The 2017 Spring Budget delivered by chancellor Philip Hammond has been deemed to be not particularly good for those running an SME. The main causes for concern when the budget was announced were centred around the proposed increases to the rates of NICs and the reduction of the dividend tax free allowance and how this would affect the self-employed and particularly sole traders forming their own registered companies.
The government did perform quite a swift U-turn a week following the Budget in scrapping the proposed NI increase for the self-employed after a huge backlash where the proposal was criticised for breaking a manifesto pledge made in 2015.
NIC Increases
Originally, the plan was to increase Class 4 national insurance contributions for the self-employed to 10% in April 2018, with a further 1% increase to 11% in 2019. These increases were predicted to raise £145 million per year for the government by 2021/22. However, after criticism was received from the Labour Party, the proposals were first shelved until the Autumn Budget, but were then set to be completely scrapped, as Philip Hammond outlined in a letter to Tory MPs.
While there is a little respite for the self-employed from the extra burden of increased national insurance payments, Hammond did say in his letter that there will be no increases in NI in this Parliament. This statement is now leading many to wonder whether this subject will be revisited again by the new Parliament following the recent shock announcement of the snap General Election by Theresa May.
There is no doubt that if Hammond had pressed ahead with the increases, he would have made himself incredibly unpopular with the 5 million self-employed people in the UK, as well as going against one of their manifesto promises. The proposal was an unfair target on the self-employed, and with the ongoing shift in recent years towards more self-employment and the steady rise of the gig economy, the many thousands of small businesses that rely on non-permanent staff to operate would also have suffered greatly as a result.
Slashes to the Tax-free dividend allowance
The Spring Budget also saw an announcement that the tax-free dividend allowance was going to be slashed from £5,000 to £2,000 from April 2018. Again, in another government turn-around, the plans were shelved for the cut, but could be revisited once again after the snap general election.
The reduced limit on the tax-free dividends was unveiled in the Budget by Philip Hammond after he declared that there was a lot of unfairness about the tax advantage. The £5,000 allowance has been in effect since 2016, and means that there is no tax liable on dividend payment up to this amount. This has been very helpful for small business owners, such as entrepreneurs and one-person companies, who pay themselves a wage through their own company.
Although the proposals for the cut from £5,000 to £2,000 have been removed from the Finance Bill that is planned to go through before the general election on 8th June, it is quite possible that the proposed cuts will be re-introduced following the election. The advice being given by investment firms is not to assume this cut has been abandoned for good.
No Priorities for Small Business
Although the Conservative party see themselves as the party that supports and encourages business, the Budget’s tax changes were seen by many as not being in line with the priorities of small business. A pre-Budget survey of SMEs showed that income tax reduction was the number one priority. These proposals were clearly not what businesses wanted to see from the Budget.
Even with the U-turn in the national insurance increase proposals, the Budget has still turned out to be a bit of a mixed bag for small business owners. Although there was an announcement that the roll out of the governments ‘Making Tax Digital’ programme has been delayed for businesses who fall below the VAT threshold, many small business owners still feel there is an unrealistic timescale for them to meet with the new requirements.
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Big Business Favouritism
Although the chancellor stated that it is the governments plan for the UK to be seen as a great place to start and grow a new business, the emphasis of the Spring Budget was very much seen to be in favour of big business interests over small business concerns.
With SMEs making up a staggering 99% of the private sector, there is a real desire to see more focus being placed on the needs of this sector. Yet there is still no concrete news coming from the government about the appointment of the newly created Small Business Commissioner position. It would also be good to know who was up for consideration for this role, but as yet there appears to be no news about potential appointments.
Standing up for Small Business
The Small Business Commissioner position was set to be filled later this year, but with the recent snap election announcement we are now left wondering if this will still be a priority for this year. As well as the appointment of a Commissioner, it would also be useful for SMEs to know what powers the person will hold. Many small business owners want to see an end to such issues as late payments that can potentially cripple a small business and force them to go under.
It is estimated that around £26.3bn is owed by larger businesses to SME companies within the private sector. Because of this stranglehold on their finances, an average of 50,000 small businesses are collapsing each year. This has a knock on effect of £2.5bn costs to the economy a year.
It is hoped that the appointment of the new Commissioner will put an end to the bullying practices of big business that sees SME companies often waiting around 72 days before their invoices are paid. This is too long a time to wait for most SMEs operating on a small budget.
