 

Here’s my thoughts on some of measures announced to date:

 

  • Capital gains tax up from 18 per cent to 28 per cent for higher rate taxpayers.

Stewart Case verdict: While this headline rate has gone up, entrepreneurs will be less concerned now that Entrepreneurs Relief on the sale business assets has doubled.

 

  • VAT rise to 20 per cent maintained from January 2011.

SC verdict: Only really impacts consumer retailers who have had to put up prices or absorb costs.

 

  • 50 per cent tax rate for highest earners maintained. 40 per cent higher rate threshold lowered.

SC verdict: As personal tax rates climb there comes a point where it’s less attractive to go out and create wealth. I believe 50 pence rate will have to be looked at during this parliament.

 

  • Corporation tax cut from 28 per cent to 23 per cent over the next four years, giving Britain lowest rate of any major Western economy.

SC verdict: Good news for larger business who get taxed at the main rate of corporation tax, but no benefit for smaller businesses with smaller profits.

 

  • Launch of the Office for Tax Simplification – 43 complex tax reliefs abolished and 100 pages removed from the tax code.

SC verdict: A sensible move on the face of it, but more red tape for businesses is being introduced all the time.

 

  • Income tax relief on Enterprise Investment Schemes increased from 20 per cent to 30 per cent from April 2012.

SC verdict: The aim here is to encourage greater external investment in smaller unlisted businesses. A good move that should encourage growth.

 

  • Increase in R&D tax relief to 200 per cent / Limit on Entrepreneur’s Relief increased to £10 million.

SC verdict: Two more sound measures to encourage investment by SMEs.

 

  • Pledge to introduce extra 40,000 apprenticeships in the UK / 24 extra university technical colleges to be created by 2014.

SC verdict: Another good measure in principle aimed at boosting skills and creating jobs for the unemployed. Always more to be done on skills though.

 

  • Abolition of RDAs and creation of Local Enterprise Partnerships.

SC verdict: I think the full remit of LEPs is still to be communicated properly. It will take time to determine whether this has been worthy exercise.

 

  • 21 Enterprise Zones to be created.

SC verdict: Again we’ll have to see how this works over the coming years. Throwing money at an area doesn’t always solve its problems.

 

  • Levy on bank profits and crackdown on bankers’ bonuses.

SC verdict: A popular move politically, but could ultimately make the UK unattractive as a base for the financial institutions that create wealth.