Monday 13 March 2017

Small business has become this government's 'cash cow'

The increase in National Insurance contributions announced in the Spring Budget is the latest in a number of tax increases introduced by this government which have a negative impact on small business. The government is in need of cash and it seems like squeezing small business is a relatively easy way of swelling their coffers.

Let's explore the evidence for this. Recent tax changes targeted at small business include:
  • The introduction of a dividend tax effective from April 2016
  • Changes to the VAT flat rate scheme effective from April 2017
  • Increase in national insurance for the self employed from April 2018
  • Reduction in the tax free dividend allowance from £5,000 to £2,000 per annum from April 2018
The case put forward by the government for making these changes is that they are 'Levelling the playing field' between 'self employment' and employment. I use the term 'self employment' in its broadest sense here to include those who trade via limited companies, usually as owners (shareholders) and directors (employees). So they have set about withdrawing all the relatively minor tax breaks which were in place to support risk-taking and entrepreneurship.

The issue here is that self employment and employment are not the same and in my opinion should not be taxed in the same way. Many of the smallest businesses are already struggling to make ends meet, particularly in the early stages of their business. Many entrepreneurs do not have a pension or if they do it is often inadequate. They don't get paid if they are absent or sick. All spare funds are often put into keeping their business going and paying their employees and other costs. An extra tax burden on top of this will be hard to bear and in some cases will have a significant effect on the businesses and their owners.

The dividend tax has been introduced without so much as a murmur of protest. For a basic rate tax payer the extra tax burden will be around £2,000 per annum. There were no marches on Downing Street, no petitions on Facebook and no outcry in the Press. The changes to the VAT flat rate scheme again have passed through with little opposition although the cost to a small businesses turning over say £50,000 will be around £2,000 annually along with an increased administration burden. The National Insurance increase has generated more resistance, not least as it went back on the Tories election manifesto pledge not to increase National Insurance, Income Tax or VAT. At the time of writing the government has said the change is 'fair' and it will go ahead.

So what is the conclusion to be drawn from this? Well it seems clear to me that this government does not understand or value small business and sees it as an easy target to hoover up cash. It's an easy target as the Tories are attacking their natural constituency. There has been little protest from the opposition to these tax changes. Small businesses seem to bracketed in with 'big business' excess and tax avoidance scams and as such are seen as fair game to squeeze a bit harder. The danger with attacking your natural supporters is that when things start to bite as they will soon, you find that you cannot take your core support for granted any more.

The UK is still a good place to do business. It's relatively easy to start up and administration, although burdensome, is simpler than in many other countries. If we take away all the tax incentives for business owners we will see more businesses failing and more entrepreneurs thinking, 'What's the point'? if an increasing chunk of their endeavours goes straight into the Chancellor's purse.  Small businesses are the engine for job creation, they give our high streets their diversity and colour, they are the big businesses of the future. We need to nurture and encourage them rather than squeeze the life out of them.

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