As George Osborne prepares to deliver the Emergency Budget, entrepreneurs are hoping that spending cuts will take a greater weight of the deficit-reduction burden than tax rises.
However, they’re also realistic enough to acknowledge that they have to share some of the pain. And asked which tax rise would be most damaging to them as a business and the wider economy, the most frequent reply was national insurance contributions (NICs).
Even though the Conservatives jettisoned Labour’s proposed 1p rise to employers’ NICs, there are still considerable misgivings about the fact that the employees’ 1p rise will apparently be preserved by the coalition government.
Many people don’t quite realise the devastation an NICs hike could wreak because people think 'it's only 1%' but the reality of a 1% hike is around 8% on the employees’ monthly NI bill, and that bill is already high enough
Henry Allen, MD of 99Moves
False logic
Far from applauding the Chancellor for scaling back Labour’s plans, Tor Macleod, co-founder of career planning website careerplan4.me, hinted that, if anything, the tax should be cut. “National Insurance employers contribution is an already prohibitive and damaging tax,” he says. “This financial hit acts as a barrier to recruitment for companies – particularly small and medium – as they find the cost renders hiring new employees too significant a drain.”
It’s a false logic, he suggests, to raise the tax to boost tax receipts as the damage to job creation ultimately means a higher welfare bill. “Public sector redundancies are expected to push the number of UK jobseekers close to three million – three million competitors battling recruitment freezes and a lethargic job market.
“The private sector will be extremely hard pushed to create jobs at the same rate that the public sector sheds them so it’s essential that there’s strong motivation to do so. The prospect of an increased National Insurance contribution attached to a potential new recruit is an enormous deterrent and wholly counter-productive.”
NICs were one of the most contentious issues of the election campaign and one which the Tories were generally adjudged to have outflanked Labour on. The Conservatives’ dubbed Labour’s proposed rise “a tax on jobs” and the label stuck, while a succession of business leaders came out in support of the Tory position.
Sara Tye of Redhead PR also believes that the most damaging tax rise Osborne could announce is an NIC one: “National insurance employers’ contribution will have the greatest effect on businesses as this affects every type of business across the UK,” she says. “It will really affect that employee line in the P&L and will obviously have an effect on recruitment, especially for large firms. The government should think very carefully before raising it.”
Chris Oakley CBE, chairman of digital marketing agency Chapter Eight, adds to the chorus of concern about adding to the NICs burden. “For a company like Chapter Eight, an increase in the employers' national insurance contribution would be the most damaging,” he says.
“The nature of our business, providing global e-commerce solutions and designing websites for our customers, means our workforce grows along with our success. So an NI increase would be a disincentive to grow since cost is immediate and there's a time lag before revenue follows. It would, as the Conservatives said in their election manifesto, be a direct tax on jobs.”
Equally as controversial has been the coalition’s proposals to hike the top rate of capital gains tax from 18% to somewhere in the region of 40%. The rise, a Liberal Democrat manifesto pledge, is targeted at short-term stock market speculators and capital gains on second homes, which is worrisome for the property investment sector.
“The proposed equalisation of CGT and income tax rates would hit my property-buying clients,” says Louise Reynolds, director of Property Venture. “This would evidently impact business flows for my overseas business.
“People tend to buy overseas property as second homes or investments and these fall under CGT rules when coming to sell. The countries I deal with have double taxation treaties with the UK and so the UK tax system drives the level of taxes UK-based clients pay.”
However, she says, lobbying from business groups might have convinced David Cameron, who promised to listen to a range of views over the issue, to scale back the plans. “I have been a bit relieved to hear that this may not necessarily be the case, in reality when the Emergency Budget is announced next week,” she says. “I understand some of the lobbying taking place may have changed the government stance somewhat and they may allow taper relief, as there was under previous CGT regimes, or possibly the CGT treatment may not end up being as harsh as first believed.”
Nevertheless, until the Treasury clarifies its vague assurances of “generous exemptions for entrepreneurs”, many business owners contemplating selling their businesses will be wondering whether they’ll need to accelerate their exits.
Douglas Broom, head of content for accountancy training and software providers CHH, says: “A capital gains tax rise would have the most damaging effect on small businesses of any tax rise as it would hit entrepreneurs when they sell a business they may have spent years building up. Given that business owners stimulate the economy best by selling and then moving on to a new challenge, it is important to encourage this behaviour.” He acknowledges, however, that “the government will protect small businesses through some kind of entrepreneur relief.”
Neal Gandhi of international business service provider Quickstart Global believes that even as it stands, the CGT law is seriously flawed. “Perhaps the most damaging tax is one that destroys entrepreneurship and with it job creation and innovation,” he says. “A punitive capital gains tax, particularly one as clumsy as the current one, will do the economy no favours.
“At present entrepreneur’s relief requires that you have been a PAYE employee for at least 12 months leading up to a sale, whereas many owners remunerate themselves via dividends or have no day-to-day role long before exit. Entrepreneurs will need to study the fine print and hold the government to account if they get this wrong.”
Approval
Rather less provocative is the Chancellor’s proposal to reduce corporation tax. The coalition government’s commitment to reducing the headline rate of corporation tax by 3p from its current level of 28p has met with widespread approval from the business community.
Not universal approval, however. Some manufacturers have expressed reservations because the Conservatives had budgeted to fund the cut by abolishing tax allowances which the sector says are vital in making new equipment affordable.
David Clift, corporate tax director at Hazelwoods LLP, says: "Businesses are likely to be most affected by changes to National Insurance and corporation tax. Although corporation tax rates may be reduced, this will probably be offset by the withdrawal of certain allowances. Manufacturers in particular benefit from allowances for expenditure on equipment and tax breaks for developing new products and processes. Withdrawing these tax breaks could discourage investment.
