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Progressive or reckless?

By: Jeff James

Listed Under: Top Story

Published: Wednesday, July 28, 2010

So the second Budget of 2010 has been and gone. It took place on June 22 and was met with a decidedly mixed response.

The term ‘harsh but fair’ was bandied about in the newspapers and the prospect of public sector job cuts was touted as one of the main trouble areas, with some 600,000 jobs to go in the future. The Office For Budget Responsibility has predicted that there will be 490,000 job losses by 2015 and 610,000 by 2016.

POSITIVE
In terms of small businesses, however, the reception to the Budget was more even in terms of positivity and negativity. Experts have said the Budget will actually be positive for small businesses, although some firms will not escape the after-effects.

It was announced that measures would be taken to stimulate growth in the sector by reducing the small companies tax rate from 21 per cent to 20 per cent in 2011, which is said to help 850,000 small firms. Corporation tax will also be reduced, with the rate falling to 20 per cent next April from its current level of 21 per cent.

Those who set up their own business will also gain from an extension in entrepreneurs’ relief on Capital Gains Tax. This will allow new entrepreneurs to set up on their own and possibly create important new businesses of tomorrow. Businesses outside the south east and London will not have to pay National Insurance contributions for the first 10 employees they take on.

However, the rise in VAT from 17.5 per cent to 20 per cent has not gone down well. Businesses will be forced to put their prices up, and this will lead to a greater emphasis on undercutting the competition - not to mention the fact that smaller businesses will find it more difficult to attract customers.

The VAT increase was regarded as being a start point in trying to clean up the country’s debt problems. It was also seen to be a preferable alternative to raising income tax, although the move will not help the less well off.

The Federation Of Small Businesses, while generally supporting George Osborne’s policies, said the VAT increase could affect smaller retailers. National chairman John Walker said: “The increase in VAT will hurt small firms, who will have to pass the increase onto their customers, unlike big business, which can absorb the cost.”

Looking at the VAT increase, the prospects can seem gloomy. Higher inflation. Cash flow problems. Greater insolvency. Higher interest rates. Ultimately? The prospect of another recession. This was argued by Simon Newark, a partner at accountants UHY Hacker Young, who said: “The VAT increase could push up prices on the high street by around two per cent, which would have a very significant impact on inflation. Higher inflation could trigger interest rate rises, risking the spectre of the 'double-dip' recession.”

Newark added that banks and charities would also be affected by the VAT increase: “For businesses which cannot reclaim VAT, such as banks, it will directly hit their bottom line. Given the weak state of the banking sector and the ongoing reluctance of banks to lend to small and medium-size enterprises, a VAT hike could further reduce lending to the small business sector. Even businesses that can reclaim VAT will suffer. Higher VAT will eat into cash flow, which could push some businesses into insolvency."

Steven Law, president of insolvency trade body R3, was more damning: “Retailers and restaurants, especially, will find themselves between a rock and a hard place as they struggle to work out what will damage their bottom line more: taking on the extra tax burden or suffering an inevitable fall in consumer demand if they pass the tax on.”

However, another argument was put forward by the British Chambers Of Commerce. The organisation said that the VAT increase was the “least worst” option. A survey was carried out prior to the Budget that revealed more than 60 per cent of business leaders said that out of the possible tax rises, the increase in VAT would be the best option for their business.

BUYING BOOST
In the short-term, however, it is arguable that small businesses could see a boost in buying. This is because customers will want to buy products before the VAT increase kicks in from 2011. City retail analyst Clive Black acknowledged this, saying he predicted a “modest” increase in spending as various shoppers wanted to beat the increase in VAT.

Comparison site uSwitchforbusiness conducted research into the reactions of the VAT hike. A third of small firms, according to the research, believe the increase will put off customer spending.

Spokesman for uSwitchforbusiness, Jake Ridge, commented: “It will not only cost businesses money to implement, it will also make trading harder, putting consumers off spending, pushing costs up and making it harder for them to compete. SMEs will have no option but to carry on battening down the hatches.”

Similarly, respondents to a survey conducted by the Forum Of Private Business were unhappy with the VAT increase. Research manager for the FPB, Tom Parry, said: “Concerns remain over the VAT increase, bank lending, the impact on job creation of the National Insurance rise, public sector cuts and areas of government support. The result of the coalition government’s first test appears to be that it has passed, but is not yet achieving top marks.”

Overall the latest Budget does not seem to have been the horror story some small businesses were expecting. Even though the increase in VAT is the main bugbear, in the short-term this could prove useful for small businesses as shoppers may rush to buy goods before the hike kicks in.

PROGRESSIVE
Chancellor Osborne commented that: “Everyone will pay something, but the people at the bottom of the income scale will pay proportionately less than those at the top. This is a progressive Budget.”

However, acting Labour leader Harriet Harman regarded the Budget as “reckless”. She added that: “This is a Tory Budget that will throw people out of work, that will hold back economic growth and will harm vital public services.” Green MP Caroline Lucas said that the Budget was full of “pointless austerity”.

Speaking to some local businesses, opinions on the Budget were also mixed. Brian Dixon said that the rest of the year could prove to be quite fruitful because people would be stockpiling products. “The VAT rise will not come into effect until next January, so we have noticed that customers are starting to buy a lot more. I imagine that they will want to take advantage of the current VAT rates.”

Lee Johnson said his company had also enjoyed a very successful summer so far. “It’s still only the middle of summer, but the signs so far have been very good. We have not seen any fallout as a result of the Budget. People are continuing to spend, although this may be a result of next year’s VAT increase. But on the whole, the Budget has not adversely affected our business.”

Julie Horsfall-Harris did, on the other hand, express concern about the Budget, and in particular what will happen in 2011. “It’s easy to focus on the here and now, but we also need to think about what will happen early next year when businesses will be more obviously affected by the Budget.

“What businesses need to do is prepare themselves in case the economy does dry up again. If they are having a successful year, they need to put some money aside in case next year is not as busy. All businesses go through peaks and troughs, so any good business needs to have both a good contingency plan and funds.”

Barbara Ramsay also expressed concern about the long-term implications of the Budget and the state of the economy. “At the moment, things are ticking over. But apart from the VAT increase next year, there are the cuts that will be made in public sector jobs. And a great number of our customers are in the public sector, so if there is to be a tightening of belts in this area it could prove to be a very serious problem.”

The sample of opinions shows that the best way for a business to deal with the change in the economy and the Budget is to take one day at a time. While various businesses may have experienced growth, sitting on laurels is not an option.

As Barbara Ramsay pointed out, both the VAT increase and cuts in public sector jobs could prove problematic. Businesses should prepare for such an eventuality, with any profits made going into a ‘Rainy Day’ account or a marketing campaign to attract new customers.

And as Ramsay says: “Any hardworking business will continue to come up with good ideas, innovations and deals. As long as you put in the right amount of preparation, dedication and hard work, you will stand a good chance of riding out these turbulent times.”

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