SUPPORTING SMALL BUSINESSES AND ENTREPRENEURS

Budget 2002 is a Budget for enterprise - small businesses received a further boost today as the Chancellor announced a package of measures to cut taxes and reduce compliance costs, promoting entrepreneurial spirit and supporting new business start-ups.

The package will offer reductions in tax and compliance cost burdens for up to 900,000 businesses in the UK. It includes:

cutting the corporation tax starting rate from 10 per cent to zero, meaning that 150,000 companies will no longer pay any corporation tax;
cutting the small companies' rate from 20 per cent to 19 per cent, benefiting over 335,000 additional companies;
measures to ease the impact of VAT on small business including:
- an increase in the VAT registration threshold to £55,000, keeping 4,000 businesses out of the VAT net;
- an optional flat rate scheme, which will allow 500,000 small firms to cut their compliance costs by up to £1,000, and will be extended to 200,000 more small firms with turnovers up to £150,000 next April;
- the removal of automatic penalties for all those firms with turnovers of up to £150,000, who will instead first be offered help and advice when they are late with their VAT payments;
- reforms designed to make it easier for businesses to join the VAT annual accounting scheme, and to recover VAT on bad debts; and
- the introduction next year of a targeted scheme to allow approved importers to delay accounting for VAT on their imports, significantly cutting compliance costs and improving cashflow.
implementing a three-stage move towards universal electronic filing of employer PAYE returns, with financial incentives to encourage small employers to make greater use of IT, as recommended by the Carter Review of Payroll Services;
a cut in beer duty for small brewers from June 2002, offering a 50 per cent cut in duty for those producing up to half a million litres and duty savings worth over £120,000 for breweries producing up to 3 million litres of beer per year. In total, 9 out of 10 breweries will benefit from the scheme;
providing greater flexibility for Venture Capital Trusts (VCTs) by enabling VCTs to merge or be wound up without investors losing tax reliefs;
announcing today successful bidders for pilot projects to help small firms get 'investment ready' by improving their ability to attract external finance to meet their growth aspirations;
modernising the way the Construction Industry Scheme deductions are set off against tax liabilities during the year to improve the cash flow of around 20,000 companies in the construction industry.

For more information, see

Press Notices

REV/C&E1 A modern and competitive business tax system

REV 1 Inland Revenue tax rates and allowances for 2002

C&E 1 Alcohol and tobacco duties

DETAILS

The package of measures includes:

