Is the tax burden for start-ups too high? Entrepreneurs I speak to seem to be unable to hide their concern at the avarice of our tax men.

The uptick of corporation tax for small firms in this year's budget, from 20 to 21 per cent, seemed to epitomise the rising burden of entrepreneurs. CGT went up 80 per cent too – though there is an exemption for first time entrepreneurs. Stealth taxes, such as business rates, sales licences and carbon taxes are soaring.

So what’s the government doing inflicting tax hikes on the most important – and fragile – sector of the economy? Why is government imposing tax increases on small firms?

The answer, in a word, is debt. The national debt is now £581bn. For eight years the government has been borrowing like crazy, spending money on “eye catching initiatives” without waiting for revenues to increase at the same rate.

The money for these initiatives has been borrowed on the world’s bond markets, and we pay bondholders interest of between 4 and 4.5 per cent, depending on the duration of the loan. Total interest repayments on the debt total £31bn a year. This, Alistair Darling tells us, will rise to £34bn within a few years.

To put this into context, we spend £21bn on transport each year. In fact, we now spend as much on debt interest payments as we do on defence, a staggering fact considering we are at war on two fronts.

Wasting money on debt interest payments means tax reductions are impossible. If the debt didn’t exist, we could abolish a whole raft of taxes: perhaps we could axe Capital Gains Tax (which raises £4.8bn a year) beer and cider duties (£3.3bn a year) and fuel duties (£25bn). Or we could abolish council tax (£25bn a year). Or maybe we could slash corporation tax to 5 per cent. Take your pick!

Tragically, Brown and Darling won’t follow this path. The budget set out the government’s spending plans for the next few years, and borrowing won’t fall. Instead we’ll continue to pay out tens of billions a year in interest repayments, borrowing more and more to pay the interest on the money we’ve already borrowed.

This year we will borrow £43bn more, three-quarters of which is purely to cover existing interest payments. Darling forecasts total debt will hit £731bn by 2012 – a figure so vast it makes the £4.5bn we lost when Brown sold our gold at the bottom of the market look like a rounding error.

So entrepreneurs should brace themselves for further tax hikes. Even if Brown and Darling’s figures are right, taxes will continue to rise as the government tries to cope with spiralling debt repayments.

In a “worst case scanario” – and since 2000 Brown’s debt forecasts have been hopelessly optimistic – we could be in for massive tax hikes.

With Ireland’s corporation tax at 12.5 per cent, and Estonia taxing retained profits at zero, Britain’s entrepreneurs are feeling pretty irked right now. How will they feel in the future when the tax man comes knocking for more cash, to pay for this debt mountain?

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By Charles Orton-Jones  on   Jul 11,2008

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Keywords

tax    corporation tax    CGT    Alistair Darling    Gordon Brown      

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