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2018-Budget

 

Written by Ray Coman

 

2018 BudgetPhilip Hammond spoke for over an hour earlier this afternoon delivering his last Budget before the UK exits the EU.  The UK is set to officially leave the EU on the Brexit Day of 29 March 2019.

 

Hammond was able to deliver positive figures relating to UK growth and a reduction in government borrowing.  He spoke about the age of austerity coming to an end.  A round up of the key changes announced which will affect personal taxation are offered below:

 

Raise in personal allowance and higher rate tax threshold

Off-payroll rules to extend to private companies

HMRC to become preferred creditor following insolvency

Extension to minimum holding period to qualify for entrepreneur’s relief

Annual Investment allowance increase

Non-residential building allowance

Digital Services Tax

Letting relief to be narrowed

Restriction on Principal Private Residence relief

R&D tax credit to be limited

VAT threshold frozen

Other changes

 

Raise in personal allowance and higher rate tax threshold

 

The Chancellor delivered the most significant measure in his speech as a last item. The personal allowance will increase to £12,500 and the higher rate tax threshold to £50,000 with effect from 5 April 2019.

 

Increases in the personal allowance and tax threshold have been one of the most popular of the Conservatives Manifesto pledges.  In April 2019, the personal allowance was increased to £11,850 and the higher rate tax threshold to £46,350.  The increase to £12,500 and £50,000 respectively had been planned for April 2020.  The Budget announcement made this afternoon brought forward that rise by one year.

 

The rates and allowances from 2020-21 will be raised in line with indexation.  Increasing tax thresholds with inflation is intended to prevent so called ‘fiscal drag.’

 

Off-payroll rules to extend to private companies

 

The ‘IR35’ rules seek to tax an individual as an employee who would be an employee but for a company.  The rules are designed to prevent people from forming companies solely to save tax, mainly in the form of employer’s national insurance.  Until now, the onus has been on the company owner to demonstrate that they are actually self-employed, to avoid the application of IR35.  However, the government will now place responsibility with the hiring company to demonstrate that workers operating through companies are being taxed appropriately.

 

The tax savings of operating via a limited company are substantially in the form of savings in employer’s national insurance.  The new regulations will place the onus of proof on hiring companies to ensure compliance of contractors with IR35.

 

Announced in the Budget is a delay in the new rules until April 2020.  The regulation will not affect small entities but only large and medium sized employers and their intermediaries, such as hiring agents.  It should come as a relief to one-person company owners who will have less pressure to prove the status of working arrangements from which their client often stands to benefit the most.  The regulation could pave the way for the cut in corporation tax scheduled for April 2020 to proceed without an accompanying sleu of personal service companies as witnessed in the past.

 

HMRC to become preferred creditor in insolvency

 

Since 2003, amounts due to HMRC in VAT and PAYE have not payable ahead of other creditors in the event of a business folding.  A change to this regulation will mean that from 6 April 2020, in an insolvency, HMRC will be preferred for the payment of VAT, PAYE and CIS deductions.  The rules on corporation tax and income tax remain unchanged.  Therefore, amounts paid to the business for VAT from its buyers, or withheld from employees in income tax, national insurance and CIS will be payable to HMRC ahead of trade creditors.

 

Extension to minimum holding period to qualify for entrepreneur’s relief

 

Hammond spoke about various calls to abolish or significantly reform entrepreneur’s relief.  This is a valuable relief for owner managed businesses and contractors which allows for a business disposal to be taxed at a significantly lower rate of tax than a profits extraction by dividend.  The relief also benefits senior employees who are awarded share in their employers’ company through the Enterprise management Incentive Scheme.

 

Following today’s announcements, the conditions required to qualify for Entrepreneur’s Relief must be met throughout a two-year period. This tighter requirement is an increase from the current condition which is just one year, and will be introduced from 2019-20. It is unlikely to affect the majority of business owners who hold their shares for well over a year in any case.

 

Annual Investment allowance increase

 

The Annual Investment Allowance will increase from £200,000 to £1 million for a period of one year starting 1 January 2019 and ending 31 December 2020.  This will benefit mainly larger businesses.

