When Tony Blair became leader of the Labour party nearly 13 years ago, his
first aim was to make the traditional party of the working classes safe for
middle England.
As Gordon Brown approaches the top job — he is now just weeks away from 10
Downing Street — one of his aims is to demonstrate he can be trusted by
business. The last thing he can afford is for the business vote to be
claimed by the resurgent Tories.
So, while the primary objective of last Wednesday’s budget, Brown’s 11th, was
to wrongfoot the Conservatives and generate favourable headlines by cutting
the basic rate of income tax by 2p in the pound from 22% to 20% — paid for
by tax hikes elsewhere — an important secondary objective was to woo
business.
His new strategy of reaching out to Britain’s boardrooms emerged last autumn.
The rumblings of discontent from the business community were getting louder.
This is despite the fact that, as Brown confirmed last week, Britain’s
economic record over the past 10 years has been good, as are prospects for
the next three years. For firms, economic stability, it seems, is no longer
enough.
So he used the inaugural meeting of his international business advisory
council on November 17 to host a summit for chief executives of Britain’s
leading firms.
The Treasury summit, held in “1HGR” — its state-of-the-art Horse Guards Road
building overlooking St James’s Park — heard from the business advisory
council, whose members include Bernard Arnault, chairman and chief executive
of LVMH; Jean-Pierre Garnier, head of Glaxo Smith Kline; Sir Li Ka-shing,
chairman of Hutch-ison Whampoa; Sir John Rose, chief executive of
Rolls-Royce; Ratan Tata, chairman of Tata Group, and Meg Whitman, president
and chief executive of eBay.
But the summit, held under Chatham House rules, also heard from the men and
women running UK businesses, and the consensus was that more needed to be
done to boost competitive-ness, on skills, infrastructure, investment and,
crucially, tax.
Whether it was that summit, or the public warnings from companies about
relocating — HSBC said it could save £400m by doing so — something clicked.
Brown’s other 2p cut, reducing the main rate of corporation tax from 30% to
28%, was a move that firms could barely have hoped for even a few weeks ago.
“A lot of us have been making the case for the UK to be more competitive on
business tax, but 12 months ago the Treasury’s attitude was that they didn’t
need to do anything,” said Paul Davies, head of tax at accountant Ernst &
Young. They have now recognised the need to be seen as competitive. Having a
lower headline rate does make a difference. If you’re a business and looking
to locate, that is what you look at first, rather than the intricacies of
tax allowances.”
When the main business-lobby groups put in their budget submissions, all
called for a corporation-tax cut but few expected it.
Richard Lambert, director-gen-eral of the Confederation of British Industry
(CBI), said he had detected a recognition among officials that cuts in
corporation tax were needed, though he had received no direct hint from the
chancellor of a change of view.
Even a teasing hint from Brown a few days ago in a newspaper interview that
business would have reason to be pleased with the budget failed to remove
the doubts about whether he would follow through, though it did prompt
George Osborne, the shadow chancellor, to make a preemptive pledge to cut
corporation tax by 3p in the pound.
“Headline rates matter,” Lambert said. “This was quite symbolic. It’s a
recognition of the problem, a signal.” He noted that Treasury budget
documents said the case for further reductions would be kept under review.
“I was surprised,” agreed Miles Templeman, director-gen-eral of the Institute
of Directors, which had called for the cut. “The tax-take remains too high
but directionally this is the way we want to go.
“We just hope this is the start of a process, not the end of it. Other
countries are reducing their tax rates so we need to keep doing it if we
want a dynamic and competitive economy.” Lambert disclosed that the CBI
intended to set up a corporate tax task-force, consisting of tax experts and
business leaders, to push the debate forward and keep the pressure up for
further reductions in tax. “We need to ask whether a corporate tax system
that was appropriate 20 years ago is still appropriate today, as well as a
range of other questions,” he said.
The task-force will report early next year, in time for the first budget of
Brown’s as yet unnamed successor. The aim will be to keep up the pressure
for further changes.
But there was more to the budget than the cut in corporation tax. The North
Sea, once the cash cow for successive chancellors, is now disappointing.
