Following the final Autumn Statement and talk of deeper austerity, fall in real value of wages and rising national debt, Philip Hammond introduced Wednesday’s Budget (the final one planned to be held in the Spring) on a more positive note; referring to a better than expected economic performance, a reduction in the OBR borrowing forecast, and hence reduced spending plans to avoid further unnecessary increases in debt.  He also reported that real wages were now on the up and should continue to grow.  The view of some people, many on the opposite side of the political fence, remarked that it was a complacent Budget and there was a bias towards big corporates.

 

Rise in Class 4 National Insurance (NIC) for the self-employed

The rate is initially set to rise from 9% to 10% from April 2018 and then to 11% from April 2019.

What this means and our comments

Whatever your view or political persuasion, this has proved to be an emotive issue and has sparked wide differences of opinion.

It was rumoured that something would be done to address the perceived inequality of tax treatment between the employed and self-employed sectors.  Whilst this measure may not have a significant financial impact on many people initially, it nevertheless sends a message that the Government thinks it’s only fair that everyone should be taxed the same.  However, in our view and many others, this is not the whole picture.  The phrase ‘risk vs reward’ does not even seem to have been mentioned.  Whilst there will always be some who arguably benefit unfairly from the self-employed rules, surely genuine self-employed individuals are entitled to a more favourable tax and NIC treatment, which reflects the extra risk they take and the lack of certain benefits, which are afforded to their employed counterparts (such as pay for holidays, sickness and accidents at work, etc).

And the importance of the true self-employed freelancer seems to have been totally underestimated.  In the Bath area alone, we know that many important small businesses rely on good freelancers and the flexibility that comes with such individuals.  It works for both parties.  These are the type of businesses that are surely needed to be ahead of the game and influence productivity in the UK economy in the lead up to leaving the EU?

And where will it stop?  The rate is initially set to rise from 9% to 10% from April 2018 and then to 11% from April 2019, but could other measures be announced in the Autumn Budget? 

One positive point to highlight however, is that there has always been potentially more scope for self-employed people to claim genuine business related expenses than the employed individual, and so, it is worth revisiting this area and looking more rigorously at certain areas, such as “Use Of Home” deductions.

Bizarrely, last year’s announcement to raise dividend tax from April 2016 (other than the first £5,000, as covered below) appeared to be an attempt to reduce the personal tax advantages associated with operating as a company, when the owner managers extracted most of their company profits as dividends.  Unable to impose National Insurance on dividends, the Government increased tax rates on dividends, which made the decision whether to operate through a company or as a sole trader much more marginal in certain cases.  Now, one might expect more people to operate through a company depending on the profits and drawings expected.

 

Reduction in dividend allowance

This is now set to be reduced to £2,000 from 6 April 2018.

What this means and our comments

George Osborne introduced a £5,000 tax-free dividend allowance from 6 April 2016, and Philip Hammond has now taken the opportunity to reverse this, not in full yet, to £2,000 from 6 April 2018.  So, it was very short lived and looks set to eventually disappear altogether, which is perhaps frustrating from a planning perspective, although it undoubtedly presented an opportunity for some to take maximum advantage and pay no personal tax on profits distributed to family shareholders, etc.  Having said this, the overall dividend tax rates had also been increased, and so for many owner managers who took salary and a reasonable level of dividends to live on, the £5,000 allowance helped just a little to soften the hike in overall rates.  And it should be remembered that the company pays corporation tax, albeit at 20% currently, before the dividends can be paid out.

 

Some listening on Making Tax Digital (MTD)

Businesses with turnover below the VAT threshold (£85,000 from 1 April 2017) do not have to start using the MTD service until from April 2019. 

What this means and our comments

Before yesterday’s Budget, other than those micro businesses with turnover under £10,000, all other unincorporated businesses, the self-employed and landlords had to start complying with the MTD quarterly filing regime from April 2018.  Following much lobbying by the accountancy and tax profession arguing that the timetable was much too quick, the Government has listened, well a little.    This at least buys these businesses some more time, although there was no announcement about the turnover limit for businesses to be completely exempt from MTD, and so it appears that unfortunately, this will remain at a mere level of £10,000 turnover.   So for businesses under the VAT threshold, the implementation date will now be their first accounting period starting on or after 6 April 2019, although there has not yet been any clarification on how these new rules will interact with the current self-assessment system. 

