Introduction
Chancellor Philip Hammond delivered his first and last Spring Budget on 8 March 2017. What a difference a year makes. Since the last Budget we have a new Chancellor, and a very different set of circumstances following the Brexit vote, but the storyline seems strangely familiar.
Philip Hammond delivered a gag-filled speech at his first Budget, but the small business community may not have found too much to laugh about when reviewing its contents.
Hammond stated that the government’s ambition is to make Britain the ‘best place to start and grow a business’, but the self-employed and business shareholders both face a substantial hike in potential tax.
Many small business owners will be hit by rises in National Insurance contributions, if they are self-employed, and the cut to the tax-free dividend allowance if they work through a limited company.
This guide focuses on the taxation aspects of the Spring Budget only and is designed to appeal to our smaller business clients.
The following summary is based upon material made available on the gov.uk website following the Chancellor’s statement
Key points
The key announcements for small businesses were:
Making Tax Digital deferment by one year for businesses with turnover under the VAT threshold to April 2019
Dividend allowance cut from £5,000 to £2,000 from 6 April 2018
Class 4 NIC increases from 9% to 10% from 6 April 2018, and to 11% from April 2019
VAT thresholds increases to £85,000 (£83,000 deregistration) from 1 April 2017
Capital Gain Tax annual exemption increases from £11,100 to £11,300 on 6 April 2017
Personal tax
Income tax: Rates and allowances
The previously announced rise in the personal allowance from £1,000 to £11,500 from 6 April 2017 and the start of the higher rate tax band increasing from £43,000 to £45,000 was confirmed. The Chancellor also confirmed that by 2020 the personal allowance will increase to £12,500 and that workers would not start to pay 40% income tax until they earn £50,000.
There was no change in the main rates of income tax of 20%, 40% and 45%. The additional rate band, at which 45% income tax becomes payable, will remain at £150,000 from 6 April 2017.
Trading an property income allowance
Two separate £1,000 allowances are to be introduced from 6 April 2017 for trading income and property income.
The first £1,000 of gross trading or property income will be exempt from income tax. If the income exceeds £1,000 the taxpayer will have a choice of:
deduct the £1,000 ‘allowance’ from their gross income and being taxable on the excess, or
deduct allowable expenses in the normal way.
Finance cost relief for landlords
The Government will restrict the tax relief on finance costs that individual landlords of residential property currently receive. The restriction will be phased in over 4 years, starting from April 2017. By 2020-21, residential landlords will only save basic rate tax, on the interest element of their expenditure, rather than the full 40% or 45% some landlords receive.
National Insurance
National Insurance for the employed
The weekly Lower Earnings Limit (LEL) increases from £112 pw to £113 pw. This is the income limit where some state benefits start to accrue e.g. a ‘qualifying year’ towards the flat rate state pension. No National Insurance is actually paid at this limit unless the Secondary Threshold is exceeded.
The weekly Primary Threshold (PT) and the Secondary Threshold (ST) both increase, and will once again both be aligned, from £155 pw and £156 pm respectively to a single amount of £157 pw.
For our clients who pay themselves £672 pm, through their payroll, this should result in an increase to £680 pm from their April 2017 payroll.
The Upper Earnings Limit (UEL) increases from £827 pw to £866 pw (£43,000 pa to £45,000 pa). This is the limit at which 12% NIC stops and the lower rate of NIC of 2% starts to be paid.
The main rates will remain at 12% and 2% (over the UEL) for employees and 13.8% for employer’s National Insurance. The Employment Allowance remains at £3,000 for eligible employers.
National Insurance for the self-employed
The Class 4 rates will remain at 9% and 2% (over the UEL) for 2017-18, with increases in the Lower Profits Limit from £8,060 to £8,164 and the Upper Profits Limit increasing from £43,000 to £45,000.
In the 2016 Budget it was announced that Class 2 and Class 4 NIC would be merged from 6 April 2018, and we expected that the rates of Class 4 NIC would increase at that time. That expectation has been confirmed, as the main rate of Class 4 NIC will increase from 9% to 10% from 6 April 2018, and will increase again to 11% from 6 April 2019.
It remains to be seen whether alignment of Class 4 NIC with employee’s Class 1 NIC, will be made at 12%, from 6 April 2020.
The Budget papers imply that the additional rate of Class 4 NIC, currently set at 2%, will not increase from 6 April 2018.
As self-employed individuals won’t pay Class 2 NIC of £148.20 per year, and Class 4 NIC is only payable on profits over the lower profits limit (£8,164 for 2017/18), individuals with self-employed profits of less than £16,250 should pay less NIC from April 2018.
Philip Hammond said: ‘The difference in NIC is no longer justified by the difference in benefits entitlement. Such dramatically different treatment of two people earning essentially the same undermines the fairness of the tax system.
The Chancellor then explained that an employee earning £32,000 per year would pay National Insurance contributions, between him and his employer, of £6,170. However, a self-employed person, earning the same, would only pay £2,300. According to the Chancellor this measure will narrow the difference in taxation between the employed and self-employed, and that the choice of status shouldn’t be driven by differences in tax treatment.
It has been stated that there is no rational reason for the self-employed to pay less NIC than the employed now that both now receive the same Flat Rate State Pension. However, many say that the self-employed take more risks in running their business and do not receive statutory sick pay, maternity pay etc which are available to employers; i.e. the self-employed should not have to pay the same amount of NIC.
