Welcome to the November 2018, Budget Special, newsletter from Chamberlains
Firstly, an apology: I haven’t managed to produce any newsletters since the summer – the longest lapse since I started them in over five years ago! I’ll try to get back to doing them monthly again.
Last week we had the Budget – a bit more involved than sometimes, so I’ll concentrate on that this time.
And I need to remind people about tax returns. It’s already too late to submit these on paper (the deadline was 31 October) so they must be done online. There are a few exceptions – for example spies and High Court judges are obliged to do paper returns – but software generally works well (or at least ours does!). I said back in the spring that we’d charge people more for sending in information late – I wrote, “from this year, fees will increase 25% for anyone after the end of September and by 50% for anyone after the end of November.” Otherwise, life gets very difficult in December and January, and we don’t have the opportunity to look at things as well as we’d like.
SO, THE BUDGET…
MORE MONEY FOR NHS AND AN END TO AUSTERITY?
As previously announced, these were the main themes of the Chancellor Phillip Hammond’s third budget but we were waiting to hear where the extra money was going to come from. Had he found a “Magic Money Tree”, or would tax and borrowing have to increase? In fact, he was able to claim extra money will come from better than expected economic growth forecasts (still pretty low, but not as bad as feared.). And this feeds though into higher tax revenues without the need to increase tax rates. However, he threatened that he may have to have a re-think (if he’s still in number 11) if Brexit negotiations don’t go to plan. In other words, he may have to reinstate a Spring Budget to claw back the good things he’s offering…
As you’re probably aware by now, the best thing for most people was the early increase in personal allowances. Other items were widely spread minority interest ideas. Once again, the personal pension regime was left untouched – higher rate taxpayers can still benefit from generous tax refunds here. Personally, I was disappointed by lack of measures to support the Government’s supposed Green Agenda – I assume not deliberately, but simply because they had other priorities. But at a time when we’re getting repeated reports on the dangers of climate change and the urgency to reduce global warming, it was sad to see Capital Allowances for green equipment being removed, and fuel duty still frozen. And finally, should Chamberlains re-brand as a Drop-in Tax Café, with a tempting Menu of services?!
PERSONAL ALLOWANCE AND HIGHER RATE LIMIT INCREASED EARLY
Back in 2015, the Government’s manifesto pledge was that the
personal allowance would rise to £12,500 in 2020 and the higher rate tax threshold to £50,000. However, the Chancellor has decided to bring forward these increases one year early from 2019/20, taking an estimated 1 million taxpayers out of higher rate tax.
In the current tax year, someone earning £50,000 would pay tax of £8,360, but next year it will only be £7,500 – a generous reduction of £860. However, it’s not quite so good as it seems (“Stealth NI rise to nullify half of budget tax cuts” screamed the Daily Telegraph) – because more income is subject to the standard 12% National Insurance. Taking both tax and NI into account, our £50,000-earner would be left with £37,536, £524 better than this year’s £37,012.
Are you surprised at how much National Insurance there’ll be? Effectively, as I’ve often said, in most respects it’s just another tax. In this example, this year it’s 55% as much as the tax; next year it’s 66% as much. Painful! (This is one of the reasons people often like to take dividends rather than a salary, to avoid the NI – see the IR35 section below.)
Note that up to 10% of the personal allowance (£1,250 from 6 April 2019) may be transferred from one spouse or civil partner to the other if unused and the transferee is a basic rate taxpayer. As announced last year, this transfer is now available on behalf of deceased spouses and civil partners.
NO CHANGES IN TAX RATES
The basic and higher rates of income tax and remain at 20% and 40% respectively, and the 45% additional rate continues to apply to income over £150,000.
There had been rumours that the dividend rate might be increased, but dividends continue to be 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. Note that only the first £2,000 of dividend income is now tax free.
The annual ISA investment limit increased to £20,000 from 6 April 2017 and remains at that level for 2019/20. Dividends on shares held within an ISA continue to be tax free.
As I mentioned, the much-rumoured further restriction in pension tax relief failed to materialise.
IR35 “OFF-PAYROLL” RULES TO BE EXTENDED TO PRIVATE SECTOR
Very controversially, the Government have decided to extend the rules for personal service companies (PSCs) in the public sector to workers in the private sector from April 2020. (PSCs are normally one-person companies where the sole director/shareholder provides a service to an employer almost as if they’re an employee. They invoice their work through the company and then pay themselves mainly with dividends to avoid NI. Understandably, the Government has been fighting back against this.)
