Duncan Smith warns of hidden Budget taxes 'like IR35'

Iain Duncan Smith, the Conservative Party Leader, criticised the Chancellor immediately after he had delivered his speech, saying he "wondered what hidden taxes lurked in the Budget this time, like IR35."

Mr Duncan Smith said: "For the first time in four years, the country was running a budget deficit, that Government borrowing has risen by £17.2 billion, Government debt had risen by £5 billion over the last year and public investment had dropped by £1 billion. These were not mentioned in the budget report."

Michael Howard, the Shadow Chancellor, also criticised IR35 at a recent speech to the Centre for Policy Studies in London. He said: "We have become accustomed to the phenomenon of discovering after a Budget Statement that some very important measure has been buried in some obscure footnote. When the Chancellor introduced the new 10p-starting rate in his 1999 Budget he neglected to mention that he was abolishing the existing 20p rate. Neither was his stealth tax on entrepreneurs - IR35 - mentioned in his 1999 speech. Instead, he said: 'I want to recruit, motivate and reward Britain's risk-takers."

Raising personal tax through a number of low-key stealth taxes without raising the headline rates, Mr Brown has watched thresholds increase in line with inflation, rather than earnings, resulting in more people than ever before paying income tax and 700,000 more paying at the top rate.

The Professional Contractors Group expressed disappointment that the Government had missed another opportunity to repeal IR35 yesterday after campaigning against the legislation since its introduction in 1999.

Other industry reactions:

David Lennan, Director General of the British Chambers of Commerce, accused Mr Brown of taking business competitiveness a step backwards. He said: "A cut in the small companies corporation tax will not compensate for the higher national insurance contributions small businesses are being forced to make.

"Raising national insurance rates makes a mockery of the distinction between our tax and national insurance. It is high time that one of our political parties stopped this farce and had the courage to merge the two systems, saving our small businesses billions of pounds a year.

"VAT is one of the most time-consuming Government-imposed tax burdens that small businesses face. We welcome the Chancellor's attempts to try to simplify the system, but believe the flat rates being suggested are not sufficiently generous to encourage widespread take-up of this new scheme."

Tim Nicholson, Chief Executive of the Recruitment and Employment Confederation, said: "The Budget is a mixed bag for employment. The proposed Employer Training Pilots looks like good news, as long as it isn't strangled by red tape, as is the reduction in corporation tax for small businesses. The increase in national insurance contributions will add costs for business which may stifle economic growth and job creation just as these are starting to pick up.

"The private recruitment sector also looks forward to continuing to help the Chancellor achieve his goal of full employment, as it has done in recent years, despite the threat of further regulation."

John Walker, Policy Chairman at the Federation of Small Businesses, said: "It is a tragedy that the Chancellor has decided that the self employed will also pay higher National Insurance Contributions. The average income from self-employment is just £13,890 compared to an average income from employment of £21,842 per annum. This undermines any attempts the Chancellor has made to help the low paid.

"In March 1999, the Chancellor stated that the £2 per week Class 2 NIC made by the self employed was adequate to fund their benefit entitlement. The class 4 entitlement is therefore a separate additional tax on entrepreneurs.

"The announcement on corporation tax will help incorporated small businesses. The abolition of 10 per cent rate tax band for businesses with annual profits of less than £10,000 will be a great help to fledgling companies. But over two thirds of small businesses are unincorporated, and once again the Chancellor has done nothing for the self-employed. In fact the inequality in their tax treatment has widened.

"The administration of VAT is a major headache for all small businesses. We have been pushing for VAT simplification over many years and a flat rate will give real benefits to small businesses, possibly as high as the Chancellor's estimate of £1,000. Up to 700,000 small businesses will be affected once the flat rate is extended to businesses with a turnover under £150,000. We are also pleased with the abolition of automatic VAT fines."

Digby Jones, Director General of the Confederation of British Employment, said: "The Chancellor has given with one hand but taken with the other. Companies will be delighted by measures to boost innovation and entrepreneurship. But there will be deep dismay at the net increase of some £2.5 billion in the cost of doing business in Britain.

"An increase in employers' NICs also impacts on every business of every size regardless of whether or not they are making profits.

"Tax credits for research and development are a significant boost to UK innovation. We would like it increased but this is a good start for a credit that will make a real difference, provided the Government sticks with it over the long-term. We are pleased that the Chancellor has made the credit simple enough for businesses of all sizes to use."

"The Chancellor has left business in no doubt that he is committed to encouraging enterprise. The tax improvements, including the red tape burden, are welcome. We especially welcome the financial help for small businesses gaining accreditation as Investors in People."

John Whiting, Senior Partner at Price Waterhouse Coopers, said: "When announcing that national insurance for employers, employees and the self employed will increase by 1 per cent for 2003/04, the Chancellor did not make it clear that from 6 April 2003, employees will pay national insurance on amounts above the upper earnings limit for the first time at a reduced rate of 1 per cent - thus giving an effective top rate of tax of 41 per cent on earnings.

"The changes from 2003/04 also impose significant burdens on employers and the self-employed. It is thought that the 1 per cent increase in the employers' rate of NIC will be the major revenue earner for the Government (and bone of contention for employers)."

Stephen Coleclough of Price Waterhouse Coopers addressed the budgetary changes to Indirect taxes. He said: "The burden of VAT on small businesses has been reduced with a flat rate calculation for businesses with a turnover of less than £100,000 (rising to £150,000 from April 2003).

"The Chancellor has announced further measures to reduce the burden of VAT for small businesses. A new optional flat rate scheme for businesses with a tax exclusive annual taxable turnover of up to £100,000. Such businesses will be able to calculate the VAT due by applying a flat rate percentage to their tax inclusive turnover, saving administration time and costs. The new scheme comes into effect from 25 April 2002.

"The rate of small companies' corporation tax on profits up to £300,000 has been reduced from 20 per cent to 19 per cent, effective from 1 April 2002. The last cut in the small companies' corporation tax rate was from 1 April 1999. This further cut, together with the associated changes in marginal rate relief for companies with profits between £300,000 and £1,500,000, is expected to benefit some 335,000 companies. The saving for an average smaller company is estimated to be about £700 per annum."

Keith Mansfield, tax partner at Price Waterhouse Coopers, said: "The starting rate of corporation tax has been reduced from 10 per cent to 0 per cent on the first £10,000 of profits (but phased out as profits rise to £50,000), as part of the Government's commitment to rewarding entrepreneurial spirit. It will take 150,000 profitable companies out of the charge to tax. For companies with profits between £10,000 and £50,000 the effective marginal rate of tax (i.e. the tax on this tranche of profits) will be 23.75 per cent, effective from 1 April 2002."

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Richard Powell, UKTECH