Welcome to the Budget special March 2017 newsletter from Chamberlains
There’s a detailed tax card on the Contacts page of our website – you can download it by clicking here for more information, please let me know if you would like a hard copy .
The only major unexpected things were the proposed increase in National Insurance for the self-employed and the decrease in the dividend allowance from £5,000 to £2,000 – more details below. Other changes were more or less as expected, and many had already been announced. The ones of most common interest were:
aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa 2017/18 2016/17
aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa £ £
Personal allowance (tax-free income) 11,500 11,000
Income tax rates – no change
20% Basic rate band (including Personal allowance) £0 to £ 45,000 43,000
40% Higher rate band from then until: 150,000 150,000
45% Additional rate tax above this
Individual Savings Account (ISA) annual limit 20,000 15,240
Capital gains tax allowance 11,300 11,100
VAT registration threshold 85,000 83,000
Inheritance Tax nil rate band – unchanged 325,000 325,000
(NB: for 2017-18 a further £100,000 may be available for homes)
Corporation tax rate 19% 20%
ATTACK ON SELF-EMPLOYED IN BUDGET
In his first Budget on 8th March the Chancellor Phillip Hammond (or spreadsheet Phil as he likes to be known, to boast of his un-showy attention to detail) announced a controversial increase in National Insurance. He claimed that he would level the playing field between employees and the self-employed by increasing Class 4 National Insurance Contributions (NICs) from 9% to 10% from 6 April 2018 and then to 11% from 6 April 2019. His justification is that the self-employed are now entitled to more generous state benefits than in the past (but still not all) – so their NIC rate should be increased towards the 12% Class 1 NIC employee rate.
To soften the pain, we already knew that the flat rate Class 2 NIC contributions or the self-employed, currently £2.80 a week, would cease on 5 April 2018. In theory, only the self-employed with profits in excess of £16,250 (so that’s probably most people, at least in the south of England!) will pay more national insurance.
But is it going to happen?! There’s been an enormous backlash against it – a) because it’s a breach of an election manifesto promise not to increase NI, and b) because it seems like an attack on the small business culture that the conservatives supposedly encourage. It seems that they’ll reconsider it in the Autumn budget, so it may be re-thought.
TAX FREE DIVIDEND ALLOWANCE TO BE REDUCED TO £2,000
He also announced measures to limit the rise in tax-driven incorporation – although this already seemed to be slowing. The £5,000 tax free dividend allowance introduced by George Osborne will be reduced to just £2,000 from 6 April 2018. Mr Hammond claimed that many smaller owner-managed businesses have incorporated as limited companies mainly for tax reasons – but that’s nothing new, and the £5,000 dividend allowance wouldn’t have created much incentive.
Typically the director/shareholders of such businesses have paid themselves in dividends and paid less tax than similar unincorporated businesses. That’s certainly true, but the dividend tax changes last year (in rough terms, adding 7.5% tax to all dividends over the £5,000) had already reduced the advantage and the £5,000 allowance originally seemed to be some compensation for the extra charges. Since 6 April 2016, once the dividend allowance has been used the remaining dividends are taxed at 7.5%, 32.5% and then 38.1%, depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate. There are rumours that these dividend rates may also be increased in future years.
Although the cut in the tax-free dividend allowance is clearly aimed at owner managed companies, it will also impact on those with substantial share portfolios – and low interest rates encourage savers to invest more in shares. Mr Hammond reminded us in his speech that the annual ISA investment limit increases to £20,000 from 6 April 2017 and that dividends on shares held within an ISA continue to be tax free (as also in pension schemes). Maybe ISAs will gain appeal.
START OF DIGITAL REPORTING DELAYED FOR SMALLER BUSINESSES
The Government is committed to the “Making Tax Digital” (MTD) project which is scheduled to start in April 2018 with the first quarterly updates being submitted by the self-employed and property landlords in July 2018.
Many business owners, professional advisors and the Treasury select committee have expressed concerns about the timescale for the introduction of MTD. The Chancellor announced that there will be a one year deferral in the start date to 2019, but only for self-employed businesses and property landlords with gross income below the VAT registration limit, £85,000 in 2017/18. It will help most landlords, but only the smaller businesses will benefit.
CHANGING YOUR ACCOUNTING DATE CAN ALSO DELAY THE START OF DIGITAL REPORTING
Apart from shrinking your business, another way of delaying the start of Making Tax Digital (MTD) might be to change its year end. The legislation in the latest Finance Bill specifies that MTD will apply to accounting periods commencing on or after 6 April 2018.
