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Created: Thursday, 24 November 2016 21:17
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Last Updated: Thursday, 24 November 2016 22:34
Written by Ray Coman
The 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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Created: Wednesday, 16 March 2016 20:31
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Last Updated: Friday, 18 March 2016 11:46
Written by Ray Coman
Mr Osborne delivered his eighth Budget as Chancellor at round 12.30pm today. The Budget was announced against a backdrop of slowing global growth, recent interest rate cuts by central banks into negative territory and the forthcoming EU referendum in Britain. The first two Budgets of our current government have been far reaching and full of surprises. This contrasts with the Budgets of the preceding coalition government which tended to alter very little.
The overviews below follow the chronological order in which the announcements were made, with some supporting explanation.
Loans to participators
Termination payments
Diverted Profits Tax (Large companies)
Corporation tax fall
Tax relief for ‘micro-entrepreneurs’
Business rates drop
Stamp duty on commercial property
Indirect taxes mixed
Class 2 NICs
Capital gains tax cut
Entrepreneur’s relief for investment in small companies
Chancellor silent on entrepreneur’s relief restriction for contractor companies
Lifetime ISA of £4,000 a year for the under 40s.
Personal allowance and tax threshold up next year
Author’s note
Loans to participators
From 6 April 2016, the charge for a loan to a participator will increase from its current rate of 25% to a new rate of 32.5%. A participator is typically a shareholder or director of a company with five or fewer owners. Directors of a one-person or ‘contractor company’ and family owned business will usually be participators.
A full summary of the rules can be read here in the article about overdrawn director’s loan accounts. In brief, where a contractor has not retained sufficient funds in the company at the year end to cover corporation tax, it will be a requirement to lend money as a director. This loan gives rise to a tax charge.
Company funds are usually represented by the company bank account, however amounts owed from clients and equipment and other assets brought into the business can also be used as a buffer.
If the bank account is brought back into balance in future years, the charge can be repaid by HMRC. However there is a cash flow drawback and an administrative burden of borrowing money from the company.
Termination payments
Payments on termination of an employment contract receive preferential tax treatment, provided the payments are not an entitlement under the employment contract. Under current legislation a termination payment is not subject to employer’s national insurance and the first £30,000 will not be subject to income tax in the hands of the employee.
From 6 April 2018, many termination payments over £30,000 will be subject to employer’s National Insurance.
This measure has the purpose of an anti-avoidance provision.
Diverted Profits Tax (Large companies)
A series of new rules are scheduled to be introduced to bring profits derived from the UK into the charge of UK corporation tax. The measures are aimed at companies with profits of over £5 million.
The rules will have most impact on multi-national organisations with that particular scope to structure finances so group profits are taxed in jurisdictions with lower than average rates.
For most companies, the deduction from profits chargeable to corporation tax for interest payments will be restricted to 30% of UK income.
Only 50% of current year profits can be reduced by losses brought forward from previous years.
The tightening of rules on withholding tax for royalty payments and other measures will also be presented.
Corporation tax fall
Following previous announcements, the corporation tax, which is currently 20%, was due to fall to 19% in April 2017 and to 18% in April 2020. The Chancellor announced that the rate will now be reduced further to 16% in 2020.
Tax relief for ‘micro-entrepreneurs’
Traders and landlords with less than £1,000 will not need to declare this income on a Tax Return. The income will be tax free. This will particularly benefit vendors with a side-line on websites such as E-Bay and AirBnB. Traders bringing in more than £1,000 income can deduct the allowance from their income profits, instead of actual expenses. A total of £2,000 can be exempted from tax, one allowance for property income and the other for trading.
Business rates drop
From April 2017, small business rate relief will be increase. The relief currently exempts businesses with a rateable value of £6,000, however this is set to increase to £12,000 from next year. The higher rate threshold will also increase at the same time from £18,000 to £51,000.
