Small Talk: Budget gives a boost to smaller wealth creators

On the face of it, last week's Budget was good for small businesses. George Osborne saved some of his few handouts for smaller companies and those that run them, cutting corporation tax for firms earning modest profits and providing greater relief for entrepreneurs.

The main highlight was the cut in small business corporation tax, paid by those making profits of less than £300,000 a year. The rate will fall to 20 per cent in April next year, from its current level of 21 per cent.

In addition, those small companies making more than £300,000 will benefit from the staggered fall in the higher rate of corporation tax over the next four years.

"I think the corporation tax changes are great," said Milan Shah, the managing director of Varani Foods, a Wellingborough-based spice manufacturer that employs 31 people.

"It is good to see that the tax framework has been laid out for the next five years. People should not forget that many small businesses are still not back in profit, so of course the tax won't apply, but at least we know what to expect."

Those that set up businesses are also set to benefit from an extension in entrepreneurs' relief on capital gains tax (CGT). The entrepreneur's rate of 10 per cent was extended to gains of up to £5m, from £2m, although the higher rate of CGT was increased last week to 28 per cent from 18 per cent.

"This was a nod from the Chancellor to the entrepreneur that they are welcome and being appreciated," Russell Gardiner, a tax specialist at Ernst & Young, said.

"It is a Budget that has been aimed at wealth creators, especially if you look at the changes to capital gains tax relief, and the national insurance changes for companies in the regions."

Mr Osborne also said that companies established outside London would be able to claim up to £5,000 in national insurance contribution relief for the first 10 people they employ.

The announcements did not meet with universal approval, however. The hike in VAT attracted a volley of criticism. The Federation of Small Businesses (FSB), which largely supported Mr Osborne's proposals, warned that the VAT increase was likely to hurt smaller retailers. "The FSB welcome[s] many of the measures that the Chancellor has announced in the emergency Budget," said John Walker, the FSB's national chairman. "[But] the increase in VAT to 20 per cent will, however, hurt small firms who will have to pass the increase on to their customers, unlike big business, which can absorb the cost."

The Treasury confirmed that the Government will maintain a number of former Labour chancellor Alistair Darling's small business measures, such as the extension of the "time to pay" scheme, which enables companies to extend their tax deadlines.

However, it was also confirmed that the Government will scrap Labour's plans to introduce a credit adjudicator to hear appeals from small companies that have loan applications rejected by the taxpayer-owned banks, Royal Bank of Scotland and Lloyds Banking Group.

The previous government set definitive targets for lending, targets that the banks have so far missed, and planned to use the office of the adjudicator to force the banks to lend to credit-starved small businesses. The new Government will announce measures on bank lending later in the year.

Aldermore

Credit adjudicator or not, one person claiming to be leading a crusade to lend to small and medium-sized businesses (SMEs) is Philip Monks, the chief executive of Aldermore Bank.

Mr Monks has spent most of the year attacking his larger rivals for not lending, and today points to Bank of England figures, which show that banks wrote off £4.1bn of bad loans during the first quarter of the year, a 41 per cent hike over the same period in 2009.

He argues that the continuing write-downs of bad debts is stymieing lending to small companies, increasing pressure on the companies themselves and fuelling higher unemployment.

"The big banks are the first to admit that they got carried away in the boom times and that they are worried about what other problem loans they have left," Mr Monks said. "Unfortunately, that means they are having to ration their lending and small businesses suffer the most from that."

Of course, Mr Monks is not acting through altruism, and Aldermore does not pretend to be a charity. His comments are designed to put pressure on the Government to exempt new banks like his from the levies that are about to descend on the financial services industry.

"We have a strong balance sheet and no legacy of toxic loans – that is why we managed to provide over £300m in finance to SMEs in our first year and that is why we intend to provide a lot more funding to SMEs in the next year," he said. "That is why the SME lending arms of big banks need more help from the Government – any tax on SME lending through a bank levy is totally counterproductive." Incidentally, Mr Monks refuses to say how many loan applications from small businesses Aldermore decides to reject.