Compared with his budget a year ago, Brown has been forced to revise down
his projections for oil revenues by an average of £4 billion a year because
of rising costs and falling production costs. This meant that, while Brown
appeared to be satisfying business’s demands, there was never any question
of a net tax giveaway.
“As I listened to the budget, I thought this is ticking lots of boxes,” said
Martin Temple, director-general of the Engineering Employers’ Federation.
“We asked for a cut in corporation tax, and for more for education, science
and research and development. I thought this is rather good.”
As well as announcing the cut in corporation tax, Brown also spent the
equivalent of £150m in a full-year enhancing the R&D tax relief for
both larger and smaller firms and pledged new money for science and
innovation.
There was a revenue-raiser of nearly £1 billion a year by abolishing rate
relief on empty commercial properties. In future, business rates will have
to be paid even when a property is not in use, increasing the incentive for
more efficient use of buildings.
For Temple, however, the sting was in the tail. The cut in corporation tax was
to be paid for partly by a £2.3 billion cut in the value of capital
allowances for investment in plant and machinery. This, which will heavily
penalise capital-intensive firms, destroyed the good work of the
corporation-tax cut, he said. “In the end, it’s all about investment, and
the need to see it encouraged. The real story was in the capital allowances
and you have to say, as a result of that, the budget was negative.”
Even the corporation-tax cut may not be as good as it seems. Brown said it
would give Britain the lowest rate in the G7 (America, Japan, Germany,
Britain, France, Italy and Canada).
But according to an analysis by the CBI and accountant KPMG, the effect of the
cut will be to make Britain’s tax regime more internationally competitive,
but not by much.
Taking into account tax changes planned in other countries, the
corporation-tax cut will lift the UK from joint 15th in the league table of
OECD (Organisation for Economic Cooperation and Development) countries to
equal 10th.
But Britain will continue to be undercut by many other countries in Europe.
According to Mike Devereux of the Institute for Fiscal Studies, 18 (of 27)
EU members will have corporate-tax rates as low or lower than Britain, even
after the reduction announced last week.
Britain is undercut, not just by the likes of Ireland, with a rate of 12.5%,
but also by most of the new entrants to the EU, as well as countries like
Austria, Finland and Portugal. Denmark and Sweden, normally thought of as
high-tax countries, have similar corporation-tax rates to the UK’s new 28%
level, which will come into force next year.
But while larger businesses were debating whether the budget marked the
beginning of a trend towards even lower taxes, smaller firms — those with
annual profits of up to £300,000 — were cursing an increase in their tax
rate.
There were howls of outrage from the small-business community as the
chancellor hit them with an unexpected hike in corporation tax from 19% to
22%. The increase will be in stages, coming fully into effect in April 2009.
Around 4m small businesses will face an increase in corporation tax from 19%
to 20% next month, rising to 21% next year and 22% in 2009.
Small-business organisations are particularly upset that Brown has singled out
the smallest businesses for the tax hike while at the same time reducing the
tax rate for large firms. They feel that they are having to pay for the
benefits being bestowed on bigger companies.
The Federation of Small Businesses said that its newly elected chairman, John
Wright, would be seeking an urgent meeting with Treasury officials this week
to express his concern about the increase in the tax rate.
Stephen Alambritis, a spokesman for the FSB, said: “We want to know why the
chancellor did not stop at the cut in tax rates for larger companies but
went on to levy an increase on the smallest companies. We are going to ask
for the reasoning behind that decision.”
Brown offered small firms the carrot of enhanced investment allowances to
compensate for the tax hike; a new annual investment allowance of £50,000.
The Treasury said it was only acting to prevent abuse of the system by
self-employed people turning into companies. But experts were unconvinced.
“There’s some irony here,” said Devereux of the IFS. “We have a rate-cutting,
base-broadening reform for large companies, but a base-reducing,
rate-raising reform for small companies.”
Lambert said the Treasury, having encouraged self-em-ployed people to turn
themselves into companies, had got itself into the position where it risked
losing billions if the practice continued. “They have got themselves into a
real pickle,” he said.
