Government reaffirms intention to reform business rates system

Following a six-month review into council finance, Communities Secretary Eric Pickles has reaffirmed the Government’s intention to overhaul the way councils are allocated income from business rates.

Under current arrangements, which have been in place since 1988, business rates charged on most non-domestic premises, including shops, offices, pubs and factories, are calculated and collected by local authorities and put into a central pool before being redistributed through a complex formula to all councils, where they are used to pay for services like the police and fire brigade.

However, the Government is now proposing an overhaul of this 'formula grant' system, to allow local councils to keep the business rates they raise. The intention of 'localising' business rates is to give councils more incentive to invest resources as they see fit to boost business and create jobs in their areas. In addition, councils will be able to fund major projects by borrowing money against future revenue from business rates.

Mr Pickles told MPs: "No more will proud cities or historic counties be forced to come to the national government with a begging bowl. Councils will have a greater control over the cash, helping them plan for the longer term."

Labour shadow Caroline Flint attacked the proposals on the grounds, saying: : "Cutting funding to areas of the highest need doesn't free councils from central control or empower them, it stops them from doing the things their communities need of them. Yes, we want a funding system that supports jobs and encourages enterprise - but not every area has the same ability to attract investment and new business, not everywhere can be Westminster or the City of London."

Currently, the amount raised via business rates varies widely from £1.8bn in Westminster to just £8.5m in West Somerset. However, Mr Pickles suggested that councils which raised the most could expect to subsidise those which raised the least, through a new system of tariffs and top-ups.

The Local Government Association has broadly welcomed the plans.

Bank of England unlikely to raise interest rates in near future

Earlier this month the Bank of England's Monetary Policy Committee decided to keep interest rates on hold at 0.5%, and minutes released from the meeting suggest that a rise is unlikely in the near term.

The MPC said that business surveys suggested "continued modest underlying economic growth in the second quarter", but some softening in the outlook for the third quarter for both manufacturing and services.

The minutes state that there is a "substantial" risk posed by an escalation of the eurozone debt crisis, and that "the funding costs faced by the major UK banks remained elevated… and were likely to continue to affect the price and availability of credit to many households and businesses adversely."

On 7 July the nine-man committee voted seven to two in favour of holding rates at 0.5%. Spencer Dale and Martin Weale voted to raise them to 0.75%. Both men had voted to raise rates in each meeting from February to May, along with Andrew Sentance.

However, Sentance, the most aggressive member, who voted to raise rates to 1%, has since been replaced on the MPC by Ben Broadbent, a former Goldman Sachs economist. Broadbent voted to hold rates in June and July.

The British Chambers of Commerce has encouraged the MPC to hold interest rates. David Kern, chief economist at the BCC, said: "With wage pressures remaining modest, and with businesses and consumers facing acute pressures, it is right to wait before raising rates.

"At present, only one member of the committee [Adam Posen] has voted for increasing the quantitative easing programme, but if the economy continues to shows sign of weakness in the next few months, the MPC should consider this option more seriously to avoid a setback."

Low interest rates 'deter young savers', study suggests

Low interest rates on children's savings accounts are deterring many parents from investing in their future, a new study suggests.

According to a survey by consumer group Which?, the average instant access account for children provides a 1.1% return on money invested, while some even offer rates as low as 0.05%.

Those offering some of the lowest interest rates include child savings accounts affiliated with major football clubs.

Which? also said it expects interest rates on child trust fund accounts to fall sharply when the new junior ISA is introduced later this year.

'It's really important that children are encouraged to save, but it's a real disincentive when there are such poor rates on offer,' commented James Daley, Editor of Which? Money.

'We think the situation may get worse unless the Government allows transfers from child trust funds [CTFs] to junior ISAs as we foresee that rates for CTFs will decline as providers concentrate their efforts on the new market for junior ISAs.'

The findings have prompted calls for banks and building societies to review their rates and do more to incentivise saving.

However, the Financial Secretary to the Treasury, Mark Hoban MP, said the introduction of junior ISAs shows the Government is dedicated to improving the UK's savings culture.

'Junior ISAs will be a great example of a simple, clear and tax-free account that allows families to save and invest for their children's future,' he said.

Capital allowances 'too complicated' for small businesses

Tax breaks designed to encourage businesses to invest in new equipment are overly complex and fail to boost spending, a new study suggests.

Research for the Open University has found that just 8% of firms understand the rules regarding capital allowances, while 19% rated them 'acceptable'.

A further 31% of those surveyed said the system was 'too complicated' and 42% didn’t know what they were and/or left it to their advisers.

The study was conducted by the Finance & Leasing Association (FLA) as part of the Open University’s Quarterly Survey of Small Business in Britain.

Under the capital allowances system companies can write off some of their purchase of equipment against their taxable profits.

