Starting and running a small business can be immensely satisfying and rewarding, but it can also be both difficult and expensive.
Accountant Emily Coltman explains what incentives are currently available to small businesses – and what the Government has either promised it to do or has promised to consider in the future.
These proposals are still at the “consultation” stage, but the Government has proposed the following:
Cash accounting for small businesses
Under this proposed scheme, businesses with turnover under £77,000 would be able to prepare their accounts each year based on money coming into, and going out of, their business, rather than taking into account when work was done and what period costs actually related to.
For example, if you invoice a customer on 1st March 2012 for work you’ve already completed, and they pay you on 30th April, currently you’d have to put that income into the tax year to 5th April 2012, whereas under the new proposals it would go into the year to 5th April 2013.
If properly implemented this could make accounts preparation much simpler.
These are measures that the Government has said “will” happen.
Business Finance Partnership; start and extension
Last Autumn, the government promised a Business Finance Partnership to help businesses raise funds from non-bank sources. They initially planned to make £1 billion available for this, but this has now been increased to £1.2 billion. Of this, £100 million has been earmarked to help small businesses through non-bank lending methods, such as peer-to-peer lending.
The Government will allocate these funds to vetted fund managers, who will then be in a position to lend the money to businesses.
Research and Development (R&D) tax credits; second extension
Here’s how that works.
If your company incurs qualifying R&D costs, then it can reduce its taxable profits by the actual costs, and then by another 125% of the actual cost. So if your company incurred £12,000 of qualifying cost, and was eligible for the relief given to small and medium-sized enterprises, it could reduce its taxable profits by £27,000 (£12,000 x 225%).
The effect of this is that, if after the £27,000 is taken off the company still makes a profit, it will have saved corporation tax of £27,000 x 20% = £5,400.
Currently, though, if your company makes a loss, then the only way it can be paid any tax credit for research and development costs straight away is if it pays PAYE and NIC on employees’ wages, and even then the most it can claim back is 12.5% of the loss it has made.
From April 2013, the Government will introduce an Above the Line credit for R&D, with a minimum rate of 9.1 per cent before tax. This means that loss-making companies will be able to claim a payable credit even if they don’t have to pay any PAYE or NIC.
The Government is consulting on the final rate and how exactly this credit will work.
The Government has promised to make Belfast, Birmingham, Bradford, Bristol, Cardiff, Edinburgh, Leeds, London, Manchester and Newcastle “super-connected cities”. They plan that by 2015 this will deliver ultrafast broadband coverage to 200,000 businesses, and more, smaller “super-connected cities” are promised.
Reform of the Enterprise Management Incentive (EMI) scheme
The Government has promised to “improve and reform the Enterprise Management Incentive scheme by providing additional support to help start-ups access the scheme; by consulting on amending restrictions that currently prevent the scheme being used by academics employed by start-ups, and by more than doubling the individual grant limit to £250,000, subject to State aid approval”.
Newly implemented plans
Here’s some of what the Government has actually implemented within the last 12 months.
National Loan Guarantee Scheme
On 20 March 2012, the Government launched the National Loan Guarantee Scheme (NLGS).
The banks must then pass on the entire benefit they receive to smaller businesses, by offering them cheaper loan rates than they would normally give. Typically, the loan rate would be 1% cheaper than standard.
Each bank will implement the scheme slightly differently but they are all obliged to pass on the benefit of the reduced rates.
You can find out more about this by approaching a participating bank.
Enterprise Finance Guarantee extension
The Enterprise Finance Guarantee scheme itself is not new. However, the Government has now said that it will guarantee more of a lender’s portfolio under this scheme, which means that more finance should be available through it.
We’ll look at the Enterprise Finance Guarantee scheme in more detail shortly.
Research and Development (R&D) tax credits: relief extension, first step
Before 1st April 2012, R&D tax credit could only be claimed if your limited company had spent at least £10,000 a year in qualifying costs. That limit has now been abolished.
As we saw above, the rate of relief on qualifying costs is 225%. That’s an extension that came in on 1st April 2012 too. Before that date the relief was 200% of the cost.
Joint registration scheme for limited companies
If you’re planning to set up a limited company in the near future, instead of having to register first with Companies House and then with HMRC, you can now complete one form to inform both bodies at once, under the joint registration scheme.
Companies House’ form now has six questions at the end relating to tax. HMRC may need to contact you for further information once you’ve completed this form.
Business Tax Dashboard
HMRC have recently set up their Business Tax Dashboard for small businesses, which allows you to view your business’s tax liabilities (corporation tax or income tax, VAT, and PAYE if your business employs staff) in one place.
However, the information provided by HMRC suggests that this dashboard will not cover National Insurance. If your business employs staff, or if you’re a sole trader paying income tax and Class 4 National Insurance on your profits, this could be a major drawback.
If your business is a limited company then you won’t be able to see your personal income tax here, only the company’s corporation tax.*
Finally, let’s look at some schemes that have been in place for a while to help small businesses.
Passport to Export
Enterprise Finance Guarantee
The Enterprise Finance Guarantee (EFG) scheme gives government protection to a wide portfolio of participating lenders, so that these lenders can make available finance facilities such as loans, refinancing, overdrafts and supplementary invoice financing, to businesses who might otherwise not be able to access finance.
Typically this is because the business cannot offer security for a conventional loan. Businesses who might not be able to repay the loan would not qualify.
EFG financing is available to such viable businesses with a turnover of up to £41million a year.
VAT flat rate scheme
Briefly, instead of adding up all the VAT you charged to your customers, taking off most of the VAT your suppliers charged to you, and paying the difference to HMRC, you work out your VAT by adding up all your sales including VAT and applying your flat rate percentage to that figure.
The flat rate percentages are set by HMRC and depend on what trade sector your business is in.
If you use a business record-keeping tool then the time you will save is limited, but potentially there’s less scope for errors because you don’t have to identify which costs you can and can’t reclaim input VAT on.
It can also sometimes save you some money, though that’s not what it was designed to do.
If you need further guidance as to what help is available from the government for your small business, look at the BusinessLink website or the website of the Department for Business, Innovation and Skills.
Emily Coltman ACA is Chief Accountant to FreeAgent, who provide an online accounting system designed to meet the needs of small businesses and freelancers. Try it for free at www.freeagent.com. *It allows you to see both your personal tax and the corporation tax you owe.