 

Non-residential building allowance

 

With immediate effect for contracts entered into on 29 October 2019, a capital allowance will be available on new non-residential structures.  Reminiscent of industrial buildings allowance which has been scrapped for many years, this will provide a tax form of depreciation for investment into commercial buildings.

 

Digital Services Tax

 

The Chancellor spoke about the slow pace of progress about implementing an international tax on digital businesses.  The current system of corporation tax extends to business which are incorporated in the UK or have central management and control exercised in the UK.

 

With effect from 1 April 2020 the government plans to charge a 2% tax on business with UK generated revenues.  The new tax will apply to technology companies with more than £500 million of annual profits. The tax is therefore targeted at the likes of Facebook, Apple, Amazon, Netflix and Google (FAANG.) While 2% is a modest target when compared to comparable rates affecting other corporations, it should at least result in some UK revenue from the tech giants.

 

Letting relief to be narrowed

 

Currently, letting relief is a generous tax break which exempts up to £40,000 of gains per owner.  The relief reduces the gains subject to tax where a property is let by its owner and former resident.  It was designed to discourage properties being left empty.

 

The reform announced today will restrict this relief so that it is only available to live-in landlords.  The new rules, which will take affect from 6 April 2020, could significantly affect any landlord letting out properties that were once his or her home.

 

Restriction on Principal Private Residence relief

 

The amount of gain which is subject to capital gains tax is reduced by period of occupation. So much of the gain which relates to a period that it was a person’s home is exempt from tax. In addition to actual periods of occupation, tax relief is available certain deemed period of occupation. This includes the final months of ownership.  Announced this afternoon, the final period of ownership will be halved from 18 months to 9 months.

 

R&D tax credit to be limited

 

It is possible for a business to claim a credit if it suffers a loss from research and development activity. The tax credit available to SME from 1 April 2020 will be restricted to three times the PAYE liability for that year.  This is an anti-avoidance provision designed to tackle an increase in the number of supposedly fraudulent claims.

 

VAT threshold frozen

 

Mr Hammond acknowledged a shortcoming in the current VAT registration threshold which obliges business to register as soon as the threshold is exceeded.  Apparently, EU regulation currently prevents the Chancellor from phasing in the effect of VAT for smaller traders.  He stated his intention to freeze the VAT registration threshold for a further two years until April 2022.  He indicated an intention to smooth the suddenness of the effect of the threshold for smaller businesses in the future.

 

Other tax changes

 

  • Business rates will be cut by one third over the next two years.  The tax break for smaller retailers is an attempt to relieve recent hardship on the high street.
  • The contribution required by smaller firms towards the apprenticeship levy will be halved from 10% to 5%.
  • Consultation will be launched to make the granting of certain license from public bodies dependent on the applicant demonstrating tax registration.

 

Author's note: The Chancellor expressed hopes of a 'double deal dividend' following the EU exit.  One gain in the form of unlocking a buffer he is holding in reserve pending the exact outcome of negotiations.  The other benefit deriving from the end of uncertainty.  The expectation is therefor set for a more relaxed fiscal policy ahead, which could include the much-anticipated cut in corporation tax scheduled for 2020.

Spring Statement 2018

 

Written by Ray Coman

 

Spring Statement 2018The first budget that follows a new Parliament is traditionally the most punitive and, having got over that hump, regulatory reform seems to be calming. In this, the first Statement to occur in spring rather than autumn, there were no major announcements.

 

Against a background of increasing regulatory and tax burden for higher income and owner managed business and contractor sectors, the Statement content should come as some relief.

 

The chancellor announced a review of VAT. The consultation will include a proposal for graduating small businesses with a turnover between £85,000 and £115,000 into the 20% rate. The implementation may therefore be effective ahead of the making tax digital for VAT deadline scheduled for 1 April 2019.

 

In the light of recent announcements, the most that can be concluded from the statement at this stage is that no news is good news.

 

November 2017 Budget

 

Written by Ray Coman

 

The 2017 Budget was delivered in the context of slowing economic growth.

