Benefit to business is scrambled by curate's egg report

OUTWITH public sector bodies and financial services companies, it is small and medium sized businesses which are the mainstay of the Scottish economy. For such owner-managed business, the big question is whether the Pre-Budget Report (PBR) announcements did enough to stave off the impact of recession.

Some of the changes announced are to be welcomed, but – like the curate's egg – they are only good in parts. It is good news that for smaller companies, corporation tax remains at 21%, but it must be remembered that this rate only applies if the company retains its profit or reinvests it. It has been pegged at this rate until April 1 2010, but many family company proprietors will already be debating whether they should be extracting company profits before income tax and national insurance contribution rates increase in future years.

While a new top tax rate of 45% on salaries has been announced with effect from April 6 2011, the marginal tax rates created by the new rules clawing back personal allowances can give rise to tax rates in excess of 60%. The new dividend tax rate of 37.5% where income exceeds £150,000 also suggests that retaining profits in small family companies may be shortsighted, especially as the budget deficit is such that higher tax rates may be likely in future.

It is welcome news that the proposed legislation on income shifting, where husband and wife split income to best family advantage, has been postponed again but the other tax changes do make it advisable for small businesses to look at their business structure yet again if they are to operate tax efficiently.

The reduction in the rate of VAT is welcomed by consumers but the short term nature of it, just 13 months, means that the boost to sales will not last long. Meanwhile, traders are faced with changing their administrative systems and upgrading software to cope with the new rate in a short timescale.

A significant cost for Scottish business is transport and it is a major disappointment that fuel duty increases, originally included as part of this year's Budget statement but subsequently postponed due to spiralling oil prices, are to be reinstated with effect from tomorrow.

The recent stock market crash has impacted adversely on many owner-managers' pension funds and the announcement of a five year freeze from 2011/12 to 2015/16 on both the maximum amount that can be contributed tax efficiently into pensions schemes and on the total tax-privileged amount of the pension savings is a concern.

Although £1.8m seems vast for many of us, it has to be measured against the cost of providing a decent pension in retirement, which likely to get higher if annuity rates fall and life expectancy grows. There is no doubt that, particularly if inflation takes off, it will be harder for the family company owner to make adequate provision for retirement.

For businesses in trouble in the current environment there is extended loss relief, but capped at £50,000 and again only for a temporary 12 month period.

As unemployment rises, individuals who have lost their jobs may invest their redundancy payments into setting up in business on their own. But there was nothing specific to encourage this new group of entrepreneurs.

The increased personal tax rates, high by international standards, will encourage the more entrepreneurial to head overseas and will discourage inward investment into the UK, by making it more expensive for foreign workers to be employed in Scotland.

With an election to come before some of the measures take effect and with near unanimity that tax rates will have to rise in future to pay back the sums now being invested by Government, the measures announced create considerable uncertainty.

Uncertainty is anathema to business people – it deters investors and makes it hard to plan – while consumers who are unsure just how wealthy they are going to be save for a rainy day. So while everyone hopes the Chancellor's short term measures to boost the economy will work, the measures which will boost Scotland's economy in the longer term are hard to spot.

Valerie Smart is head of tax at PricewaterhouseCoopers, Edinburgh