Emergency Budget June 2010
Was it really as bad as we expected?
Gerry O'Boyle is a self employed Accountant from Bangor who runs his own business (O'Boyle Accounting& Taxation Ltd) specialising in saving tax and other costs for small businesses. He prepares Accounts and tax returns for small companies and offers practical advice in running a business. Gerry helps businesses by offering Quickbooks advice and training. He also teaches Taxation on a part-time basic in the local SERC College.
We knew the new Conservative-Liberal government was going to introduce a harsh budget so what areas or sections of society will suffer most and will the chancellor achieve his target of actually balancing the budget? Mr Osborne didn't give a lot of detail about how cuts in the public sector of 25% over four years would be achieved and it's difficult to see how he will make these overall savings to cut our deficit.
Increasing VAT to 20% from Jan 2011
Without doubt this was the main talking point of the budget. Except for a temporary reduction last year VAT has been at 17.5% for almost 20 years. This was a very simple way for the chancellor to raise over £10bn annually. The question now is will Mr Osborne actually receive his £10bn every year? In early 2011 the cautious consumer will start to notice prices increasing just as we should be coming out of recession. In reality most purchases are subject to VAT and increasing the rate to 20% will hit those on lower incomes harder than the rest of the population and would cause inflation.
Meantime the small businesses who are struggling at the moment anyway will be reluctant to increase their prices. Some businesses will try to absorb the VAT increase themselves but in the long run this can be a dangerous strategy as their profit margins will then decrease. Their customers will have to get used to the fact that prices are going to go up in 2011.
The happiest business sector will be those companies that either have an annual turnover below the VAT threshold (less than £70,000 and so don't have to register for VAT) or those businesses that sell VAT exempt or zero rated goods.
Capital Gains Tax (CGT)
The Liberals seemed to lose some of the argument here. However the CGT rate did increase to 28% for higher rate tax payers immediately from last Wednesday. Those on basic rate tax will continue to pay only 18%. Despite rumours of a decrease in the CGT threshold the CGT exemption amount remains at £10,100 per annum.
Also from a business point of view there was good news with Entrepreneur's relief where the proceeds of business sales were taxed at a flat 10% rate, up to a "lifetime allowance" of £2m. This was maintained and the lifetime allowance was actually increased to £5m.
Income Tax
There was good news when we heard the basic tax free allowance was increased by £1,000 to £7,475. It's amazing to think that in Labour's pre election budget in March they actually froze the tax free allowance! From a business point of view the TFA increase is also good news too as Sole Traders will have higher tax free allowances and directors in limited companies can pay themselves higher (tax free) salaries. However from April 2011 all employees who earn more than £21,000 will pay more national insurance. Furthermore there will be a lowering of the threshold for the higher 40% tax payers. The predicted phasing out of tax credits has not really happened although most middle income earners will eventually lose their annual tax credit of £545 over the next few years.
Corporation Tax
The new government has promised to reduce the higher rate of Corporation from 28% to 24% over three years. Of course this will only really help large business organisations. More importantly for small business in Northern Ireland, he pledged to cut the small companies' tax rate from 21% to 20% - a little help but as I said last week still a lot higher than our counterparts south of the border where the corporation tax rate is 12.5% despite greater financial constraints in the Irish Republic.
Capital Allowances
Yet another tax change in Capital allowances (depreciation allowed on capital equipment) and this time the news is not so good! The annual investment allowance will decrease from £100,000 to £25,000 from April 2012. For small businesses the current allowance of £100,000 is quite attractive. 100% tax relief on the first £100,000 of capital equipment. If you are thinking of investing in new equipment, plant or machinery then this year (or next year) is a good time to buy and avail of this tax incentive. Also maybe best to buy before the VAT rate increases in January - then you benefit in two ways!
If you need any practical help with preparing Accounts, Tax issues or Quickbooks training please contact
Gerry O'Boyle on 07725613308 or 02891453212 or e-mail gerry@oboyleaccounting.com