Member Article

Pre-Budget: fuelling the engine of recovery

Graham Morgan, corporate tax partner at Kingston Smith LLP, shares his views on the upcoming Budget.

It is generally acknowledged across the political spectrum that economic growth will be driven by the private sector, and in particular by small to medium sized enterprises (SMEs).

The Chancellor’s - admittedly limited - room for manoeuvre in the forthcoming Budget has to be focused on stimulating investment in entrepreneurial activity which will encourage businesses to expand and develop and, more specifically, take on employees.

The headline rate of Corporation Tax is already scheduled to reduce to 23% by 2014, and there are calls to go even further, slashing the rate to 20% or even 10% in the longer term, to increase the UK’s competitiveness as a place to do business. Expect the Chancellor to reaffirm the reductions already announced, and to perhaps give a nod towards further reformof the Corporation Tax regime post 2015.

Of course, because of the parlous state of the public finances, the political view is that any rate reduction must be balanced by adjustments to the tax base so that the overall tax take is not significantly affected. With this in mind, we have already experienced reductions in the rate of capital allowances on plant and machinery.

It is generally acknowledged that the capital stock of our manufacturing base is ageing and inefficient compared with that of our major industrial competitors. To stimulate investment in areas of social and economic deprivation we are promised 100 per cent first-year allowances for companies investing in plant or machinery for use primarily in designated assisted areas within Enterprise Zones. To qualify for this new relief, the expenditure must be incurred in the period between when the area is treated as being a designated assisted area and 31 March 2017.

The tax system is also used to encourage innovation, both through Research & Development (R&D) and through the new Patent Box initiative, due to come into force in 2013. The Finance Bill will contain amendments to the R&D regime for SMEs and for larger companies designed to improve take-up. The proposal to take the tax benefit “above the line” for large companies is intended to move the value of the relief to the operating level, and away from the Finance Department.

Patent Box will offer a new low rate of Corporation Tax (10%) on profits from the exploitation of patents – clearly an assault on the tendency for multi-national companies to locate their intellectual property in tax-friendly jurisdictions, such as Ireland. The rules are in draft form, and are likely to be amended as the Bill proceeds, but they appear to offer significant opportunities for innovative companies, including SMEs developing and exploiting patentable ideas in the UK.

The principal fiscal barrier to employment remains the secondary (employer’s) National Insurance Contribution, currently at 13.8% of payroll costs. The limited “holiday” for new businesses announced in the last Budget (up to £5,000 for the first ten employees hired in the start-up year) has singularly failed in its objectives, with almost no take-up. Expect some activity in this area, probably around reducing bureaucratic obstacles to taking on employees.

Graham Morgan is a corporate tax partner at Kingston Smith LLP, the top 20 accountancy firm.

This was posted in Bdaily's Members' News section by Kingston Smith .