Pre-budget report

The stimulus announced by Chancellor Alistair Darling on 24 November, combined with a dramatically revised growth target for 2008 of 0.75% and for 2009 of between -0.75% and -1.25%, a ballooning national debt and deteriorating conditions for businesses means that we need this to be a short, sharp recession or we could feel the pain far longer than our Chancellor anticipates. It is a political and economic gamble and our economy, according to Darling, is expected to be in recovery by the middle of 2009.

In a raft of measures for businesses, value-added tax has been cut to 15% until the end of next year; corporation tax for businesses making less than £300,000 has been frozen at 21% and £50,000 of losses is available to offset from the previous three years of profits rather than just one. There will be approximately £7bn available to small businesses, including £4bn from the European Investment Bank, of which £1bn is set to be available by the end of the year. A £1bn emergency fund will allow companies to borrow sums from £1,000 to £1m on flexible terms with the government guaranteeing the lending.

Relief

Howard Jones, head of financial services and tax partner at Mazars, commented: "Funds available to brokers is good news, although it sounds a complicated process to release them. Also, Darling is allowing all businesses to carry back the current year's loss from the profits of the last three years (as opposed to the normal one year) up to £50,000, in order to get a refund in tax for accounting periods between November 2008 and November 2009. However, the National Insurance contribution increase is not going to help and will be introduced from 2011, as it will cost employers and employees." For the majority of workers, this will be an increase of 0.5% for the employer and 0.5% for the employee. However, the full details of this increase will not be announced until March.

Resources

Commenting on the reduction in VAT, Paul Bradley, VAT partner at Mazars, said: "This is a window of opportunity for the finance sector to reduce capital expenditure, for example if you are buying a commercial property. It is good news but there is a sting in the tail for businesses that intend to use the reduced rate for artificial arrangements, such as using subsidiary companies as vehicles for pre-payment arrangements prior to VAT returning to 17.5% or higher."

It is also good news for insurers. David Bearman, a VAT partner specialising in financial services at Ernst & Young, said: "A big winner will be the retail banks and insurers, both of which can recover little or none of the VAT they incur on their costs, so the rate reduction decreases their external costs of broadly 2%. The impact for investment banks and commercial insurers is likely to be lower, in the region of a 1% to 1.5% reduction on their external costs."

However, despite this series of measures taken by the Treasury, it is the battle for banks to extend credit that was identified by one broker as the most important factor for the economy. Nick Tamblyn, managing director at Perkins Slade, commented: "Looking at freeing up credit and improving credit insurance are issues that need to be addressed and will help our customers. The credit market is in danger of closing down; if credit insurance is withdrawn, that means clients are exposed and you get into a spiral. They have had a rapid shift to a hard market; there is increased credit risk out there."

AT A GLANCE: DARLING'S KEY ANNOUNCEMENTS

- Postponement of increases on small business corporation tax (for those making profits up to £300,000), keeping it at 21% from next year instead of the proposed rise to 22%.

- VAT to be reduced from 17.5% to 15% from 1 December to 31 December 2009.

- Businesses will not have to pay tax on empty commercial properties in 2009-10 if the business rates are less than £15,000.

- For tax purposes, losses of up to £50,000 can be offset against profits from the last three years rather than the normal one.

- An extra £4bn to help small to medium-sized enterprises from the European Investment Bank; £1bn of loans through Small Business Finance Scheme; £1bn to the Export Credit Guarantee Department to ease short-term cashflow for small exporters; and £1bn of tax cuts. Not all of the help will be available straightaway.