The Chancellor’s Autumn Statement is two steps forward, one massive leap back with changes to the VAT flat rate.

The papers have been awash with analysis of the Chancellor’s Autumn Statement, the state of the economy, the impact of Brexit and how the JAMs are going to suffer more for longer.

The Federation of Small Businesses said its impact for SMEs would be “modest and medium term”. For me, there are three things which really stand out that’ll affect my clients and their businesses: two good, one bad – well we can’t have everything can we?!

I’ll start with the bad news…

The changes to the HMRC’s VAT Flat rate scheme to avoid abuse of the system are now complicated and awaiting confirmation but the upshot is that it will be costly news to many businesses like my own – accountants and consultants – service rich but goods poor operations.

The HMRC overview is here but let me clarify.

What is it changing to? A new 16.5% VAT flat rate for businesses with limited costs will replace the current system of sector specific percentages.

How will it work? Up till now, businesses had been able to decide which flat rate % was applicable to their company by trade sector, but now they must decide if they meet the definition of what constitutes a limited cost trader. (This is set to be defined in new legislation).

For some businesses using the scheme, or thinking of joining the scheme, they will need to complete a test to decide whether they should be on the scheme and use the new 16.5% rate.

The new 16.5% category will only apply if costs of goods are either: less than 2% of turnover or if over 2% but less than £1000 per annum. Goods will be specifically defined for the purposes of the measure.

Who will it impact? It will impact service oriented businesses in many sectors whose sector VAT rate is currently significantly lower. It will take time and significant effort to define who is eligible and will result in many businesses paying more tax.

When will it come into effect? April 1st 2017, but it may be backdated to now. Watch this space as more detail, definition and legislation is to come.

On the plus side…

The Chancellor’s financial golden nugget for SMEs was earmarking a not insignificant £400m into venture capital funds through British Business Bank Investments (BBBI) in a bid to unlock £1bn of finance and boost firms’ ability to grow – whether that’s a start up that’s looking for phase 2, a scale-up or to stay ahead.

How it works: The Fund will specifically target later stage ventures through the BBBI VC Catalyst Fund – a stage the BBBI has identified as having a funding gap preventing businesses reaching their full potential.

How to apply for funding support: The BBBI finances through 90+ partners and uses venture capital, equity and debt finance to help fund company expansion as it doesn’t distribute funds directly. This particular £400m pot will be distributed through the VC Catalyst Fund and its partners. To work out which is the best VC for your business to apply to – start with the Business Finance Guide.

Finally, it’s great to see the Chancellor confirm his plans to permanently increase the business rate relief, taking 600,000 small firms out of the rates system completely and lowering bills significantly for many others. Rural businesses will now get 100% relief on rates – which is fantastic news.

So for many small businesses it really is a case of two steps forward, one back…

WrightCFO is an outsourced Finance Director consultancy specialising in part-time FD contracts in the SME market. Contact me for a free consultation.

www.wrightcfo.co.uk

sophie@wrightcfo.co.uk

Tel. 0208 943 9027

 

 

Nine Budget Boosters for Small Business & Entrepreneurs

It’s safe to say this month’s budget was rather overshadowed by Ian Duncan Smith’s spectacular resignation and subsequent government retraction over proposed disability cuts. However, there was some seriously interesting stuff in it for small businesses that I think got rather overlooked.

Bear in mind that Osborne’s budget (and everything most politicians do right now) is most probably dictated and influenced by their stance on the upcoming referendum on Europe, but this was clearly a budget designed to encourage independent small business – as that demographic is seen by the government as critical to the success of a ‘remain’ vote. Small businesses were even labelled the ‘clear winners’ of the budget, so let’s see what rewards have been reaped in the battle to win over SME’s hearts and minds…

Here are the Chancellor’s 9 budget boosters for small business.

Business rate relief – the threshold has been more than doubled from £6,000 to £15,000 for small business rate relief, while the higher rate has increased from £18,000 to £51,000. This will take many small businesses – they reckon over 600,000 – out of the system altogether and could mean your business pays no business rates at all, or at least significantly less – around £6,000/year. Osborne also added that in the future, business rates increases will be based on CPI rather than RPI, which should provide more realistic rates bills for retailers.

Self-employed NICs – from April 2018 class 2 National Insurance Contributions will be abolished for the self-employed, meaning you will only pay one type of National Insurance (Class 4 NICs) for profit of £5,965 or over per annum.

Income Tax threshold – from 2017 the threshold for paying income tax will be raised from £11,000 to £11,500, while the higher rate will also be raised from £43,000 to £45,000 for the 2017/2018 tax year.

Corporation tax – is to be cut from 20% currently to 17% by April 2020, in theory benefitting around 1 million companies according to the Treasury.

Entrepreneurs’ Relief Extension – An extra £10m has been added to the existing limit to encourage investors to back unlisted companies.

Capital gains tax – The reduction of capital gains from 28% to 20% and the basic rate cut from 18% to 10% will affect the sale of equity in businesses only (so not residential sales) and will apply from the start of the new tax year next month (April 2016).

Commercial Stamp duty – The chancellor has abolished stamp duty on commercial property sales up to £150,000 value, then set simple new bands of 2% on sales from £150,000 – £250,000 and 5% thereafter.

Sharing economy businesses – to try and keep up with the times, two new tax free allowances worth a combined £1,000 have been created for income on property you own and trade conducted through online sharing platforms.

Online equality – overseas retailers will no longer be able to store stock in the UK and sell online without paying VAT.

While these measures were widely welcomed by small business and entrepreneur representatives, it’s worth noting that in last autumn’s statement Osborne & the government announced cuts of 17% to the Department of Business, Innovation and Skills, as well as the surprise axing of the Business Growth Service – including the Growth Accelerator programme which helped an estimated 18,000 small businesses to raise over £100 million of finance.

Now they plan to pay for these budget boosters by cracking down on big firms and their flexible tax reduction practices such as offsetting debt interest against profits and using losses in one year to offset profits in another.

So let’s just hope Osborne and his team manage to do this more successfully than they have done to date, and that small businesses can finally reap the rewards of long overdue measures to help level the playing field.

 

WrightCFO Ltd is a Finance Director Consultancy for SMEs. If you think your business might benefit from an outsourced part-time FD, please get in touch.

sophie@wrightcfo.co.uk

wrightcfo.co.uk

wrightcfoblog.wordpress.com

@sophieLwright