Published:
29
Oct
2018
Updated:
30
Oct
2018
Written by Ray Coman
Philip 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.
As the end of the tax year approaches, the following calculations explain the optimal salary payments for companies with a sole director.
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