 

The main headline from the Budget came from a reduction in stamp duty for first time buyers. For the purchases under £300,000 which is reckoned to apply to about 80% of buyers there will be no duty to pay. For homes worth between £300 thousand and half a million, there will be no tax on the first £300,000. First time buyers purchasing a home worth over £500,000 will pay stamp duty at the normal rate. The rules take effect immediately.

 

Various rates increased with effect from April 2018. The personal allowance is up to £11,850, higher rate tax threshold to £34,500, capital gains tax exemption to £11,700 and national living wage to £7.50 per hour. Until 31 March 2020, the VAT registration threshold of £85,000 is to be frozen.

 

The government intends to make the granting of certain licenses conditional upon proof of tax registration. This is to tackle the so call ‘hidden economy.’

 

2017 Budget

 

Written by Ray Coman

 

imgur 5 w600The March 2017 Budget delivered by Chancellor Hammond this afternoon added further tax pressure to the self-employed and owner manager business sector. The speech descended into Pantomime at one stage with Hammond retorting 'oh yes we will!' to a heckle from the opposing benches. If it was a Pantomime Budget, the accountant was yet again cast as villain.

 

Increase in national insurance rate for the self-employed.

Cut to dividend allowance

VAT

Making tax digital

Promoter of Tax Avoidance

Cash basis

Recap on previous announcements

 

Increase in national insurance rate for the self-employed.

 

A self-employed individual is subject to a rate of (Class 4) national insurance of 9% on any profits over the small profits limit, currently £8,060 per annum. Announced in the Budget was a rise in this rate to 10% from April 2018 and again to 11% in 2019.

 

Cut to dividend allowance

 

A dividend allowance was announced by the preceding Chancellor, when the rate of income tax on dividends was hiked. Its effect is to treat as tax exempt the first part of any dividend received. The allowance, currently £5,000 will be decreased to £2,000 from 6 April 2018. This will affect self-employed people who conduct business through a company.

 

VAT

 

The Value Added Tax (VAT) registration threshold is set to rise to £85,000 from £83,000 in April; The de-registration threshold to also increase from £81,000 to £83,000.

 

Making tax digital

 

The government is introducing policy for businesses and landlords to report profits to HMRC once every three months. In today’s announcement, this requirement will be delayed by a year, to April 2019, for landlords, sole traders and partners with a turnover below the VAT threshold. Companies will be required to report profits once every three months from April 2018.

 

Promoter of Tax Avoidance

 

As previously announced in the 2016 Autumn Statement, a financial penalty will be imposed on any person involved in the promotion of a scheme which is defeated by HM Revenue & Customs.

 

Cash basis

 

Certain unincorporated business can account to HMRC for profits on the basis of cash paid and received.  This contrasts with the accruals basis used for other entities, where profits would be determined to a greater extent by invoice date.  The government has increased the threshold for accounting for profits on the cash basis to £150,000. Once the basis is applied it can continued to be used until profits reach £300,000.  The threshold is currently £83,000 and the proposal is due to be effective 6 April 2017.

 

Recap on previous announcements

 

The list below summarises forthcoming changes announced prior to the Budget:

  • Personal allowance to increase by £500 to £11,500 on 6 April 2017.
  • A £2,000 increase to the higher rate threshold
  • Class 2 NICs to be abolished from April 2018.
  • A cut in the rate of corporation tax to 19% on 1 April 2017 and again to 17% in 2020.

 

Autumn Statement 2016

 

Written by

 

Autumn Statment 2016The newly appointed chancellor’s speech yesterday included many confirmations about the tax changes announced by his predecessor, Mr Osbourne.  However, the full report introduced an alteration to the flat rate scheme that will have a significant impact for contractors and other self-employed individuals.

 

Flat rate scheme to end for most contractors

Corporation tax

National Insurance

Personal allowance and higher rate tax

Salary sacrifice

Savings

Switching of Autumn and Spring announcements

 

Flat rate scheme to end for most contractors

 

The Autumn Statement brought an increase in the flat rate scheme to 16.8%.  The new percentage will apply to most contractors, regardless of their business activity.  Since the percentage is applied to VAT inclusive turnover, a flat rate scheme trader will now pay 19.8% of the 20% VAT collected.  This 0.2% benefit will effectively cancel the tax benefit of using the scheme.

