Election series: Key tax changes that will impact small business

With the UK election looming, what are the key tax changes we can expect that might impact small businesses?

by | 24 May, 2024

A sign reading ‘Polling station’ placed outside a community centre

Britain has suffered what some would describe as uncharacteristic high tax increases under the Conservatives, as the government has grappled with a series of hammer blows over its 14 years in power. These have included the pandemic, conflicts in eastern Europe and the Middle East, the cost-of-living crisis, to name but a few.

As we approach a highly charged general election, accountants and businesses wait with bated breath to see what happens to tax policy. For accountants the prospect – according to recent polls – of a new government means getting their heads around a raft of new tax regulations and amendments on behalf of their clients.

Michelle Denny-West, a partner at Moore Kingston Smith, believes that UK tax legislation is becoming increasingly difficult to navigate: “Without the right infrastructure, SMEs struggle to manage tax and regulatory changes, resulting in mistakes and missed opportunities.”There is then a pressing need for the next government to get it right the first time. What are some of the key changes we could expect to see following a potentially fraught and certainly historic general election campaign?

National Insurance Contribution (NIC) reductions

NlCs look likely to be one of the biggest dividing lines in tax policy in the upcoming election. Chancellor Jeremy Hunt announced his second cut to NICs in less than six months by 2 to 8 per cent in the Budget, which he says will benefit 27 million workers. This has proven controversial, with Labour labelling it an “unfunded pledge” and the Lib Dems calculating that the freeze on income tax thresholds will cancel out any savings from the NIC cut.

In terms of their own policy, the Liberal Democrats say they would slash NICs for small firms by quadrupling the employment allowance to £16,000. Meanwhile, the Green Party proposes extending national Insurance to cover investment income as well employment income.

Moore Kingston Smith’s Denny­ West hails the NIC reduction, saying that combined with falling inflation it will increase the general population’s spending power and bring more people into the workplace: “Both are good for small businesses.”

However, Accountancy Partnership managing director Lee Murphy describes those NIC cuts as undermining the-government’s commitment to make 2024 ‘the year of the SME’.

Murphy adds that the “headline­ grabbing” NIC cuts will only benefit those earning between £33,000 and £55,000 a year, while everybody else pays more tax thanks to fiscal drag. He says: “Things are going to get worse unless significant change happens to help SMEs in this country. The costs faced by SMEs from April are increasing just to employ staff, who are paying more in tax while receiving a higher hourly wage, and this is a huge challenge.”

A raft of VAT changes

ln the Budget, the government announced a VAT registration threshold increase to £90k from £86k from April, the first change in seven years. This has generally been hailed as positive for small businesses, saving 28,000 of the smallest from needing to pay the tax.

However, head of indirect tax and MD at Alvarez & Marsal Tax, Mairead Warren de Burca, is less optimistic. She says it could cause small businesses to undertake avoidance tactics to stay below the threshold, such as limiting trading in the final months of the year, or intentionally keeping operations separate. She sees it as “more of a symbolic gesture than a transformative fiscal policy, with ongoing implications for how small businesses navigate their VAT obligations and growth strategies”.

Other parties have differing approaches. In the autumn the Lib Dems announced they would cut the main rate of VAT to 17.5% from 20% for one year in a bid to support every family and business in the UK with the spiralling cost of living.

Labour, meanwhile, intends to end the VAT exemption for independent schools. The Lib Dems have been vocal in opposing this proposal, and Warren de Burca agrees that this could introduce complex financial and administrative challenges for these institutions, which might impact the whole education sector.

For Warren de Burca, there are other small businesses that could use more focus from the next government.

For example: “The extension of VAT exemptions to all private gyms could emerge as a health-promotion strategy, yet it lacks political advocacy.

“Additionally, the hospitality sector’s relief through reduced VAT rates remains a topic of interest, albeit without clear political commitment. These potential VAT discussions reflect underlying priorities and could influence policy directions post-election.”

Improved R&D tax reliefs

Research and development (R&D) has become a central theme for both the Conservative and Labour parties, as each competes to be the ‘party of business’. Both main parties have renewed their focus on R&D tax reliefs to shore up science and technology innovations. There is little news from other parties, with no mention of the tax relief by the Lib Dems.

​​In the Budget, the government announced the merging of the existing R&D expenditure credit (RDEC) and SME R&D schemes, with a 20 per cent relief. Without going into detail, Labour has stated that it will uphold R&D tax credits should the party win power.

Reviews are mixed. Kelly Oakley CTA, an associate director at ForrestBrown, expects the merged scheme for R&D tax relief to be “the most significant reform of R&D tax incentives for many years”. However, a study of more than 600 industry leaders from innovation funding consultancy Ayming UK revealed that 58 per cent of businesses are not aware of the R&D tax reforms at all.

Oakley concedes that the reality of R&D tax relief hasn’t always matched the government’s rhetoric. She suggests that efforts to “rebalance” rates between large and small businesses, combined with a heightened focus on compliance, have led some businesses to approach the issue with caution. “Whatever the result of the next election, a period of stability is long overdue after years of almost constant change and uncertainty which has made long-term planning of R&D investment challenging.”

As election season continues, we can expect to see all the parties ramp up their discourse around tax policy. Bev Wakefield, owner of Vibrant Accouncancy, expects the changes to have a significant impact on small businesses, both in terms of planning enough to ensure that they are making the most out of reliefs available and timings, “but also administratively [in terms of] the new changes and how it impacts them”.

For Michelle Denny-West, election season policy will continue to focus on growth, with policies carefully crafted to ensure the announced cuts remain in place. She says: “For the tax cuts to be sustainable, the tax must be collected elsewhere, so it is anticipated that subtle measures Will be included to guarantee this.”

Fiscal drag, or the freezing of tax thresholds which pushes more people into higher tax bands, is an example of such a measure.

Bev Wakefield, however, is more optimistic, saying accountants are well­ rehearsed in navigating the changes, and that it is vital for clients that they maintain this adaptability and “ensure that all of the changes are adopted and interpreted in a way that can be understood for all”.

Whichever party forms the new government, there will be a slew of changes for accountants to make themselves aware of and begin preparing for. Business as usual then.

This article first appeared in the Financial Accountant magazine May/June 2024.

Read next: Election series: Key policies and business impact.

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