Tax & admin · 9 December 2015

How recent government policy will impact on micro business tax operations

The last year has been a busy one for micro business tax changes
The last year has been a busy one for micro business tax changes

Learning about the range of micro business tax policies that affect you as you’re starting up, and then keeping up with the changes to legislation can be a challenge.

With this in mind, I thought it would be useful to provide a roundup of the past few months to assess what changes there have been in government policy and how these will impact on you and your business.

The “good”

Starting with the positives, it’s obviously worth noting that corporation tax is going down – falling to 19 per cent in 2017 and then 18 per cent in 2020, making it the lowest in the G20.

Elsewhere, George Osborne announced a 50 per cent increase to the national insurance employment allowance, from £2,000 to £3,000 – a handy change for small business owners wanting to reduce wage bills. It is though, important to look at this alongside the national living wage, which may well offset the saving in some cases.

The Annual Investment Allowance is an interesting one – it was always intended to be a short-term measure, allowing small and medium-sized businesses to make tax-deductible investments in various equipment, plant and machinery in a bid to kick-start growth. It currently sits at £500,000 and was due to decrease to £25,000 from January 1, 2016. Osborne has instead decreased the allowance to £200,000 from that same date onwards. This may be a decrease, but it’s actually a longer-term measure than it was initially billed as, so it’s positive news for small businesses.

The “bad”

The dividend shake up has been a particularly discussed change among smaller firms. Currently, small business owners who are top rate tax payers have the option of growing their firm and paying themselves dividend income at a 30.6 per cent tax rate – or selling the company and paying capital gains tax at a rate of 28 per cent.

From 2016, the top rate of tax on dividend income will rise to 38 per cent, while capital gains tax is set to remain at 28 per cent. It was a fairly unexpected change, and some owners may decide to put their firms up for sale before the new rate comes into play. Tax is unlikely to be the only driver behind this kind of decision, but it could contribute.

The old system has been scrapped, with a tax-free Dividend Allowance of £5,000 a year for all taxpayers, replacing the Dividend Tax Credit in April next year. In the past dividends were one way for small business owners to pay themselves and this change could prove quite an adjustment for some.

Most disappointing in recent months however, was probably the announcement on business rates. The big change here was that they’ve been localised and a lot of small firms I’ve spoken to would’ve preferred a reduction.

Many feel retail is the toughest market for independent businesses to survive in and had hoped the chancellor would’ve tackled business rates and reducing costs as a priority to help make the environment more hospitable for them.The effect of this policy will vary by location. Places which are thriving startup hubs like London will generate huge amount of business rates and be able to plug that money back into the area immediately. The worry is where you have somewhere considerably less established. It definitely makes it harder for new places to attract firms.

The uncertainty over what will happen here is also a concern for small firms – it may encourage competition and lowering of rates to attract more businesses, or it may be seen as another way of raising more tax.

The future

In recent months, the overriding approach to small and micro business tax by the new government has been measured by and large. It has been even-handed and fairly pro-business for the most part. The business rates were a chance for a big change – and it was in the sense that it marked the biggest change to local taxation in more than a quarter of a century, it wasn’t in a way that would have let small firms reap the rewards. It will be interesting to see how local councils deal with this newfound power over the coming years to see whether the shake up pays off,  or if the North-South divide is exacerbated further.

Stay tuned for more insightful information on micro business tax issues from KPMG Small Business Accounting’s Bivek Sharma.

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Bivek Sharma has been a partner with KPMG for over ten years, specialising in accounting, tax and software. He started the Small Business Accounting division over two years ago with a goal to transform accounting services for small businesses. The team works with a huge variety of industry sectors and companies including coffee shops, technology companies, manufacturers, pubs, restaurants and retailers.