Small companies will get a £7 billion package of measures to help to bolster them through the economic downturn. The move follows a series of warnings from small business groups that many viable businesses are facing ruin largely because of cash-flow problems and access to finance.

The Chancellor, who described small businesses as the engine of the economy, promised that the banks would take up a £4 billion pot from the European Investment Bank and that £1 billion was likely to be available by the end of the year.

Alistair Darling also bowed to calls from the Federation of Small Businesses (FSB) to create a £1 billion emergency fund. This will be used to enable companies to borrow sums from £1,000 to £1 million on flexible terms. Under the temporary programme the Government will guarantee bank lending of up to £1 million to small businesses. Smaller companies are also to be given a free rein to spread tax payments, including corporation tax, VAT and national insurance for as long as they need. Small businesses have argued for flexibility from Revenue & Customs when they have trouble paying bills on time but are hopeful of future income.

There will also be far more generous arrangements for small companies to offset tax on current profits against previous losses. Currently a business can offset profits against losses in the previous year, but now they will be able to offset tax on current profits against losses in three previous years. The FSB said that this move would help companies through the ups and downs and denied that it would reward failure. Stephen Alambritis, its head of external affairs, said: “These will be viable businesses, it is just a way of helping to smooth things out.” The offsetting alone is likely to deliver hundreds of millions of pounds for smaller companies.

The Government is to make another £1 billion available to help exporters with trade credit through the Export Credit Guarantee scheme. The Treasury is also shelving next year’s planned increase in small business corporation tax. However, the 1p increase to the new rate of 22p is still planned to take effect by 2010-11.

The Department for Business and Enterprise also announced the creation of two smaller funds to boost small business. A £50 million pot will be made available to pump equity into businesses that are having trouble getting financing because of their high levels of debt. The department will back commercial fund managers who pump equity into the businesses.

A £25 million, six-month support package is to be administered through the regional development agencies. This will give funds to viable businesses which are having difficulty raising finance. This month Advantage West Midlands, the Midlands regional development agency, launched a £4 million programme to help small companies.

John Walker, national policy chairman of the FSB, said: “Many of these measures, such as giving businesses longer time to pay bills and offsetting losses, will give small businesses a welcome breather from the taxman and allow them to concentrate on sustaining their business, supporting their staff and growing the economy in the long term.”

But the Forum for Private Business said that the moves did not go far enough. A spokesman said that while many of the measures to boost liquidity were welcome, “we are disappointed that these initiatives are both temporary and short-term, and that much of what has been given today will be clawed back post2011. In addition to short-term liquidity solutions, we were hoping for medium and long-term policies.”

Accountants also gave warning that entrepreneurs running small businesses who earn more than £150,000 could be hit by a tax take of more than 52 per cent after the rise in the top rate of income tax to 45 per cent and the rises in national insurance contributions. Alex Henderson, from PricewaterhouseCoopers, said that an entrepreneur taking payment from his or her own business could face a total tax take of 52.8 per cent when they pay dual national insurance and the higher rate income tax.

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