This means that if you currently prepare accounts to 30 April then the first quarterly update to be submitted to HMRC will be for the period to 31 July 2018. However, if you changed the accounting date of your business to 31 March then the first quarterly update would be for the period from 1 April to 30 June 2019.
However, this doesn’t apply to rental businesses – if properties are held personally the rent is treated on a tax-year basis, so there’ll automatically be an accounting period starting on 6 April 2018. There are other tax implications in this change – we can help you to consider them.
CORPORATE TAX MEASURES
The Chancellor announced that the Government is committed to continue to have the lowest corporate tax rate of the G20 major trading nations (although who knows what Donald Trump will do?) As already announced the corporation tax rate reduces to 19% from1 April 2017 and then to 17% from 1 April 2020.
The corporation tax rate for small and medium sized companies trading in Northern Ireland will be reduced so that such companies can compete with those in the Republic where the rate is 12.5%.
The Government is also keen to continue to encourage investment in research and development (R&D) and the Chancellor announced that the R&D tax credit claim procedure would be simplified. The idea is that expenditure that can be said to be for R&D (and the remit’s quite wide) can lead to tax refunds or to enhanced losses to carry forward against future profits. Currently some firms of tax consultants charge exorbitant fees for helping with the claims, so a simpler claim system would be welcome.
TAX FREE CHILDCARE SCHEME STARTS 2017
The chancellor also announced that the new tax-free childcare scheme is due to start in 2017.
The scheme will provide up to £2,000 a year in childcare support for each child under 12 where the parents save in a special account. If they save £8,000 the government will top up the account with 20% to a total of £10,000 which can then be used to pay for childcare costs.
BUSINESS RATES RELIEF FOR SMALL BUSINESSES
There has been much lobbying from the small business sector to reduce business rates. The Chancellor stated that 600,000 small businesses currently benefit from small business rates relief.
He also announced that no small business that is coming out of small business rates relief will pay more than £600 more in business rates this year than they did in 2016/17.
Any measures relating to pubs have a populist appeal, and in order to support the licensed trade from April 2017, pubs with a rateable value up to £100,000 will be able to claim a £1,000 business rates discount for one year.
FLAT RATE VAT SCHEMES
It wasn’t mentioned in the Budget, but it’s worth a reminder that the system‘s changing as from 1 April 2017. Until then, a business was sometimes able to gain from the way it charged and paid-on VAT. The classic system meant that VAT was neutral for VAT-registered businesses, but to ease administration and encourage compliance a Flat Rate Scheme (“FRS”) allowed a business to charge VAT at the standard rate, to ignore VAT on purchases, and then to pay on a lower amount to HMRC. The idea was that the business owner perhaps gained just a little, but not unreasonably. There are different FRS percentages for different types of trade. However, some people took unfair advantage of the system, so it’s now restricted to businesses which buy in goods (not services) that total more than 2% of the sales in any one quarter. If not, the flat rate becomes a penal 16.5%.
A simple table may help… Let’s suppose that a small publishing business makes sales of £25,000 in one quarter and that it incurs costs of £400 on ink and paper, and £4,600 on website and accountancy costs. Its old FRS percentage was 11%. But £400 is less than 2% of the £25,000 sales, so it will need to use the new rate of 16.5%. Under the old system, it gained £700 from the 11% FRS (see the table below) as compared to the “Classic” VAT system, whereas it will lose £950 if it’s forced to use the 16.5% rate. Evidently, it’s better for it to ditch the revised flat rate scheme and to revert to the classic (neutral) VAT system.
Flat Rate Scheme illustration
aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa“Classic” Old flat New flat aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaarate rate aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa11.0% 16.5%
VAT at 20% A 5,000
Sales including VAT B 30,000
Purchases – goods 400
– services 4,600
Total purchases ex VAT 5,000
VAT incurred at 20% C 1,000
Purchases including VAT D 6,000
Net cashflow before payment of VAT
= B – D 24,000 24,000 24,000
VAT payable: Classic version = A – C 4,000
VAT payable: Old FRS = 11% of B 3,300
VAT payable: New FRS = 16.5% of B 4,950
Net profit aaaaaaaaaaaaaaaaaaaaaaaaaaaa 20,000 20,700 19,050
Gain/(loss) as compared to Classic version 700 (950)
If you follow the figures through, you’ll see that the classic system is neutral – the VAT washes through and, after payment of the £4,000 to HMRC, the business is in the same position as if no VAT had been charged, with a profit of sales minus purchases: £25,000 – £5,000 = £20,000 profit. The old flat rate schemes allowed a small bonus profit – with an extra 1% in the first year of operations, because the business was allowed to reduce the percentage by 1%. This was ultimately considered to be unfair, hence the change.