Insights

George Osborne started his first budget by preparing us for the worst, with his opening line that it would be “tough but fair”. And it was. In fact it was much better than we had anticipated, especially given the hype around rises to CGT these past weeks.

In our view, this is the first decent budget for entrepreneurs and business owners for some time and it’s exactly what the country needs to help rebuild economic activity.

Since the abolition of the taper relief system, business owners looking to reap the rewards of their hard work have had less and less to get excited about. Being offered entrepreneurs’ relief at 10% for the first £2m of gains only wasn’t much of an incentive, and then, after the banking crisis and recession, business sales reached an all time low.

With its first Budget, the coalition has been true to its promise of creating a climate in which UK businesses can flourish by making the country as attractive as possible to foreign investment. First of all, the employers’ NIC holiday for new SMEs setting up outside London and the South East was welcome, although some groups have called for this to be made UK wide. Rates of NIC were left unchanged, except for a rise in the lower threshold for employers’ NIC. These measures will in effect make employing staff at the lower end of the pay scale less costly and should help stimulate job opportunities. Combined with the rise to the personal allowance for those on the lowest incomes, it should also help increase demand for jobs and go some way reducing the number of people reliant on benefits.

Corporation tax is also set to fall for both large and small companies. For small companies the rate will drop to 20% from 1st April 2011. Larger companies will ultimately save proportionately more tax as the rate is cut over four a year period from the current rate of 28% to a low of 24%. This gives the UK the lowest main rate of corporation tax of any European country and should act as a significant draw to businesses looking for an international hub. The non-dom rules for individuals, which are largely viewed as a deterrent to inward investment are unlikely to be a deterrent to businesses looking to employ non-UK domiciled staff for periods of less than 7 years.

For entrepreneurs, the extension to the existing entrepreneurs’ lifetime relief from £2m to £5m was entirely unexpected, even though the Chancellor promised that CGT reliefs for business owners would be generous. Starting from 23rd June, any employee or company officer, with at least a 5% stake in a qualifying business will pay capital gains tax at the rate of just 10% on the first £5m of gains from a sale. Initially we were skeptical that this rate would indeed remain once the CGT rate increased, since the previous method of calculation would have meant an automatic increase alongside the increase in the main rate of CGT. However we were delighted to see the ‘fraction’ calculation replaced by a straight rate of 10%. It is excellent news for entrepreneurs and will inevitably create an increased interest in exit planning as it becomes more worthwhile for business owners to sell. Any business owners who decided to crystallise gains at the previously existing rate for fear of incurring a subsequent CGT rate rise in the Budget, will still be entitled to the additional allowance for future qualifying gains.

These positive announcements were balanced with some pain and an inevitable 2.5% rise in VAT. With the treasury deficit so high, this is probably the most manageable way in which to increase revenue, although there are criticisms that it also affects those least able to afford it. Essential items such as food and children’s clothing will continue to be exempt for the duration of the current parliament.

The reduction in the Annual Investment Allowance (AIA) from the current £100K to £25K was the other significant announcement that will have an impact on business in the future. However the Chancellor has been smart about its introduction being phased in, so that any businesses looking to make a significant investment have the next 21 months to plan. This therefore gives two benefits. It could help influence capital investment in the short term, which in turn boosts the economy, and, longer term, it will be a source of additional tax revenue.

Overall, we felt that a lot more thought went into this Budget than some of the others we’ve had in recent years. The way it was presented and the extent to which a variety of stakeholders had been properly considered was refreshing. We think the year ahead will bring some very positive opportunities for business owners – especially if they’re looking to sell!