This follows a consultation in Summer 2018 on how to tackle non-compliance with the intermediaries legislation (commonly known as IR35) in the private sector. The legislation which has applied in the public sector since April 2017 seeks to ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a company.
There will be further consultation on the detailed operation of the rules, and small businesses (yet to be defined) engaging such workers will be excluded.
This will represent a significant administrative burden on large and medium-sized businesses who will be required to decide whether the rules apply to payments to such workers and deduct tax and NICs.
CAPITAL GAINS ENTREPRENEURS’ RELIEF CHANGES
This has got a bit more complicated. The basic idea that is that, if you qualify, you can sell the shares in your company and pay tax at just 10% on the profit. However, for such a generous allowance, there are a number of hoops to go through – and they’ve just got narrower! Firstly, the Chancellor announced that the minimum qualifying period for CGT entrepreneurs’ relief will be increased from 12 months to 24 months for disposals on or after 6 April 2019.
And there are further changes affecting shareholdings in personal companies. In addition to the individual holding 5% or more of the ordinary share capital and voting control they will also now be required to be entitled to 5% or more of the company’s distributable profits and assets in a winding up – so some “funny shares” will be caught. As now the individual must also be an officer or employee of the company concerned; and the company must be a trading company or the holding company of a trading group.
CAPITAL GAINS ON UK PROPERTY SALES
As from 6 April 2019, Non UK residents will pay CGT on commercial as well as residential property gains – with a 30-day period from the sale to make a tax return and pay the tax.
From 1 April 2020, UK residents will have to do the same for residential property that isn’t fully exempted by dint of them having permanently lived there.
And also from April 2020, the “deemed occupation” for the last period of ownership will reduce from 18 months to 9 months. Currently, if you owned a house for 5 years but just lived there for the first 2 ½ years, you would be deemed to have also lived there for the last 18 months – you would only be taxed on one year’s proportion of the gain ie. 5 years minus the total 4 years ”occupation” (subject to other allowances.) As from 2020, this would increase by 9 months – you’d be taxed on 1¾ years, ie. 5 years minus 3¼ years “occupation”.
There has also been a useful allowance known as “lettings relief”. So long as you’d lived in the property for at least a while, there was an allowance of up to £40,000 if you’d rented it out. As from April 2020, this will only apply to periods when the tenant shared the house with the taxpayer.
COMPANY TAX TO REDUCE TO 17%
As previously announced the current 19% rate is scheduled to reduce to 17% from 1 April 2020. There had been talk of a delay or cancellation in this reduction, but no.
ANNUAL INVESTMENT ALLOWANCE INCREASED TO £1m
The Annual Investment Allowance (AIA) which provides businesses with a 100% write off against profits when they acquire plant and machinery has been temporarily increased from £200,000 to £1 million for two years from 1 January 2019. Not that that applies to many of my clients…
However, the current enhanced capital allowance for energy efficient plant will be abolished from April 2020 (one of those un-green measures). A further change is that the writing down allowance for special rate pool equipment, broadly long-life assets and fixtures in buildings, is being reduced from 8% to 6% from April 2019.
NEW CAPITAL ALLOWANCE FOR COMMERCIAL BUILDINGS
A new 2% straight line tax deduction is being introduced for the cost of construction or renovation of commercial buildings and structures.
This tax break will apply to eligible construction costs incurred on or after budget day and will be available to commercial property landlords as well as trading businesses. The cost of the land is specifically excluded.
R&D TAX CREDIT RESTRICTED
The amount of repayable R&D tax credit for Small and Medium Sized Enterprises (SMEs) will go back to the old system of being restricted by the amount of the claimant company’s PAYE and NIC liability from April 2020.
The new limit will be set at three times the company’s total PAYE and National Insurance contribution payment for the period.
VAT REGISTRATION LIMIT CONTINUES TO BE FROZEN
The VAT registration limit normally increases in line with inflation each year. However, It was announced last year that the limit would be frozen at £85,000 until 1 April 2020. It has now been announced that the limit will now remain at the same level until 2022. The deregistration limit will remain at £83,000.
MORE RATES RELIEF FOR SMALL BUSINESSES (How do you like the sound of “Chamberlains – the Drop-in Tax Café”?)
There has been much lobbying from the small business sector to reduce business rates to enable traditional retailers in particular to compete with internet traders.
The Chancellor has announced a one third reduction in business rates for small businesses with premises with a rateable value up to £51,000. Unfortunately it only applies to retailers – although these include cafés and restaurants – hence my speculation about Chamberlains rebranding as a Café!