 

The new percentages take effect from 1 April 2017.  At that point, most traders will be better off using standard VAT accounting, and recovering VAT on expenses.  For many, the accounting cost and hassle of being VAT registered will not outweigh any VAT recovery on expenses.  Traders registered voluntarily should consider VAT deregistration.

 

The flat rate scheme currently ranges between 11% and 14.5% for most businesses.  The highest percentage a trader can currently pay is 14.5%.  However, a contractor providing services typically has has relatively 'low costs' relative to providing services.  Only business that are not ‘low cost traders’ will be exempt from the new rules.  To continue to use the lower flat rate percentage, a business has to spend at least 2% of turnover on goods.  Goods in this case exclude:

 

  • Any services (such as telephone, rent, professional fees, insurance and sub-contractor costs.)
  • Capital items, (such as computer equipment and office furniture.)
  • Vehicles, vans and other motor expenses.
  • Food and drink consumed by the business. 

 

Even where the 2% test is met, a trader will not be excepted unless total expenditure on goods exceeds £1,000 per year.

 

Retailers, restaurants and other business with high cost of sales will, by and large, meet the test.  For IT contractors, management consultants and other service providers, the flat rate scheme is unlikely to be of any practical use.  For instance, it is remote that stationery and office consumables will comprise 2% of turnover.

 

Corporation tax

 

The Chancellor confirmed plans to lower corporation tax to 19% in April 2017 and eventually to 17% by April 2020.  The rate by 2020 is expected to give Britain the lowest company tax in the G20.

 

National Insurance

 

The employer’s (or secondary) national insurance limit will be slightly increased so that it is the same as the employees’ (or primary) national insurance limit.  The two thresholds will be aligned at £157 a week with effect from April 2017.  The change would not result in any extra tax liability for an employee.  The extra liability for an employer would be no more than £7.18 a week per employee.  The alignment is intended to simplify national insurance.

 

As announced in the 2016 Budget, Class 2 National Insurance Contributions, payable by self-employed people, will be abolished from April 2018.  A further Budget announcement confirmed is the liability of termination payments over £30,000 to national insurance.  The measure also takes effect in April 2018.

 

Personal allowance and higher rate tax

 

The government confirmed the previous announcement that the personal allowance will rise to £11,500 in 2017-18 and again to £12,500 by April 2020.  The higher rate tax threshold is also set to increase from £42,000 (in 2016/17) to £45,000 next tax year and eventually to £50,000 by 2020.  Following this, the personal allowance threshold will rise in line with the CPI measure of inflation.

 

Salary sacrifice

 

Salary sacrifice scheme describe an arrangement where an employee foregoes pay in order to receive some benefit.  Employee do not have to pay national insurance o benefits and therefore the scheme can bring a tax advantage.  Depending on the rate of an employee’s national insurance, a benefit could be as much as 12% cheaper if paid by salary sacrifice than out of take home pay.

 

The Autumn statement announced an axing of perks, such as gym and private healthcare memberships and smartphones from salary sacrifice.  Nonetheless, a tax benefit will still arise from sacrificing pay in favour of:

 

 

Therefore pension and childcare, which are the most common, benefit will not be affected by the new rules.

 

Savings

 

Further reiterations of the measures to be introduced in April 2017 included:

Increase ISA limit from £15,240 to £20,000 in April 2017.

Savings starting rate of £5,000 to remain in 2017/18

A new allowance of £1,000 each for trading and for property income.

 

Switching of Autumn and Spring announcements

 

The major fiscal announcements have until now been made in the Spring.  The Spring Budget will be replaced with an Autumn Budget, with the effect that 2017 will contain two Budget dates.  The reasoning behind the change is to announce tax changes further ahead of their implementation on 5 April.

 

The Autumn Statement will be replaced with a Spring Statement, the first of which will be in 2018.  The statements are presented as less major, although the impact of changes will vary from one taxpayer to the next.

 

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