Stamp duty on commercial property
With effect from midnight, the chancellor has brought the stamp duty system for commercial property in line with that for residential property. The tiered system will mean that no stamp duty is payable on a property worth £150,000 or less, 2% is paid on consideration between £150,000 and £250,000 and 5% is levied on the value of the property which exceeds £250,000.
With the stated aim of helping “small firms”, the new duty will benefit all but purchasers of the highest value property.
Indirect taxes mixed
- Levy on sugary drinks
- Fuel duty freeze (despite lower petrol prices on account of the recent oil glut.)
- Tobacco duty rise.
- Freeze on beer, cider, whisky and other spirits duty with other alcohol taxes rising.
Class 2 NICs
Class 2 is a flat rate of national insurance which is payable by sole traders and partners. The contribution secures a year towards the number required to qualify for a basic state pension. This tax will now be abolished in 2018. A social security and state pension entitlement will accrue to self-employed people via the Class 4 National Insurance. This is payable at the same time as income tax.
Capital gains tax cut
With effect from 6 April 2016, the basic rate of capital gains tax will be cut from 18% to 10% and the higher rate of capital gains tax will be cut from 28% to 20%.
The rate at which an individual pays capital gains tax depends on their total income. Gains below the annual allowance are not taxable. Taxable gains are added to an individual’s yearly income. To the extent that total income and gains are above the higher rate tax threshold, gains are taxed at the higher rate. Otherwise gains are taxed at the basic rate.
Gains made on residential property will continue to be charged at the existing rate of 18% basic and 28% higher rate tax.
Entrepreneur’s relief for investment in small companies
Entrepreneur’s relief will reduce capital gains tax for the subscription of shares in an unlisted company and held for the longer term. The new rules will apply to any purchase in new shares made from tomorrow. The requirement will be for the shares to be held for at least three years from 6 April 2016 or date of purchase, whichever date is the later.
In effect the rate of tax will be 10% and subject to a life time limit of £10 million. The new rules extend relief currently available for shares purchased under the enterprise investment scheme.
Chancellor silent on entrepreneur’s relief restriction for contractor companies
The government had consulted on the abolition of entrepreneur’s relief on disposal of a business. However, there were no announcements in the Budget about this relief being withdrawn.
There remains an opportunity for company owners to accumulate profits in the company and withdraw this on eventual disposal. The accumulated funds in the business, usually represented by monies in the bank account, can be withdrawn as capital on eventual disposal. The implication is that the funds will be taxed at just 10%, rather than the much higher rates for dividends or salary.
Nonetheless, holding funds in a company in order to save tax carries the risk that the rules about entrepreneur’s relief will be scrapped.
Lifetime ISA of £4,000 a year for the under 40s
From April 2017, the government will introduce a new ISA. Savers who are under 40 on 5 April 2017, will be able to contribute up to £4,000 a year into an ISA. For every £4 contributed by the taxpayer, the government will add £1 to the ISA account. The government contributions will continue until the ISA holder reaches 50.
Some or all of the capital can be invested in an ISA for purchasing a property after just one year. However the property must be the first home owned by the taxpayer and have a value of £450,000 or less.
Alternatively, savers can wait until 60 to use the capital as pension income. Unlike pensions however there is no tax to pay on withdrawing the funds. The tax relief on investment is equal to the current basic rate of tax. To this extent the new ISAs will be more attractive to basic rate taxpayers.
If the ISA fund is not used to buy a home or for a pension on reaching 60, any withdrawals would be subject to a 5% charge and loss of the government bonus. The measure is intended to assist young people saving towards a deposit on their first property.
From 6 April 2017, all savers will be able to contribute up to £20,000 a year into their ISA.
Personal allowance and tax threshold up next year
The Chancellor announced an increase in the personal allowance from 6 April 2017 to £11,500. The higher rate tax threshold will also increase in 2017-18 to £45,000.
Author’s note
The Budget introduced some expensive tax breaks, with a particular focus on easing the burden for small business. However, with a stated policy of national deficit reduction, it remains to be seen whether this trend of fiscal policy can be upheld.