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Budget 2017: Risks for the SME

Whatever their political persuasion, SME directors would probably agree that small business policy and taxation has been broadly constructive since 2010. It hasn’t always been a smooth ride and arguably imagination and political courage have been in short supply but a period of relative stability has helped leaders plan for the future.

Will Philip Hammond keep a focus on enterprise?

And while Philip Hammond, the Chancellor, has had a firm grip on the fiscal wheel since his appointment last year, there is increasing worry that we may now slip off-road. The Greek philosopher, Heraclitus, once proclaimed “The only constant is change”. Well the political landscape shifting beneath our feet and there is a creeping danger of an increased tax burden and/or a failure to invest in the SME ecosystem.

While we hope the chancellor keeps his eyes on the road ahead, we see these five pertinent risks on Wednesday.

 

Risk 1: Allowing business rates to keep rising

Ask almost any business in London (our home at EquipmentConnect) which part of the tax system needs to be reformed and Business Rates is an almost guaranteed answer. The calculation of this tax fails to consider profits and consumption of local services and is levied using a somewhat lazy and blunt property valuation methodology. The burden of Business Rates must also be considered alongside high charges such as expensive waste collection and excessive data costs.

There is a risk that the chancellor allows the currently planned 3.8% rise to pass while signalling a green light for for future rate increases. We support the British Chambers of Commerce who has pushed to reduce Business Rates instead of the the planned reduction of corporation tax.  It is imperative that the chancellor limits any growth of this anti-enterprise, usually regressive, very blunt form of business taxation.

 

Risk 2: Reducing the VAT threshold on small business

The media have thankfully made considerable noise on this most serious threat. The government has indicated an effective demolition of the threshold at which VAT must be paid by small business. Currently a sole-trader or business can have annual revenues of up to £85,000 before VAT must be levied but this may fall by 75%. The threshold is so important because it allows small business to postpone the cost and admin pain until they are ‘de facto’ real. And this pain is very real – according to Mike Cherry, the national chairman of the Federation of Small Businesses, SME owners and the self-employed spend a working week a year complying with their VAT obligations.

Postponing this burden until micro businesses are ‘alive and kicking’ is absolutely critical if we are to maintain the entrepreneurial goodwill generated.

 

Risk 3: Dithering on transport and infrastructure investment

Britain lacks first class infrastructure across the regions. From motorways that are clogged up to overpriced rail systems that are prone to breakdown to regional broadband speeds that are plainly inadequate.

This isn’t the present governments fault but rather the result of decades of a short-termism and a London centric political mindset.

If the government is serious on developing the ‘Northern Powerhouse’ we need to push ahead with high speed rail with connectivity from coast to coast. An annoying broken record it may be but a third runway at Heathrow is essential!

The UK is fortunate to be able to borrow cheaply. The current yield on a 30 year government bond is less than 1.85% (way below inflation!). We need to make the most of this opportunity and double the national productivity investment fund created last year. It’s time to go big or go home.

 

Risk 4: Failing to grow the annual investment allowance

Closer to home for EquipmentConnect is the risk of government failing to support further increases in the Annual Investment Allowance which facilitates a taxation rebate for equipment and machinery purchase.

The current level of £200,000 per year is certainly a vast improvement on what we had before but ensuring our SMEs have access to the best equipment and machinery is essential if we are to roll out of the productivity slump that has dragged on the countries economic growth for several years now.

Furthermore, investment in equipment and machinery often has strong secondary benefits such as 1.) increasing wages for what are ultimately more productive workers (and thus increasing income tax take!) 2.) supporting UK industry – a huge chunk of expenditure goes to our burgeoning advanced equipment manufacturers 3.) enhancing our long term competitive edge in the knowledge economy.

We would hope that the government will increase the Annual Investment Allowance and by doing so, keep our country well armed for future years of prosperity.

 

Risk 5: Backing away from housing investment

Make no mistake about it – The lack of available housing has been negative for UK business. Emigration of talent and longer commute times are generally considered as leading factors dragging on productivity growth.

During the recession the number of new houses built each year fell from c. 220,000 to a measly 120,000. It is calculated that we now need to add almost 300,000 new dwellings each year to satisfy demand from changing demographics. While we are unlikely to get even close to this level – you have to look back all the way to 1968 to find a precedent – we should at least achieve 200,000 new dwelling per year by 2018. As our minister of state Sajid Javid recently emphasised there has a more suitable time to borrow cheaply by issuing government bonds

Furthermore the construction industry is one of the laggards in 2017 and with spare capacity, the stimulus is likely to achieve its goals without pushing inflation in the sector.

The other well-known Hammond, formerly a presenter on ‘Top Gear’, now at ‘The Grand Tour’, always had a knack for flipping cars including to the right, the comical flip of a Reliant Robin. Makes for good entertainment from an otherwise, arguably dull, car journalist.

Philip Hammond, maybe the most dull man in Britain, has no such pressure to entertain. Lets hope he keeps an eye on the road and ensures continuation of SME growth. With the challenges ahead in 2018 and 2019 it is of upmost importance that government doesn’t lose sight on what essentially is the backbone of the UK economy.

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