Currently, the first £100,000 of the year's investment in plant and machinery, except for cars, is allowed at 100%. However, the maximum annual investment allowance is set to fall to £25,000 with effect from April 2012.

Following the findings, Julian Rose, head of asset finance at the FLA, called on the Government to simplify the current system of capital allowances.

'If small firms are to drive the economic recovery, they need tax investment incentives that are simple to claim,' he said. 'The capital allowances system is over-complicated and falls short of providing the support that UK businesses need to encourage them to invest.'

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Delay in tax statements as HMRC fails to order enough paper

Statements about self assessment balancing payments will be delayed this year for some 500,000 people after HMRC failed to order enough special paper.

Those in the self assessment system who pay taxes 'on account' - mainly sole traders, the self-employed, and partners in businesses or LLPs - make payments in January and July 2011 based on the tax they paid for the tax year 2009-10. A balancing payment, or refund, will paid in January 2012 to rectify any differences between the estimate and the actual amount.

However, this year HMRC underestimated the number of forms - similar to credit card statements - required by taxpayers and failed to order enough of the necessary paper for printing them.

The late statements will now go out in August and, so long as payments are made within 30 days, no interest will be charged. It will also still be possible for taxpayers to check their statements online and pay via the internet or by telephone.

A spokesman for the Revenue said: "The volumes on this occasion have risen out of all proportion to previous patterns. HMRC will now ensure that they understand the reasons for this and will be fully prepared for any future rises…This in no way prevents the accurate payment of tax and no one will be out of pocket as a result."

Cost of red tape compliance on the rise

Businesses are spending more time and money on complying with regulations than ever before, latest research has shown.

According to a new survey by the Forum of Private Business (FPB), small firms spent a total of £16.8 billion on legal compliance last year, equating to an average of £14,200 per firm.

Of the 4,800 business owners polled, more than eight in 10 (84%) said they were spending more time on legislation than in 2009, while 67% revealed that they were spending more money on contracting external consultants to help minimise the burden.

The FPB argues that Government measures aimed at reducing the regulatory burden, such as the scrapping of £350 million of business regulations and a three-year moratorium on new regulations for firms with fewer than 10 staff, have yet to have an impact.

'Despite several government initiatives – some more effective than others – it is clear that we are heading in the wrong direction as far as reducing regulation for small business owners is concerned,' said the Forum's Head of Campaigns Jane Bennett.

'We simply want these measures to work properly and for the voices of the UK's business owners to be clearly heard.'

Review to examine small business tax administration

The Office of Tax Simplification (OTS) is to carry out a review of how bureaucracy in the tax system is hindering small businesses.

In a letter to the OTS, the Exchequer Secretary to the Treasury, David Gauke, has asked the organisation to examine small firms' experience of tax administration and 'their contact with HMRC at key stages of their annual cycle.'

'The first OTS reports have provided the basis for some genuine moves towards a simpler tax system,' wrote Gauke. 'To build on this excellent start, the Chancellor and I would like the OTS to look at ways to improve the tax administration for small business.'

The review will also consider the issues involved in starting and growing a new business.
'It's clear that many small businesses are struggling under the administrative burdens imposed by the UK tax system,' said John Whiting, interim tax director at the OTS.

'We plan to set up surveys and more road shows to really home in on what steps cause the most difficulties - and how the system can be improved, making it easier for businesses to get things right with the minimum of fuss.'

The OTS was set up last year to analyse tax reliefs, allowances and exemptions, and to conduct a review of business taxation with a view to reducing complexity.

Publishing its findings ahead of this year's Budget, the OTS identified 47 reliefs which it said should be abolished and 17 which need to be simplified, including Entrepreneurs’ Relief and the Enterprise Investment Scheme.

The OTS will report its latest findings on small business tax administration ahead of the 2012 Budget.

Small loan interest rates reach 10-year high

Despite record low interest rates, the rates charged on small loans have reached their highest level for more than a decade, according to financial information group Moneyfacts.co.uk.

The group found that banks and other providers are charging average interest of 12.7% on a £5,000 loan, up from 8.6% before the credit crunch and the highest level since May 2000.

The Bank of England's own findings, released earlier this month, suggested that interest rates on £5,000 loans had hit a record high of 15.58% during April - the 3.2% rise during the month being the biggest monthly change recorded since it first began collecting the data in 2005.

Moneyfacts has attributed the rise to the increased risk of people defaulting on small loans in the difficult economic climate.

Previously, lenders had offset the cost of low loan rates by selling payment protection insurance alongside them, but the industry now faces a £7bn to £9bn compensation bill for mis-selling the cover.

However, average interest rates on loans of more than £10,000 actually fell for the fourth consecutive month during April to 9.01%, according to the Bank of England.