Tax changes should go 'hand-in-hand' with growth plans

The Chancellor must temper measures aimed at reducing the deficit in the public finances with plans to help businesses innovate, grow and employ, the Federation of Small Businesses (FSB) has said.

In its pre-emergency Budget submission, the FSB argued the case for considering the needs of smaller firms.

With a rise in VAT a possibility, the FSB urged the government to recognise that a decision on timing is vital for small firms' cash-flow.

It is estimated that the reduction of VAT to 15 per cent in 2008 cost the average small business £1,500 in administration alone. 

Pointing out that small firms lack the financial buffers available to big companies when it comes to absorbing an increase in VAT, the FSB wants the introduction of a sunset clause that would enable businesses to plan for the eventual reduction.

The FSB also voiced its opposition to any significant increase in capital gains tax (CGT) for businesses and entrepreneurs, saying it would stifle long-term investment.

Instead, the FSB called for CGT on business activity to be held at 18 per cent and for the reintroduction of a generous taper relief to help savers and long-term investors. 

With one in five small firms citing national insurance contributions and PAYE taxes as the biggest barriers to growth, the FSB said that tackling the budget deficit must not come at the expense of the recovery or involve a hike in taxes for small businesses.

To encourage small firms to employ staff, the FSB recommended that the government go beyond the Conservative manifesto proposal to cut employers' NICs for new companies only and that the need to pay NICs should be negated for existing firms as well as start-ups. 

John Walker, the FSB's national chairman, said: "While the FSB does not want to see taxes increased we understand that reducing the budget deficit is a key priority. The Chancellor must use the Budget to set out his pro-business credentials and offer something to stimulate growth.

"Private sector growth is the best method of cutting the deficit, keeping taxes low and absorbing the staff that will lose jobs in this round of budget cuts."

Mr Walker went on to say that it is imperative that any changes to CGT or VAT go hand-in-hand with an ambitious plan for encouraging small firms to employ, grow, invest and innovate. 

He added that proposals to give new firms a national insurance holiday do not go far enough and will not help those businesses that have been running for a couple of years.

By cutting employers' NICs payments for established firms that wish to recruit, the government would benefit from the creation of new jobs and the additional revenue generated by the income tax and employees' NICs contributions that would be paid.

Mr Walker concluded by urging changes to the banking system: "With the four main high street banks holding 83 per cent of the SME market, there needs to be more competition for credit. This will help drive down the price of credit which we believe is putting businesses off applying for finance. 

"We look forward to the Budget on 22 June and hope that the Chancellor uses this opportunity to 'think small first'."