Good for business?

Only time will tell whether the tax cuts announced in last week’s Emergency Budget will offset the impact of the draconian spending restrictions also put in place by the Chancellor. Angus Montgomery assesses the design fallout

The business tax breaks in Chancellor George Osborne’s Emergency Budget have been welcomed by design industry observers, but are only providing a temporary distraction from the eye-watering cuts set to hit the public sector.

A series of tax breaks and entrepreneurial relief measures led the Forum of Private Business to hail last week’s Budget as ’small business-friendly’, but this optimism is tempered by the spectre of cuts potentially as high as 33 per cent to Government departments including Business, Innovation and Skills, which administers design at central Government level. The full scale and detail of the cuts – which will go across Government with only health and international aid spending ringfenced – will become clearer with the Comprehensive Spending Review in October.

The Cabinet Office has already frozen all non-essential advertising and marketing spend – having set up the Efficiency and Reform Group in May in conjunction with the Treasury. The ERG is tasked with slashing £6.2bn of Government spending. Roger Proctor, chairman of the South West Design Forum, describes the procurement freeze as ’huge news and very dangerous’, adding, ’I think this is the biggest threat to the design sector at the moment, and in the next few weeks we will see a number of redundancies.’ Proctor says a straw poll of consultancies in his region suggests the move has forced some to consider closing down completely.

Mat Hunter, chief design officer at the Design Council, says, ’The balance of cuts to tax increases in the Budget is 77 per cent to 33 per cent in favour of cuts – that’s pretty strong.’ He adds that in such an environment it is obvious that design will be a hard sell to under-pressure procurement officers, adding, ’I think the people who get design will continue to grasp it even more, but those who don’t will push it away.’

The Design Council, which receives central Government funding through BIS, is moving into a position to deal with potential cuts to its own funding, says Hunter, who adds, ’We have already streamlined costs by 10 per cent, and will continue to make a case for what we do. We have a very strong relationship with BIS – and a very intelligent one. It completely understands the value of design, and doesn’t just take a top-down numbers view.’

The Design Council is already facing up to one challenge, hoping to secure the future of its Designing Demand programme, which aims to promote design to business through workshops, mentoring and other services. The programme is currently administered through regional development agencies, which the coalition Government has now announced will be scrapped and replaced with local enterprise partnerships.

The Design Council says it will continue delivering Designing Demand, using whatever mechanism replaces the RDAs. Hunter says, ’The future landscape is unclear, but we have an effective product we will continue to deliver.’

Against such a backdrop, these positives in the Budget might seem difficult to pin down, but Esther Carder, partner at accountant Kingston Smith, says, ’The Budget is about as good as it was ever going to be – Osborne did the best he could have done with it.’ She adds, ’[The tax breaks] have really hammered home the message that the Government is not targeting people trying to run successful businesses – this sends out the right message to them absolutely.’

And taken on their own, these policies do seem welcome. Changes to the Capital Gains Tax system have been hailed in the creative sector particularly. As Carder says, ’Most businesses in the creative sector are small to medium-sized enterprises, and most SMEs will think of selling up one day.’ Although the CGT rate has been raised from 18 per cent to 28 per cent, this is lower than expectations, with some observers having predicted a 40 per cent rise. But more significant is the rise in the entrepreneurs’ relief limit from CGT, which has gone up from £2m to £5m. Carder says, ’This is the most exciting part – for SMEs, most people’s entire gains would be covered by this relief.’

The drop in Corporation Tax – set to fall from 27 per cent to 24 per cent by 2014 – is also welcomed. Kingston Smith says a 24 per cent rate will be among the lowest in the G20 countries, with obvious benefits in attracting international companies to the UK. Nicolas Mamier, managing director of consultancy Appetite, says, ’The lowering of Corporation Tax is welcome, and in small businesses like ours where everyone enjoys a share of the profits, it provides a good incentive to keep motivation high in tough times.’

The VAT rise – from 17.5 per cent to 20 per cent, effective from January 2011 – is ’almost inevitable’, says Carder. ’It’s going to bring in £13bn a year – it was always on the cards,’ she adds.

Carder says, ’The VAT increase will primarily affect businesses selling directly to consumers. The brands design groups are working for will be hit harder, but there won’t be such a direct impact on the design sector itself.’ Retail and packaging experts may disagree, but at least they have six months to prepare themselves, and can enjoy a presumably lucrative Christmas under the current rates.

As autumn’s CSR cuts start to be implemented, they might find themselves the only ones celebrating.

Key points in the Budget

  • Regional development agencies to be replaced by local enterprise partnerships
  • Cuts of up to 33% are expected across most Government departments
  • VAT to rise from 17.5% to 20%
  • Capital Gains Tax rises from 18% to 28%, but entrepreneur’s relief limit rises from £2m to £5m
  • Corporation Tax to fall from 27% to 24% by 2014

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