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Following a budget that could have produced anything from crippling tax climbs to huge spendng cuts, UK business leaders walked away from the Chancellor’s maiden speech feeling quietly confident that they had got a good deal.
This article has been written by Cathryn Hayes, head of HSBC’s dedicated Franchise Unit. The unit has been going for over 25 years and continues to work closely with the British Franchise Association (bfa) and its members in the development of ethical franchising.
Following a budget that could have produced anything from crippling tax climbs to huge spending cuts, UK business leaders walked away from the Chancellor’s maiden speech feeling quietly confident that they got a good deal.
But, as is the case with all government policies, we should wait to see how plans materialise. The staggered implementation of the announcements means that the results will be seen over years, not months.
According to one economics expert, this was a budget with an overall aim of reducing spending in the public sector, while simultaneously boosting growth in the private sector, in the hope that UK businesses will be able to pick up new government tenders as well as qualified employees.
Peter Stoney, honorary senior fellow of economics at Liverpool University, explains: "This was an entrepreneurial-friendly budget with an emphasis on public spending cuts, rather than on taxation. And the hope, from the government’s point of view, is that the private sector will come in and pick up on any fall-out from the public spending cuts."
Lower Corporation Tax rates announced
Where the cuts in the public sector will be is still vague although an average 25% reduction across all non-protected departments was announced. Clarity should come in the autumn when a spending review is scheduled. At this point, according to the new government forecasts, private sector firms will be on the cusp of a growth period, and will have a better idea of where the opportunities of employment will lie, adds Stoney.
”Certain (public sector ) areas are ring fenced, like aid and health,” he said. ”Clearly the Chancellor’s intention is that any public sector unemployment will be mitigated by growth in the private sector.” The Chancellor projected an expected peak in unemployment at 8.1% this year before falling to 6.1% in 2015.
For the private sector, Chancellor George Osborne announced that the amount of corporation tax that businesses are liable to pay is to be reduced to 24% over three years. His argument being that the "current corporation tax rate of 28% is looking less and less competitive" compared to other western economies. "I want a sign to go up over the British economy that says ‘Open for Business’," the Chancellor stressed.
But one significant omission in the budget speech was clarity around the National Insurance (NI) hike that had been promised by the Labour government.
David Bywater, tax partner at KPMG, explains: "[The Chancellor’s] failure to address the NI Contribution increase from April 2011 remains a very direct tax on employment and will hit when the UK economy is still attempting a strong forecast recovery. With the reduction in business rates for hundreds of thousands of businesses not kicking in until October 2010, many of the Chancellor’s good intentions could come too late for some businesses for who the most risky time is that period of growth."
Boost to new entrepreneurs
In addition, new entrepreneurs outside London and the south east will be able to enjoy NI breaks on the first ten workers they employ. What is more, from April 2011, the threshold at which employers start to pay NI will also rise by £21 per week above indexation.
How far this will actually impact on the creation of jobs remains to be seen. The abolition of Regional Development Agencies may be offset by the creation of a regional growth fund in England in 2011. Similar funds for Wales, Scotland and Northern Ireland are expected to follow.
Stoney stresses: "It has been a business-friendly budget, when you consider that corporation tax is coming down and there will be an NI holiday for firms outside London and the south east. It has got to be good for people earning their money in a business environment."
VAT rise for 2011
The Chancellor’s announcement of a rise in VAT from 17.5 to 20% on 4 January 2011 was met with mixed emotions. While items currently not liable for VAT will remain exempt, it is a cost increase unavoidable for most.
Businesses now need to decide whether to absorb the costs or pass the increase on to customers as this would mean a possible reduction in profits or sales. However, Osborne was clear. He said: "The years of debt and spending make this unavoidable." But Stoney thinks: "The VAT rise is so small that I don’t see it having a huge impact on UK businesses – if anything the 20% simply brings us in line with neighbouring countries in Europe."
But whether the rise is large or small, it will come at a time when the private sector can afford it, according to HSBC chief economist, Dennis Turner. He says: "The personal sector will also be making a contribution, most notably with a rise in VAT to 20%. But this will not take effect before next January, by which time the economy should have completed its fifth quarter of recovery."
But Turner’s positive outlook may not appease business leaders in the retail sector, who are likely to see VAT increased at one of their busiest times – the January and New Year sales period. While some may choose to retain their prices, hence carrying the cost of the increase, pressure will be put on wage demands as customers begin to feel the pinch.
For the economy overall, the VAT increase will inevitably push up the Customer Price and Retail Price indices, increasing inflation and putting more pressure on the Bank of England to raise interest rates next year.
Only time will tell if the reduction to the corporation tax rates will compensate for any losses businesses might experience through the VAT rise.
A clear strategy
With the cuts in capital allowances, some businesses may feel it prudent to bring their planned investments forward to take advantage of the higher allowance and rates.
The reduction in the value of capital allowances will affect those businesses with significant rolling capital expenditure programmes. The reduction in the annual investment allowance will most impact on smaller businesses for which it represented a considerable benefit.
Now is the time to prepare and plan for the Budget changes to ensure that expenditure qualifying for allowances is taken into account and those allowances are used effectively.
*HSBC’s Starting a Franchise guide has more information on the planning and research required to start a franchise. Free copies are available to download for www.hsbc.co.uk/franchise or contact HSBC’s franchise team at firstname.lastname@example.org