SMALL companies have lost tax breaks introduced by the Chancellor just three years ago.

Gordon Brown said that he was changing the rules that allow small limited companies to pay no corporation tax on profits of up to £10,000 as an anti-avoidance measure.

Thousands of sole traders and partnerships became limited companies to take advantage of a tax break that allowed them to avoid paying corporation tax on profits of up to £10,000 in 2002.

Acccountants have attacked the new move, under which firms will pay at least 19 per cent on all profits from next April. Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants, said: “It was announced as a simplification, but it’s only a simplification because the Government made it complicated three years ago. They have moved to close a loophole that they created themselves. It is no good crying wolf about a tax relief just because people use it.”

Louise Evans, of Grant Thornton, the accountant, said: “Many people were encouraged to incorporate by the Chancellor, and this is a tax hit directly on them.”

The Chancellor said that he was replacing the corporation tax break by increasing the investment allowance for small firms by 10 per cent to 50 per cent, But some experts were unimpressed. Ms Evans said: “Small firms which make a profit of less than £10,000 already benefit from 50 per cent capital allowances, so there is nothing extra on offer for them.”

Kevin Nicholson, a tax partner in PricewaterhouseCoopers, the accountant, said: “The corporation tax allowance and capital allowance are completely different. One is not a replacement for the other.”

Nevertheless, many small business owners welcomed the Chancellor’s decision to allow them to offset the cost of new accounting rules that came into force this year. The new regime, referred to as UTIF 40, could increase some service companies’ tax bills by thousands of pounds because of a change in the way that they must account for work in progress. Yesterday the Chancellor announced that they can spread the cost over at least three years, helping to cushion the blow.

The Federation of Small Businesses (FSB) also welcomed the widening of the National Employer Training Programme, which will be running nationwide from next summer. Stephen Alambritis, of the FSB, said: “The high priority given to education and training in the Pre-Budget Report is good news, as training can be a major expense for small businesses.” The scheme, which has been piloted since 2002, allows companies to reclaim the cost of training their staff to Level 2 Skills standard.

Small businesses also welcomed the Chancellor’s pledge to try to reduce the complexity of VAT payments for more small businesses. Mr Brown said that he had written to the European Commission for leave to introduce measures to allow firms with turnovers of less than £1.35 million to take advantage of simplified VAT rules. Only companies that have an annual turnover of less than £660,000 can take advantage of the regime, which allows them to fill in one VAT return a year instead of four, and to pay VAT only on payments that they have received rather than all invoices.

Mr Alambritis said: “This is a step in the right direction, but more needs to be done because VAT administration is still one of the most burdensome aspects of running a small business.”

The Government pledged to work with chambers of commerce to ensure that the 70,000 firms that are eligible at present to make simplified payments do so.

Mr Brown also said that he would save businesses £300 million by removing unnecessary regulatory burdens and simplifying the tax regime.

Micro businesses in disadvantaged areas will also be given help. Mr Brown pledged £36 million to increase the supply of affordable loans to those individuals and those hoping to start their own businesses who are on low incomes. The loans will be administered by credit unions and Community Development Finance Institutions.

Some small businesses were disappointed that the Chancellor did not pledge to extend the current 40 per cent tax relief for Venture Capital Trusts. The current tax break runs out in April.

BUSINESS PLAN

• Capital gains tax payable on first £10,000 in profits increased from 0 per cent to 19 per cent
  
  
• Capital allowances for small and medium-sized enterprises increase from 40 per cent to 50 per cent
  
  
• Allowance for firms to offset the cost of new accounting rules over three to six years
  
  
• Application to the European Commission to simplify VAT payment for firms with turnovers of up to £1.35 million
  
  
• Setting up of a national women’s enterprise task force to encourage women in enterprise
  
  
• The national employer training programme will be rolled out next year to provide training for 300,000 employees in 50,000 companies
  
  
• Wider reporting and accountability by regional development agencies

Explore Economics

• Pre-Budget Report 2009

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