A senior Treasury official insisted that there was no alternative but to act.
“It was a serious issue,” he said. “We knew something had to be done and
we’ve worked very hard over 18 months to try to get it right.”
The Forum of Private Business, which represents 25,000 small UK businesses,
said it would be conducting a full-scale survey of its members to canvas
their views before lobbying government ministers before the presentation of
the Finance Bill.
Nick Goulding, chief executive of the Forum of Private Business, said: “The
increase in corporation tax is a kick in the teeth for Britain’s small
businesses. The budget doesn’t reflect the contribution that small
businesses make to the economy. It does not seek to encourage them in any
way. We will be taking feedback from members to identify exactly where the
shoe is pinching hardest.
“There is no doubt that big businesses have had a big benefit from a reduction
in corporation tax, but it looks very much, at least in emotional terms,
that it is being paid for by small businesses. Yet if you look at who
creates the jobs in this country, it is those small businesses.”
Goulding said that although Brown had attempted to sugar the pill by
introducing tax relief on investment, in practice many small businesses
would not be able to take advantage of this because it was not relevant or
appropriate to their business.
“There are lots of perfectly legitimate businesses who are not in a position
to be able to take advantage of this relief,” he said. “Or if they did they
would be badly skewing their business because they would be making an
inappropriate investment.
“Some of them may well benefit but in order to get there they are going to
have to jump through a whole set of hoops. It is yet another way in which
the tax system is further complicated.” One disgruntled small businessman is
Mike Cherry, fourth-gener-ation owner of Just Wood, a manufacturing business
in Burton on Trent, East Staffordshire, which makes cask closures for the
brewery industry and personalised gift-ware. It employs six staff.
“I am very disappointed,” he said. “The increase in corporation tax just
beggars belief. It shows a clear lack of understanding of the small-business
sector, which is what we seem to come up against time and time again.
“It will obviously have an impact on us, which flies in the face of what all
politicians keep saying about small businesses being the driver of the
economy. Small businesses are not crying out for help but we certainly don’t
need kicking in the teeth like this. I don’t think that politicians
understand small businesses at all.
“I don’t know whether the changes in the allowances will benefit us or not.
Until I see the details it is impossible to judge, but I have a sneaking
suspicion that for established businesses like mine, which have been through
quite a lean time, that just when we are beginning to start getting back
into some sort of profitability, we are going to have more taken off in
tax.”
Additional reporting: Rachel Bridge
‘BANKS WILL BE AMONG THE BIG GAINERS’
GORDON BROWN has been keen to woo the City in recent months, and it is likely
to be the main winner from last week’s budget.
“If you look at it, the biggest net gainers are likely to be in sectors which
aren’t capital-intensive, and that includes banks and financial-services
companies,” said Robert Parkes, UK equity strategist at HSBC.
Although Brown’s overall budget package was intended to be neutral, his reform
of corporation tax will hurt firms who invest heavily in plant and
equipment. That includes manufacturers, but also utilities.
“Those with a large asset base, who previously benefited from capital
allowances, may feel worse off,” said Peter Newland of Lehman Brothers.
Calculations by the Engineering Employers’ Federation show that medium-sized
manufacturing firms will be worst hit. A company with a £10m turnover,
£400,000 profits and investing £600,000 will see its tax bill double under
the plans. A £20m turnover firm will see its bill rise 65%.
Parkes said Brown’s changes appeared targeted at those firms who were
relatively “footloose” and could relocate elsewhere in response to lower tax
rates in other countries.
Casinos dealt a losing hand
THE moment Gordon Brown finished his budget speech, bosses of Britain’s
leading casino companies were organising a conference call to share their
reactions, writes Matthew Goodman.
Britain’s gaming bosses were incandescent. They suddenly felt under siege.
The chancellor announced a radical rise in gaming duty, setting the basic rate
at 15%, far in excess of the previous introductory band of 2.5%.
The largest venues, including the planned supercasino in Manchester, will see
duty jump from 40% to 50%.
“It’s unbelievable,” said one industry executive, “but then, this government
has made a habit of doing the unbelievable.”