 

Business rates

There were some promising announcements although we wait for further details.  Of note, pubs with a Rateable Value below £100,000 should benefit from a £1,000 discount.  Also, there is to be some form of cap on increases in rates for certain businesses that come out of Small Business Rate Relief, and Local authorities are to be funded to help specific hard hit businesses.

What this means and our comments

It is good that local pubs may benefit from the £1000 discount, but on the face of it, it would have been good if a similar discount was announced for other businesses, particularly in the hospitality sector, and high street retailers, both of which are significant players in our region.  Whether this is the real reform that so many bodies and people were hoping for remains to be seen.  Many were also hoping for Plant and Equipment to be excluded from the valuations of property for the purpose of calculating the rates, but disappointingly this has not been announced.

 

Termination Payments

It has been confirmed that the reform of the tax rules relating to termination payments will take effect from 6 April 2018 and will include the following:   

  • All contractual and non-contractual payments in lieu of notice (PILONs) will be taxable as earnings
  • The first £30,000 of a genuine termination payment will remain exempt from income tax and NICs    
  • The NIC rules will be aligned with the tax rules so that employer NIC will be payable on the elements of the termination payment exceeding £30,000
  • Foreign service exemptions are to be removed.

What this means and our comments

The rules relating to termination payments have been clarified and tightened.  Individuals will be pleased the £30,000 exemption remains intact, but will find that the circumstances that it applies will be restricted to genuine redundancy situations. It will remain a contentious area on which specialist advice will still be needed.

 

R&D tax credits for companies

No monetary announcements or changes here, but the Government will consider a reduction in administrative burdens relating to the scheme.

What this means and our comments

At this stage we do not know what specific burdens are being referred to here.  Anything though that can help the local creative and innovative sectors in Bath (e.g. businesses that are started by individuals currently attending the University and Innovation Centre for example) should be encouraged.  Some increase in the enhancement for the Large Company Scheme would also have been welcome.

 

Transfers of assets to trading stock - immediate change

This was not announced by the Chancellor.  Businesses that transfer a capital asset to trading stock will no longer (from 8 March 2017) be able to elect for capital losses that would otherwise arise where an capital asset (typically property) is appropriated to trading stock to be treated as trading deductions which can be offset against the total trading profits of the business.

What this means and our comments

This measure will immediately remove an election in the tax code that has allowed businesses to convert losses attributable to a period for which the asset was a capital asset into more flexible trading losses. This is supposed to address an unfairness in the current rules that can be exploited for avoidance and will particularly impact property clients who hold property currently standing at a loss and seek to crystallise more favourable trading losses.

 

Infrastructure

Continuing the theme set in the Autumn Statement of investing in broadband, a £16m fund was announced to increase investment in 5G mobile networks and fibre optic broadband, which will hopefully filter through to the Bath area.

 

Summary

For a Budget without very much tax, a lot of consultation is anticipated later this summer, and we can probably expect more tax announcements in the second 2017 Budget later in the year.

We would have like to have seen some announcements on the following:

  • Many businesses would have liked to have seen guidance on the application of the recently introduced “Targeted Anti-Avoidance Rules” as they relate to members voluntary liquidations.  In particular, property development companies/joint ventures and certain personal service companies that wind up their activities, have historically been able to distribute the net funds and pay capital gains tax, but have been in an uncertain state of limbo for some time now.  The shareholders may be charged income tax on final distributions if they are involved in a “similar” business activity within two years of the liquidation, unless this is for a qualifying commercial purpose.  The problem is, what is a qualifying commercial purpose?  Whilst we understand the rationale for imposing income tax on some distributions where there is blatant tax avoidance, there are certain situations (particularly property development) where the company is wound up for genuine commercial reasons, and the shareholders later start a new venture in a new company, often with a different partner (e.g. property JV’s), for genuine commercial reasons.
     
  • Local entrepreneurs and start-ups in Bath would have welcomed any relaxations in the rules for the Enterprise Investment Scheme and Seed Enterprise Investment, which are seen by many as too restrictive and unnecessarily complex for businesses seeking equity funding from business angels.