A cut in the VAT rate, the decision to defer the increase in the small companies’ rate of corporation tax and the possibility of deferring tax for businesses in difficulty could all affect IFAs in the short term, as will the change to the National Insurance rate.
The reduction in VAT by 2.5 percentage points to 15 per cent from December 1 had the highest profile of the Chancellor’s proposals.
PKF tax partner Simon Littlejohns says IFA firms that charge a fee for advice will have the option to reduce the VAT rate added to their fee although it is not compulsory. Commission payments will be unaffected.
He says: “The vast majority of what IFA businesses do is exempt from VAT.”
Highclere Financial Services director Alan Lakey says fee-based businesses will have to decide whether it is worth changing their systems to take account of the new VAT rate for what could represent a small amount of business.
Otherwise, Lakey believes small IFAs will not see a significant change. “VAT does not come into it, really. If I were 100 per cent fee-based, it might have had a small impact.”
On the bright side, Littlejohns says IFAs could see a temporary fall in their day-to-day running costs. He says: “Their cost base will reduce slightly because their input costs will drop slightly. That is presupposing their suppliers pass on the cut.”
Another change in the pre-Budget report concerns National Insurance rates. From April 6, 2011, NI contributions paid by employers and employees will rise by 0.5 per cent.
The effect of the VAT change may be negligible but the NI cost is a clear drawback to businesses. However, there were some measures in the pre-Budget report that may be of help to firms, particularly those which are struggling with cashflow at present.
The most surprising announcement was a decision to allow struggling businesses to defer payment on any taxes due this year. BDO Stoy Hayward tax partner Paula Tallon says the deferral applies to all business taxes. She says: “If you are having difficulty meeting corporation tax, income tax, PAYE, NI or VAT, you will be able to contact a call centre which guarantees a decision in 10 minutes. That may help with cashflow.”
Firms can call HM Revenue & Customs’ helpline on 0845 302 1435 to request deferral of taxes. There is no set timetable for deferral. The Chancellor said this will be for “as long as they need” and Tallon says this suggests it is open for negotiation with HMRC.
On the downside, the help offered may not be as great as was first expected, as it seems the helpline operators are only allowed to defer payment on amounts up to £10,000 before applicants are transferred to the usual enforcement teams.
With no detail on how the scheme will work, Littlejohns says he is slightly sceptical about how HMRC will apply deferral without opening the scheme to all businesses, whether struggling or not.
Another measure that may ease the burden of struggling businesses is the ability to carry back losses from this financial year and offset them against profits from the last three years, instead of one year, as is normally the case.
Chartered accountants and business consultancy Baker Tilly says losses of up to £50,000 for 2008/09 can be offset against profits for the previous three years and businesses will get a cash rebate of any tax paid.
Baker Tilly’s PBR analysis says: “This measure will provide all businesses, regardless of size, incurring losses with the ability to obtain loss relief sooner than would otherwise have been the case. Under the existing rules, in excess of the previous year’s profits would have been carried forward. Businesses will therefore be able to obtain a cash repayment of tax already paid.”
This may do something to ease the burden and Tallon says it could also come in useful for companies planning revenue spending in the immediate future.
She says: “If you can cash in your loss, this makes a big difference. If there is revenue spending that you need, then you might want to do it this year rather than delay until next year when you will only be able to offset losses against the previous year.”
The last tax measure to consider is the deferral of the increase in the small companies’ rate of corporation tax. The tax was due to increase from 21 to 22 per cent in 2009 and Littlejohns says this “may provide a bit of respite”. But it is only a temporary measure and the rise is due to be implemented in 2010.
Moving away from tax, the pre-Budget report contained several other measures aimed at bolstering small firms.
The Chancellor announced a £4bn deal with the European Investment Bank to provide funding to UK banks to give loans to small and medium-sized business.
There will also be a temporary £1bn loan facility direct from the Government to lend to SMEs through a new small business finance scheme which will allow firms to apply for loans from £1,000 to £1m.
Lakey says any measure to encourage bank lending is to be encouraged. He says his business has a £35,000 overdraft facility which is used regularly but he is aware that the bank could withdraw it at any time.
However, he remains sceptical on the practical effect that any of these initiatives will have in the longer term.
He says: “We will see how it feeds through. The thing with Budgets is that you see these initiatives announced and two or three years later you look back and ask what happened to it?
“Most initiatives need to have a quango set up to run them which takes time and after a year or two has passed they run out of steam.”