The gaming industry argues that for some smaller casinos the tax rises will
mean the difference between running profitably and becoming loss-making. It
warns that the new regime could lead to the closure of some venues,
particularly the smallest casinos.
Casino bosses are especially dismayed because they have been working much more
closely with the Treasury over the past few months on the impending
deregulation of the gaming sector.
Yet, they argue, there has been no hint that such a punitive fiscal regime
could be on the cards.
“There has been no consultation at all on this. How can any business or
investor make sensible, long-term investment decisions when volatility is
increased by changes in government tax policy,” asked Ian Burke, chief
executive of Rank Group, owner of Grosvenor Casinos and Mecca Bingo.
Following the budget, Rank, the last big quoted gaming operator, announced
that its profits would be £8m lower following the tax changes. Analysts at
Morgan Stanley cut their forecasts for 2008 earnings per share by 14% and
lowered their share price target to 200p. Other analysts also brandished
their red pens.
Industry bosses are baffled as to why the Treasury should be looking to tax
the industry so heavily while the Department for Culture, Media and Sport is
looking to liberalise and modernise the sector.
“This shows a lack of coordination between departments,” said Roy Ramm, a
director of London Clubs International. “On the one hand they’re urging us
to produce better facilities with more space for nongambling activities,
while on the other they continue to reduce the ability of smaller premises
to make any profit at all.”
Bingo operators were also frustrated after the chancellor failed to scrap
either bingo duty or Vat on their activities to help avoid what they argue
is unfair double taxation.
There was disappointment, too, for offshore internet-betting firms who may
have been looking for a favourable rate of gambling duty to encourage them
to move their operations to the UK. It proved a forlorn hope, as the
chancellor announced a remote gambling duty of 15%, many times the 2% or 3%
they had wanted.
The only bright spot for leisure bosses was the changes to the tax regime for
amusement machines. The industry was relieved to hear that a previously
announced increase in the maximum payout of certain machines to £35 would
not lead to the owners having to pay a higher rate of duty.
‘I DESPAIR OF THE SITUATION IN THIS COUNTRY’
AMONG the biggest losers in the budget were small, incorporated businesses
making profits of less than £300,000 that were hit with a three-stage
increase in corporation tax from 19% to 22%.
Peter Nelder, pictured left, a small-business owner in Plymouth, is one of
those who will be affected. He bought a franchise in Subway, the sandwich
chain, with his girlfriend and business partner, Melina Dobson, three years
ago after being made redundant.
He said: “I am absolutely gutted by the chancellor’s decision to increase
corporation tax.
“We have only been in business three years and each year Gordon Brown has
taken something off us.
“Last year he took away the 0% tax rate on the first £10,000 of profit. Now
the rate of taxation is going up.
“Small businesses have been knocked for six again.
“It is really disheartening when you are trying to establish yourself and make
some money in this country. It is very, very difficult.”
He added: “It seems to me that small businesses like me will be funding the
cut in the tax rate for bigger businesses.
“The chancellor only cares about the City and about big business, even though
the reality is that most people in this country are employed by small
businesses.
“I don’t think he realises the importance of small businesses for this
country. In fact I don’t even think that the likes of me ever cross his mind.
“I despair of the whole situation in this country.”
The small-business corporation tax rate will be put up from 19% to 20% from
April 1, rising to 21% next year and 22% in 2009.
Matt Hardman, a spokesman for the Forum of Private Business, said: “The tax
increase is really bad news for Britain’s small businesses.
“Gordon Brown has tried to alleviate the impact of the extra tax with things
like allowances for research and development and the purchase of new
machinery, but these are things that companies do very rarely, and only a
small percentage of businesses do.
“He has made small businesses pay for dropping the higher band of corporation
tax for big businesses.”
Stephen Alambritis, spokesman for the Federation of Small Businesses, said:
“We were not expecting this at all and we are very disappointed.
“The chancellor seems to be punishing the very small companies.
“He has claimed to be a business-tax cutter, but in reality he has been a
business-tax cutter for only the fairly large, growing companies.”
