Boost for small businesses as Philip Hammond scraps rates rise

The chancellor will attempt to show that the Conservatives are on the side of small businesses in his budget this month with expected changes to business rates and VAT charges.

Philip Hammond is due to announce that the planned 3.9 per cent rise in business rates that kicks in next spring will be scrapped after lobbying from the CBI, the British Chambers of Commerce and British Retail Consortium.

Business rates, which generate £30 billion a year, have long been a corporate bugbear because they are linked with property values and are indexed to the retail prices index of inflation, which hit a five-year high of 3.9 per cent. This measure of inflation is usually one percentage point higher than the headline measure, the consumer prices index, which stood at 2.9 per cent in August.

The rates were due to be aligned with the consumer prices index from 2020 onwards but Mr Hammond is believed to be willing to allow this to happen straight away, according to a report in The Sunday Times. The move would save businesses hundreds of millions of pounds when the next round of rises kick in from April. The increase would have come on top of last year’s property revaluations of business rates, which pushed costs up by as much as 60 per cent in London.

Tom Ironside, business and regulation policy director at the British Retail Consortium, said a cap on the rises would be a “step forward”. He added: “Without decisive action from the chancellor in his upcoming budget retailers face a stark £270 million leap in their rates bill from April.”

The Treasury is also planning to freeze or slightly lower the threshold at which companies must start collecting VAT. At present, small businesses and freelancers must charge customers an extra 20 per cent for goods and services once their annual turnover reaches £85,000. This is one of the highest VAT thresholds in the world and costs the government about £2 billion a year.

Like business rates, this threshold normally rises in line with the retail prices index of inflation but government sources have said that it is likely to be frozen or marginally lowered this year while policymakers consider a report from the Office of Tax Simplification. Advisers at the OTS have recommended that the government change the VAT threshold because there are concerns that it acts as a barrier to growth. Some company owners and freelancers effectively shut up shop for part of the year in order to keep their businesses small enough to qualify for the exemption.

Paul Morton, tax director of the OTS, said last week that “cruise ships are full of people staying below the VAT threshold”.

The OTS, which is an independent arm of the Treasury, said that reducing the threshold to £25,000 could yield as much as £2 billion but would mean up to 1.5 million more businesses collecting the tax.

If the threshold was raised by £5,000, the cost to the public purse would be up to £100 million while as many as 30,000 companies would be saved the burden and cost of collection.

The report published by the OTS tomorrow outlines needless tax complexities, including VAT quirks. For example, a gingerbread man with chocolate eyes is zero rated, but one with chocolate trousers is standard rated.