There was a very low-key Autumn Statement this week – you know it’s quiet for news when it makes headlines that next March’s Budget will be the last Spring budget, and that budgets are moving to the Autumn. There was too much doom and gloom about our post-Brexit economic prospects for some commentators – okay, we can’t be sure but perhaps this sort of reaction is part of the “Post-truth” mentality that seems to be running rampant around the world. I’ll have a brief rant about the OED’s word of the year – Post-truth – but first I need to pick out the main points of excitement from the ironically named Box Office Phil.
GETTING THE UK “MATCH FIT” FOR BREXIT
So, the Chancellor Philip Hammond announced that his first Autumn Statement will also be his last. In future, the main Budget announcements will be made in the autumn rather than the spring. This change of date would supposedly allow longer consideration of the announcements and draft legislation before enactment the following summer.
We weren’t expecting many tax announcements and we already knew about many that were made. He could not afford too many give-aways as he expects the economy to have a bumpy ride during the BREXIT transition.
KEY TAX ANNOUNCEMENTS:
(Yawn – we knew about most of these)
- Personal allowance to increase to £11,500 in 2017/18, rising to £12,500 by 2020/21
Higher rate tax threshold to increase to £45,000 in 2017/18, rising to £50,000 by 2020/21
- National Insurance threshold to be raised to £157 a week for employees and employers
- Corporation tax rate to reduce to 17% in 2020
- Business tax “roadmap” to continue, in particular new rules for company losses
- Insurance premium tax to increase from10% to 12% from 1 June 2017 (this was new and nasty, but of limited impact for most of us)
- More anti-avoidance measures, in particular a new VAT flat rate percentage for “limited cost traders” (see below)
HELP FOR THOSE JUST ABOUT MANAGING (the JAMs)
(but will it be enough?)
The Chancellor made a number of announcements that were intended to help those families that are just about managing, the “JAMs”. Raising the personal allowance to £11,500 and higher rate threshold to £45,000 will mean they pay less income tax and keep more of what they earn.
This group will also benefit from the increase in the National Living Wage to £7.50 an hour and the changes to Universal Credit. The Universal Credit taper rate will be cut from 65% to 63% from April 2017 which will mean that fewer benefits will be clawed back as claimants’ income increases. The planned reductions in the overall benefits caps will however go ahead.
However, since the Statement, the respected Institute for Fiscal Studies has followed up their forecast that the vote for Brexit will hurt productivity and wage growth, and that the drop in sterling that followed the vote will push up inflation. As a result, it believes that real wage growth will stall next year and even by 2021 average earnings will be below their 2008 level. “One cannot stress enough how dreadful that is — more than a decade without real earnings growth,” said Paul Johnson, head of the IFS.
CORPORATE AND BUSINESS TAX CHANGES
Many of the corporate tax changes had already been announced and are set out in the business tax “roadmap” which details the government tax strategy for the life of this Parliament and beyond.
The current 20% corporation tax rate is planned to fall to 19% from 1 April 2017 and then to 17% on 1 April 2020. The government is committed to keeping the UK corporate tax rate the lowest in the G20 and there has been talk of a rate as low as 15% in the future. But that’s beyond the next election, so who knows what to expect?
The Chancellor raised concerns that people are still setting up companies to save tax – there’s still a bit of an advantage compared to unincorporated businesses with a similar level of profit, but companies have more admin costs, so it’s not always worthwhile. However, this comment may suggest that the government is still thinking about the introduction of a new “look through entity” as suggested by the Office of Tax Simplification. The idea is to put them on a level playing field by having the tax treatment will be the same for both.
The new flexible corporate tax loss rules announced in the spring budget have been subject to consultation and will go ahead from 1 April 2017.
(These are a way of businesses to get tax relief for money spent on capital equipment.) From 23 November 2016 to 31 March/ 5 April 2019, businesses will be entitled to a 100% First Year Allowance (FYA) for the cost of installing electric charge-point equipment for electric vehicles. This measure is intended to complement the 100% FYA available for low CO2 emission vehicles and to encourage their uptake (which is currently reckoned to be rather slow.)
HIGHER RATE TAX RELIEF FOR PENSIONS CONTINUES
There had been much speculation that the government would further limit tax relief for pension contributions by removing higher rate tax relief. That measure would save the country £34 billion in tax but it’s perhaps considered a step too far for Conservative voters. In fact, the only change announced concerns a new lower limit on amounts that can be saved in a pension when individuals have started drawing down from their private pension.
