A leading business group has warned that small businesses will suffer if the Chancellor raises taxes on small businesses in the Pre Budget Report.

Raising taxes for small businesses would ultimately cost the UK billions of pounds and hundreds of thousands of jobs, according to a new independent report for the Federation of Small Businesses (FSB). The report, by the Centre for Economics and Business Research (CEBR), argues that increasing the burden of taxation on the country’s small businesses – which make up 99 per cent of all UK businesses – would plunge the economy further into debt and take its toll in jobs at a time of spiralling unemployment.

Small firms are already bracing themselves for an increase in employers’ National Insurance Contributions (NICs) in April 2011. Using its own economic simulation model, CEBR tested the knock-on effects of adding 1p to employers’ NICs, paid by small and medium sized enterprises. The CEBR findings suggest that the NICs increase would cost the economy 57,000 jobs but only make a small dent in the gap in the public finances. In addition, the report states, these job losses alone would cost the Treasury around £900m in additional jobseekers allowance and other benefits.

The FSB has been calling for the Government to take steps to make it easier for the country’s 4.8m small businesses to employ staff, and so tackle rising unemployment and drive the economy out of recession. Polled FSB members believe cutting payroll taxes is the most important change the Government could make to encourage them to take on another member of staff. FSB members have also said that a reduction in business tax – such as corporation tax – would give them more of an incentive to take on another staff member.

The CEBR report found that if the Government raised the rate of corporation tax from 21 per cent to 26 per cent – the result of equalising the tax rate between big and small business – would cost around 100,000 jobs from the small business sector and reduce economic output by £4.3bn, while reducing the public sector deficit by only £1.6bn over 10 years.

Ahead of the Chancellor’s Pre Budget Report announcement, the FSB is urging the Government to freeze employers’ NICs completely.

John Walker, National Policy Chairman of the Federation of Small Businesses, said:

“This research by the CEBR shows that taxing small businesses to help reduce the public sector deficit is a dead-end that will instead cost us dearly in jobs and economic growth. The FSB has long been saying that small businesses are the country’s economic drivers and they cannot play their part in pulling the economy out of recession if they are faced with increasing taxes.

“The FSB is calling for a freeze in employers’ National Insurance contributions as the most constructive way of tackling the challenge of rising unemployment and continuing to put small businesses in the best possible position to draw the economy out of recession. We need to see the Government take on these practical proposals at a time when the country faces such financially testing times.”

Ben Read, Managing Economist at Centre for Economics and Business Research, added:

“Our report shows that the potential benefits to the public purse from increasing taxes on small business are at best minimal, and in the long term may actually damage public finances. Moreover, almost all empirical evidence shows that increasing business taxation provides disincentives for small businesses to engage in activities that they have particular strengths in: entrepreneurial activity, investment and innovation, and employment.

“In short, taxing economically beneficial activity is inconsistent with encouraging a strong recovery, and would damage growth and employment prospects.”