Sara Davies: Three things Burnham’s Budget needs to do for small businesses

When I speak to small business owners, I hear the same frustrations over and over. At a time when we should be encouraging and supporting entrepreneurs, we are putting more barriers in their way. We want entrepreneurs to thrive, because when they do they contribute more to the economy. But it’s the smallest businesses and sole traders who are being hit hardest. With a Budget coming up, here are three of the biggest problems facing businesses today. And as an advocate for people starting their own businesses, I want to know from the government: what are you going to do about it? Shorts Change the VAT cliff edge The VAT cliff-edge stopped an estimated 44,000 small businesses from growing last year. Currently, once a sole trader or business’s revenue reaches £90,000 a year they start paying VAT at 20 per cent. Crossing the threshold applies VAT at the full rate to everything, not just the amount above the line. HMRC itself has reported that businesses change their behaviour to avoid the limit, closing temporarily, refusing work, or taking holidays when they are near the threshold. The Office for Budget Responsibility (OBR) estimates that adds up to around £350m a year in sales those businesses simply choose not to make. The VAT threshold was set at £85,000 in 2017 and has increased just once since, in 2024, while inflation has soared and costs have rocketed. Worse still, the threshold is based on turnover rather than profit. That means a small-margin business can become liable for the tax when they may only have made a small profit. For a one-man band, it’s harder to prepare for these changes and may also be harder to raise prices to absorb the cost. Many sole traders must make thousands more each year just to stand still. The Federation of Small Businesses has called for the threshold to be raised to £100,000. In 2017, the Office of Tax Simplification proposed a taper, whereby businesses would pay a lower rate for the first three years after registering for VAT. The European Union has a tolerance band, allowing SMEs to remain exempt if they exceed the threshold by a small amount. With so many suggestions, it’s clear the current system isn’t working. Stop taxing people on money they’ve not yet earned Employed workers don’t have to think too much about income tax because it’s all paid before you see your wages. But it works differently for the self-employed who pay through a self-assessment tax return. The worst bit about this system is the “payment on account”, which applies to anyone whose tax bill is more than £1,000 and sees self-employed workers pay half of this year’s tax bill again as an advance on next year. The £1,000 trigger has not moved since 2009/10, so inflation has quietly pulled more small traders into the net, with about three million now liable for a payment on account. HMRC’s own advisory board says this is not working. It surveyed 3,146 small business owners last July and only 55 per cent were even aware that payments on account existed. No wonder about 1.1 million payments were missed in January 2025 – and three-quarters of these became tax debt. It’s about to get worse, too. Making Tax Digital came into effect this year, requiring those with qualifying income over £50,000 (falling to £30,000 in April 2027, and £20,000 in April 2028) to report their earnings four times a year. That means more admin and extra costs to implement the systems required – between £285 and £392 according to HMRC estimates. At a time when profits are being squeezed, this is hurting businesses. The government has just consulted on whether businesses should make four tax payments a year. The Association of Taxation Technicians has already urged it not to proceed. The Institute of Chartered Accountants (ICAEW) warned it would create cash flow difficulties. The Chartered Institute of Taxation says the collection mechanism is “poorly understood, prone to errors and limited in what it could achieve”. If the government really wants people to start businesses, it needs to stop creating more barriers to them doing it. Review the benefits trap Too many small business owners are getting caught in the benefit tax trap. Currently, if you receive Universal Credit and start a business, your entitlement for the first 12 months is based on what you actually earn, which is great. But in month 13, the Department for Work and Pensions (DWP) applies a notional amount based on the National Living Wage. Essentially, it assumes you’re earning about £1,600 a month even if you’re not. That can have a huge impact on your entitlement. According to research cited by the Work and Pensions Committee, average monthly self-employment earnings at the one-year mark were about £600. So why is the state assuming you make double that? It’s no wonder data from PeoplePlus found that the survivorship level of new businesses plummeted from 70 per cent to just 35 per cent at the 12-month mark. Working mums are getting a bad deal too. A claimant caring for a child under three is exempt from that notional calculation, thankfully. But the day their youngest child turns three, it is applied, regardless of how much their business is bringing in. The government’s justification for this is that they can now qualify for 30 free childcare hours per week. But here’s the kicker: to qualify for the free hours, a parent must expect to earn at least £2,643 over three months (about £881 a month), so more than the average business at the one-year mark, is a serious bar for someone building a business around a small child. The two systems use the same wage rate but pull in opposite directions: DWP assumes she earns 30 hours at £12.71, while the Department for Education requires her to prove she earns 16 hours. We used to have something that worked, but it was closed. The New Enterprise Allowance, which ran from 2011 to 2022, paid people moving from benefits into self-employment £65 a week for 13 weeks, then £33 for another 13, plus mentoring. Official statistics show it helped set up 161,000 businesses – some 43 per cent of which were started by women. Many claimants start a business because they have struggled to find a job and are trying to create a better life. We need the government to support them in this, not put up more obstacles, or what’s the point in trying?