Cutting corporation tax
- Cutting the starting rate of corporation tax from 10 per cent to zero and the small companies' rate from 20 to 19 per cent. From 1 April 2002 companies with profits of up to £10,000 will benefit from a zero starting rate of corporation tax and those with profits between £10,000 and £50,000 will benefit from the reduction in the starting rate through marginal relief. Companies with profits between £50,000 and £300,000 will have their rate cut from 20 per cent to 19 per cent and those with profits of between £300,000 and £1,500,000 will benefit from this change through marginal relief. Overall, these changes will benefit around 485,000 smaller companies. An average small company will save around £700 a year (see press notice REV 1 for further details).
- The Inland Revenue is also considering the compliance implications for companies, clubs and associations within the zero rate band and will be issuing guidance in due course.
Simplifying corporation tax
- Small businesses will also benefit from consultation on the wider reform of corporation tax looking at rationalising the schedular system, the scope for greater alignment between the treatment of investment and trading companies and the case for bringing the remaining taxable gains made by companies into an income regime (see press notice REV/C&E1 for further details).
Simplifying VAT for small businesses
- The annual taxable turnover limit, which determines whether a person must be registered for VAT, will be increased in line with inflation to £55,000, keeping 4,000 small businesses out of the VAT net and maintaining the UK's VAT registration threshold as the highest in Europe;
- A new optional flat rate scheme will simplify the way small businesses account for VAT. Businesses with a taxable turnover up to £100,000 will no longer have to keep records of the VAT charged on each individual purchase and sale and will instead be able simply to calculate their net VAT liability by applying a flat rate percentage to their total turnover. This will offer compliance cost savings of up to £1,000 per year for more than 500,000 businesses, including at least:
- - 32,000 small manufacturers;
  - 15,000 agricultural businesses;
  - 22,000 transport companies; and
  - 11,000 pubs.
- The Government intends next year to extend the flat rate scheme to 200,000 additional businesses with turnovers up to £150,000. From next year, the Government will also ensure that all businesses with turnovers up to £150,000 will first be offered advice and support when they are late with their payments, rather than having to face automatic fines.
- Changes to simplify the VAT annual accounting scheme will include simplifying the payment patterns for all participants in the scheme and removing the existing 12 month qualifying period before firms can join the scheme for businesses with an annual turnover of up to £100,000.
- The arrangements for VAT bad debt relief will be simplified, removing the requirement for supplier business to send letters to their debtors notifying them that they are claiming relief.
- Following consultation, a scheme will be introduced next year, for approved importers with sustained compliance records, removing the requirement to pay the VAT due on imports up front, a requirement currently estimated to cost UK importers £175 million per year in compliance and cashflow costs.
Implementation of the Carter Review recommendations on payroll:
- Following publication of Patrick Carter's Review of Payroll Services at the Pre-Budget Report, ministers invited comments on the detail of the recommendations. The consultation showed general support for the principle of greater use of information technology to help employers manage the task of dealing with payroll, although some concern about the requirement for e-filing by small employers. The responses also endorsed the proposals that the Inland Revenue should encourage employers to deal with Government electronically and should improve the support it offers to employers.
- The Government is therefore proposing a three stage move towards e-filing:
- - Employers with 250 or more employees will be required to file electronically from 2004-05;
  - Employers with 50 or more employees will be required to file electronically and beginning with the year 2005-06;
  - The incentive payments recommended by the review to encourage smaller employers with fewer than 50 employees to file electronically will begin from 2004-05 at the level of £250, tapering to £75 by 2008-09. The Government proposes that electronic filing of employer returns will become a universal requirement from 2010 for the filing of 2009-10 returns;
- To support business in the switch to using new technology, the Inland Revenue will be expanding the payroll support given by Business Support Teams and the employers' helpline. These teams offer one to one visits to new and small business to help and give advice on all aspects of business requirements for tax and NICs. The Inland Revenue will also introduce further enhancements to its website.
- A partial Regulatory Impact Assessment has been prepared and is available on the Internet at the Inland Revenue's web site.
Small brewers
- A cut in beer duty for small brewers will be introduced from June 2002 to support the nation's traditional small brewing industry. Brewers producing up a half a million litres will enjoy a 50 per cent cut in duty, equivalent to £40 off each barrel they produce. All brewers producing up to 3 million litres of beer per year will enjoy a cut in duty. In total, 9 out of every 10 of the nation's breweries will benefit from the scheme including all micro and regional brewers, the majority of which are based in rural areas (see press notice C&E1 for further details).
Encouraging entrepreneurship
- Providing greater flexibility for Venture Capital Trusts (VCTs). With effect from today there will be greater flexibility for users of the VCT scheme. New provisions will give flexibility to VCTs and their investors to consider options on being wound up or merged from a commercial standpoint rather than with regard to the tax implications.
- Helping firms become 'investment ready'. The Government is committed to improving the ability of entrepreneurs to make use of risk capital by ensuring that more know how to access it and understand its benefits. The Government is today announcing successful bidders to run six pilot projects to inform small firms about their financing options and offer a programme of support to help them become 'investment ready' .
Changes to the Construction Industry Scheme
- From 6 April 2002 companies operating as subcontractors in the Construction Industry Scheme (CIS) who receive payments net of CIS deductions will benefit from new arrangements that will improve their cash flow. Companies who have deductions made from their income as subcontractors will no longer have to wait until the end of their accounting period before they can set off these deductions against other liabilities. The deductions can now be set off against PAYE and NICs and any CIS liabilities due from employees and subcontractors they engage.
- This will particularly help small and medium sized companies who have little or no corporation tax liability as well as companies for whom construction is a small part of their activity. Around 20,000 small and medium sized companies will benefit from this measure.
- A Regulatory Impact Assessment has been prepared and is available on the internet from Inland Revenue.

NOTES FOR EDITORS

The Venture Capital Trust (VCT) scheme started on 6 April 1995. It offers a range of tax reliefs for individuals investing up to £100,000 per tax year in VCTs which are quoted companies that invest in small unquoted higher risk trading companies.
The Inland Revenue's employers' helpline, offering support to new and small business, can be reached on 0845 7143143.