Currently the net effect of pension tax relief for a higher rate taxpayer is that saving £10,000 in a pension costs £6,000. The taxpayer pays £8,000 into their pension and the government tops this up by £2,000 with a further £2,000 deducted from the individual’s income tax liability, reducing the net cost to £6,000. For additional rate taxpayers (income over £150,000) the net cost would be just £5,500.
There is currently an annual pension input limit of £40,000 which caps the combined contributions by an individual and his or her employer, although it can be higher if the full allowance wasn’t used in previous years. For those with high income this is tapered and can be as low as £10,000.
One new pension restriction that was announced was a measure to limit pension “recycling”. Those individuals who have started drawing down their personal pension will in future only be able to reinvest up to £4,000 in their pension. This hardens up the restrictions on people taking their tax-free 25% and reinvesting it in their pension.
I’m about due to do another article on the wondrousness of pensions, but please feel free to get in touch if you’d like a preview.
SALARY SACRIFICE RULES TO BE TIGHTENED UP
Some employers provide flexible remuneration packages to allow employees to give up some of their contractual salary in exchange for benefits in kind. This can have the effect of saving tax and national Insurance contributions for both the employee and employer, particularly where the benefit provided is exempt from tax (although these are few and far between.)
These tax and NIC advantages are to be withdrawn from 6 April 2017. Arrangements involving pensions, childcare, Cycle to Work and ultra-low emission cars will be still be allowed, and existing arrangements will be protected for a transitional period until April 2018. Existing arrangements for cars, accommodation and school fees will be protected until April 2021.
The Chancellor has announced a wider review of the taxation of benefits, with the intention of making this area ‘fairer and more coherent’. This appears likely to have a significant effect on any employee who is in receipt of benefits from their employer.
An employee who repays to their employer, or ‘makes good’, the cost of a benefit, avoids a tax charge. As previously announced, from April 2017 such making good will have to take place by 6 July in the following tax year if it is to be effective. Until now, the rules have been confusing – some needed to be done by 5 April, others by 1 June, others when the liability was “final and conclusive.”
CHANGES TO TERMINATION PAYMENTS TO GO AHEAD
As announced in March, from April 2018 termination payments over £30,000, which are subject to Income Tax, will also be subject to employer’s NIC. Tax will only be applied to the equivalent of an employee’s basic pay if their notice is not worked. The first £30,000 of a genuine termination payment will remain exempt from tax and NIC.
“ABUSE” OF THE VAT FLAT RATE SCHEME
The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings rather than deducting input tax on purchases and expenses and deducting that from total output tax on sales in the period. HMRC believe that the scheme is being abused by certain traders who have minimal costs who charge 20% VAT to their customers and then pay a lower percentage over to HMRC.
The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour only construction workers. A new 16.5% rate will apply from 1 April 2017 for businesses spending less than 2% of their turnover or less than £1,000 per year on goods, excluding capital goods, food, vehicles and fuel. Any business affected will almost certainly be better off returning to the normal VAT system with effect from that date. We’ll need to look at this for some of our clients…
And now… POST-TRUTH
A word for this year! So says the Oxford English Dictionary, the supreme repository of the English language (you can tell I’m a fan – many years ago I was involved in writing Spanish-English dictionaries, so I retain an interest in things lexicographical).
We use it to say that we’re living through a time when facts are felt to be less vital than emotions, when truth is no longer relevant to the way we vote or make our decisions.
The majority of economists and international politicians advised against Brexit, but the appeal of independence won. Clinton was generally accepted as better qualified to be President, but Trump appealed to people’s emotions.
But it’s worse than that: it’s not just that we (not you or I of course, but “other people”) ignore the truth, but that we don’t mind being lied to. There was no public outcry when the Brexiters admitted after the referendum that there would be no spare £350 million every week for the NHS. And in the US people surely knew that Trump lied or t least exaggerated about all sorts of things, but many were happy to disregard it.
However, I think it applies to many other areas, including finance. How many frauds have been committed by plausible tricksters? How many dubious sales have been made by slick and/or pressurizing salesmen? It’s been said many times, but if a thing seems too good to be true, it probably isn’t.
I think that we professionals have a duty to put the truth before you, preferably in an understandable way. Much of this world of figures and accounts formats can be daunting to outsiders and not everyone is a scrupulous as they could be. I consider that a key part of my job is to communicate the meaning.
If you’d like some help in understanding some accounts figures, just let me know.