UK Tax News

Spring Statement 2018

Published: 13 Mar 2018

Updated: 13 Mar 2018

Written by Ray Coman

The 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

Published: 22 Nov 2017

Updated: 01 Feb 2018

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

Published: 08 Mar 2017

Updated: 01 Feb 2018

Written by Ray Coman

The 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

Published: 24 Nov 2016

Updated: 24 Nov 2016

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:

• Pension, and related pension advice
• Child care
• Cycle to work scheme
• Ultra-low emission cars.

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.

2016-17 Contract company changes illustrated

Published: 17 Mar 2016

Updated: 12 Oct 2016

Written by Ray Coman

The emergency Budget of 2015 introduced rates of tax for dividends which had repercussions for contractors trading via a company and other owner-managed businesses.

Prior to 2016-17 there was often a clear tax benefit to forming a company compared with invoicing as a sole trader. This is because, unlike a sole trader, a company owner could take profits as dividend and thereby avoid national insurance.

The example below takes a company with profits after deduction of director’s salary of £90,000. Using the corporation tax rate for 2015-16 and 2016-17 which is 20%, profits available as dividend would be £72,000. In this case, the director receives a salary up to the national insurance threshold of £8,060 and withdraws all remaining profit as dividend.

Limited company calculation

Note in 2015/16 the dividend is grossed up by 100/90. Grossing up does not occur under the new rules.

Adding the corporation tax payable of £18,000, the overall tax burden increases from £28,276.88, to £30,819.50.  This tax is calculated on a profit, before salary of £98,060.

Sole trader illustration

The following table illustrates the tax implications of the same individual trading as an unincorporated business

It can therefore be noted form the above that while a sole trader tax liability has not changed considerably in 2016-17, a company contractor now has a burden about the same as that of a sole trader.

Personal allowance abatement

Income over £100,000 would normally result in abatement of personal allowance. A sole traderdreach this abatementold with lower income than a contractor company. This is because corporation tax is deducted from income subject to income tax.

The tax benefit of a company compared with a sole trader will be significant if the profits in the above example were increased by say £10,000.

Benefits a limited company

Where the shareholder pays another person from their income a shareholder could be added so as to effectively double the £5,000 dividend allowance. A typical situation would be where household costs are shared with a spouse, who has no other dividend income.

The rate of corporation tax drops to 19% on March 2017 and again to 17% in March 2019. Therefore, the tax benefit of company compared with sole trader will become clearer.

It is not necessary to withdraw all remaining profit as dividend. Alternative could be to accumulate profits in the company and extract these as capital gains on eventual disposal of the company.

In the approach to the 2016-17 Budget the government entered a consultation on the abolition of entrepreneur’s relief for contractor companies. However this capital gains tax relief has remained intact.

The protection of limited liability which derives from using a separate entity through which to contract often suits both sides of the arrangement for non-tax benefits.

On account of the above, it can be maintained that a company pulls more credibility.