The announcement hit the headlines as this appears to contradict in the Conservative election manifesto pledge from 2015 to not raise taxes and NICs.
Business tax
People working through limited companies
Philip Hammond’s predecessor, George Osborne introduced changes to the way people working through limited companies and paying dividends to themselves would be taxed. These were introduced from 6 April 2016.
Every taxpayer receives an annual £5,000 tax-free dividend allowance, with dividends above that level taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Only one year after this allowance was introduced, it has been announced that the £5,000 dividend allowance will be reduced to £2,000, though this will not happen until April 2018. The allowance takes the form of a band of income in which dividends are charged at 0% instead of the usual dividend tax rate.
For most people working through a limited company this will increase their tax bill, by 7.5% of £3,000 i.e. £225 pa.
Corporation Tax: Rates
The Corporation Tax rate is current 20% and will reduced to 19% with effect from 1 April 2017. The Government has reconfirmed its commitment to cut the corporation tax rate to 17% by 2020, just in time for the next election!
Capital gains tax
The annual exemption rises to £11,300 on 6 April 2017. This is a surprise as this exemption has been frozen at £11,100 since 6 April 2015.
Value Added Tax
Limits
With effect from 1 April 2017 the compulsory VAT registration threshold increases by £2,000 to £85,000. The VAT deregistration threshold also increases from £81,000 to £83,000.
Changes to the VAT Flat Rate Scheme
The Flat Rate Scheme for VAT was introduced by HMRC in 2002 to simplify the paperwork for small businesses in their calculation accounting and paying VAT who made sale of goods and services of less than £150,000 pa (exclusive of VAT). Businesses apply a fixed rate, dependent upon their industry, to their gross of VAT income. They do not reclaim VAT on their expenditure except if they purchase capital goods e.g. equipment costing over £2,000 (inclusive of VAT) for use in their business.
In order to tackle perceived abuse of the VAT Flat Rate Scheme, a new 16.5% VAT flat rate will apply from 1 April 2017 for businesses with limited costs.
Limited cost traders are defined as those whose VAT inclusive expenditure on goods is either (i) less than 2% of their VAT inclusive turnover in a prescribed accounting period; or (ii) greater than 2% of their VAT inclusive turnover but less than £1,000 per annum (pro-rata for short periods). Such traders will be required to apply a new flat rate scheme percentage of 16.5%.
Our Guide to the Autumn Statement gave further details on this scheme.
Since November 2016, when the new rules were announced, the rules have been even further tightened. HMRC were concerned that affected business would start up small side line ‘trades’ of buying and selling small amounts of goods (of £250 pq), possibly totally unrelated to the primary trade of the business. This type activity will not now be permitted to circumvent the rules.
Investments
Savings bonds
The Chancellor confirmed that the National Savings & Investment (NS&I) bond will be launched in April 2018 and pay 2.2% gross per annum.
The bond will be open to those over 16 years of age and the maximum investment will be £3,000.
Individual Savings Accounts (ISAs)
The annual subscription limit for Individual Savings Accounts (ISAs) will be increased to £20,000 for 2017/18. The new Lifetime ISA should be available from April 2017. The interest rate for the new NS&I Investment Bond has been confirmed at 2.2%; it will be available for 12 months from April 2017. It is thought that interest will be taxable, but the investor will be able to set their personal savings allowance against it. A basic rate taxpayer can receive £1,000 of bank and similar interest tax free each year. Higher rate taxpayers can receive the first £500 of interest tax free.
Making Tax Digital
MTD is the name given to the Government’s plan to move to a fully digital tax system by 2020. With some limited exceptions, businesses will be required to keep their records digitally and to make quarterly reports, of their business income, expenses and profits, to HMRC through their digital tax account.
MTD was announced in March 2015 by the former Chancellor, George Osborne. The headline announcement was that the completion of an annual Tax Return would be abolished.
The introduction of MTD is one of the biggest changes in tax administration for 20 years, following the introduction of Self-Assessment. The underlying tax rules are not changing.
For many businesses, MTD will represent significant extra administration work.
Businesses may need to buy new software, train their staff and for some small businesses completely change their bookkeeping e.g. from manual paper records or spreadsheets to full accounting software.
Initially, this is expected to be a digital submission of summary totals of income, expenses and profit or loss. In time, this may lead to submission of every single accounting transaction of the business in the quarter to HMRC.
The timetable for commencing quarterly reporting under MTD will be determined by the accounting period that starts on or after these dates:
From 6 April 2018: Unincorporated businesses with turnover exceeding the VAT registration threshold will be required to report their business income, expenses and profits
From 6 April 2019: Unincorporated businesses with turnover exceeding £10,000 will be required to report their business income, expenses and profits
From 1 April 2019: All VAT registered businesses will be required to submit their VAT returns through software
From 1 April 2020: All incorporated businesses (i.e. limited companies) which pay corporation tax must report their business income and expenses subject to corporation tax
No rabbits
In what was a low key Budget, apart from numerous gags, and unlike his predecessor, Philip Hammond failed to pull any rabbits from his fiscal hat.
Remember though, we have two Budgets this year, with another in the autumn; the measures announced then will be particularly interesting.