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KENNETH CLARKE'S BUDGET SPEECH SECTION 9: SMALL BUSINESSES

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SMALL BUSINESSES But my particular priority this year has been to help small businesses. In my opinion, the biggest...
SMALL BUSINESSES But my particular priority this year has been to help small businesses. In my opinion, the biggest contribution any Chancellor can make to reducing unemployment over the medium term is to ensure that the conditions are in place for new businesses to become established and for small businesses to grow. As a country, we generate plenty of budding entrepreneurs and any number of good inventions and ideas. Yet all to often those ideas stay on the drawing board as money is channelled instead into the safer larger companies.

My proposals seek to address three separate problems facing small businesses today: the burden of regulation; the shortage of external finance; and cashflow.

DEREGULATION I can announce today four contributions to my RHF the Prime Minister's campaign to turn the tide of excessive regulation which threatens to engulf our smaller firms.

SIMPLIFIED ASSESSING First, the Finance Bill will include the initial tranche of legislation to implement the plans announced in March to reform the current regime for assessing personal tax. The new system will be simpler and more efficient. The changes will be of particular benefit to the self-employed. Income tax and national insurance contributions

Second, my RHF the Secretary of State for Social Security published last month the report of the Working Group set up to consider the options for aligning income tax and national insurance contributions. My RHF and I agree with the Group's conclusion that there are significant savings to be had from using the same definitions, same paperwork and same audits for income tax and national insurance. We are now looking at the Group's main recommendations and will be bringing forward proposals early next year.

VAT THRESHOLD Third, VAT. Firms are currently required to register for VAT when their turnover reaches £37,600 a year. I intend to raise this to £45,000 with effect from tomorrow. This will allow up to 75,000 more traders to opt out of VAT altogether. Statutory audit. Finally, the statutory audit. The Companies Act requires all companies to have their accounts audited. But for the smallest companies the expense can be out of all proportion to the benefit.

When I was at the Department of Trade and Industry I continually pressed for a change to this. My predecessor announced consultation in the March Budget. I can now announce the conclusions. My RHF the President of the Board of Trade and I have decided that most companies with a turnover between £90,000 and £350,000 a year in future need only get an independent accountant's report on whether the company's accounts correctly reflect its books. But for the 40 per cent of companies with turnover of less than £90,000, we propose to take the deregulation a step further. For these small companies, the audit requirement will be abolished altogether.

FINANCE FOR INDUSTRY

But I don't just want to lighten the burden of regulation. I believe that positive steps are required to increase the flow of risk capital into small businesses.

CAPITAL GAINS TAX

For managers and employees to leave steady jobs and take a chance by going into business on their own, the risk must be worthwhile. At 40 per cent, our top rate of income tax is the lowest in the European Union, and I intend to keep it that way. But our capital gains tax regime still bears disproportionately on the successful entrepreneur. In 1991, we increased the capital gains tax relief for business people who sell up on retirement, by providing a complete exemption from capital gains tax on the first £150,000 of capital gains and a half exemption on the next £450,000. I now propose to increase these limits to £250,000 and £750,000 respectively.

By rewarding those who have been successful in the past, this measure will encourage potential entrepreneurs in the future. In addition, I propose that any individual facing a capital gains charge should be able to defer the tax indefinitely by reinvesting those gains in an unquoted trading company.

VENTURE CAPITAL TRUST

I also intend to create a new type of investment, a venture capital trust, which will channel savings specifically into unquoted trading companies. Investors will receive dividends and capital gains entirely free of tax. And by investing through a trust they will also be able to spread their risk across a number of different companies. My HF the Financial Secretary will shortly be issuing a consultation paper fleshing out the details.

ENTERPRISE INVESTMENT SCHEME In my view, there remains, too, a strong case for encouraging direct equity investment in unquoted trading companies. I propose to introduce a new scheme, the enterprise investment scheme, to do just that. The enterprise investment scheme will differ from the old business expansion scheme in several important respects. To target the money where we want it to go, property-related investments will be excluded. Up-front tax relief will be limited to 20 per cent. But any losses on investments will qualify for income tax and capital gains tax relief; and all capital gains within the scheme will be entirely free of capital gains tax. The limit for investors will be £100,000 a year.

Most important of all, to help those who are looking to invest their expertise as well as their money, people previously unconnected with the companies they invest in will be able to take up paid directorships.

The cost of the new scheme could eventually rise to some £50 million a year. Taken together with my proposals on capital gains tax and the new venture capital trust, I believe it could generate substantial new investment in the unquoted company sector.

LATE PAYMENT

Finally, I turn to the problem of small companies' cashflow. There is one issue, which year after year tops the list of Budget representations made to all of us by the small business community - the problem of late payment. There can be nothing more frustrating than delivering a quality product on time at a competitive price and then finding that you don't get paid for months. Late payments wreak havoc with cashflow, and for many small firms they can make the difference between survival and failure. The habit of late payment is corroding our business culture. I am quite sure that it needs to be dealt with.

There are many options for tackling this, and my RHF the President of the Board of Trade and I will be looking at two in particular: first, a new British Standard for payment performance; and second - more significant - legislation to provide for interest on late payments. Late payment was a serious problem for small businesses throughout the last recession. I believe the time has now come to take this issue head on.

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