The Chancellor Philip Hammond revealed his Spring Budget to Parliament on Wednesday 8 March 2017. The Budget sets out the Government’s future financial strategy and economic forecasts, as well as announcing changes to taxation that affect individuals and businesses.
In recent years, the nation’s small businesses have been put under increasing pressure with business rate increases, the introduction of the Workplace Pension scheme and the National Living Wage, and the forthcoming requirement for quarterly tax reporting.
One piece of good news is that, since the Budget was announced on 8 March, the Chancellor has agreed to cancel a proposed rise in Class 4 National Insurance contributions (NICs) for self-employed people.
Despite this concession, the Budget still has some important implications for UK companies. This article summarises some of the key changes that business owners should be aware of.
Changes for Limited Companies
The Corporation Tax rate will be reduced from 20% to 19% from April 2017 and 17% by 2020. On the other hand, the Government is reducing the tax-free Dividend Allowance threshold for director-shareholders from £5,000 to £2,000 in April 2018.
The Dividend Allowance enables dividends taken below the threshold to be taxed at 0%. Dividends taken over and above the threshold are taxed as follows:
- 7.5% within the basic rate band
- 32.5% within the higher rate band
- 38.1% within the additional rate band
Dividend Allowance replaced the Dividend Tax Credit in April 2016, marking the end of so-called ‘tax-free dividends’ for basic rate taxpayers. Reducing the Dividend Allowance to £2,000 will make it more expensive to draw income from owner-managed companies, even though they’ll paying less Corporation Tax.
The Government will also be consulting on certain benefits in kind that companies provide to employees, and on finding ways to make the tax system easier to understand.
Limited companies who work for public sector organisations ‘off the payroll’, i.e. through their own limited company, will be subject to new rules. From April 2017, the organisation will be responsible for deducting and paying tax and NICs associated with the limited company to HMRC. The 5% allowance that was available to cover the cost of administering these rules will be abolished for limited companies working in the public sector.
Making Tax Digital
In the March 2015 Budget, the Government announced its plans to modernise the tax system, with the aim of helping individuals and businesses get their tax right and keep on top of their tax affairs.
The new system, called Making Tax Digital, will require businesses, self-employed people and landlords to report on their tax situation quarterly to HMRC, using online bookkeeping software. Annual tax returns will become a thing of the past.
Not surprisingly, many smaller businesses are concerned about having enough time to prepare for the new system, which will launch in April 2018. So the Chancellor has said in the Spring Budget that unincorporated businesses with turnover below the VAT threshold will have an extra 12 months’ breathing space.
The timetable for introducing Making Tax Digital is now:
- April 2018 for businesses with profits chargeable to Income Tax, who pay Class 4 NICs and whose turnovers are above the VAT threshold.
- April 2019 for businesses with profits chargeable to Income Tax, who pay Class 4 NICs and whose turnovers are below the VAT threshold
- April 2019 for businesses who are registered for and pay VAT
- April 2020 for companies who pay Corporation Tax.
Note that employed people with secondary income over £10,000 a year through self-employment or property income will also be required to use Making Tax Digital. However, businesses, self-employed people and landlords with turnovers below £10,000 are exempt.
The Government also plans to consult on the design aspects of the tax administration system, including interest and penalties.
National Insurance for self-employed people
Class 4 NICs will now remain at 9%, in line with the Conservative party manifesto for the 2015 election. However, Class 2 NICs, which currently stand at £145.60, will still be abolished from April 2018.
Class 2 NICs are used by self-employed people to access benefits such as the Basic State Pension and Maternity Allowance. The increase in Class 4 contributions was designed to maintain this access as well as bringing self-employed contributions more in line with those of employed people.
Given the pending abolition of Class 2 NICs, we can expect the Government to consult on new ways of ensuring self-employed people continue to contribute to their benefit entitlements in the future.
National Living Wage
From April 2017, the National Living Wage will increase from £7.20 to £7.50 per hour for those aged 25 or over. The Government plans to increase the rate of pay to over £9 an hour by 2020 – a substantial increase in the wage bill for smaller businesses.
At the moment, businesses can operate on the cash basis if they:
- Run a small, self-employed business such as a sole trader or partnership
- Earn £83,000 or less a year
A business-owner can apply the cash basis to more than one business provided total turnover is under £83,000 and total business income less than £166,000. The advantage of the cash basis is that business owners only need to declare money when it comes in and out of the business. At the end of the tax year, they won’t have to pay tax on money that wasn’t received in the period.
The Spring Budget announced some changes to the cash basis from April 2017, which are designed to support the forthcoming Making Tax Digital system:
- The cash basis entry threshold will go up from £83,000 to £150,000
- The exit threshold will rise from £166,000 to £300,000 and
- The cash basis will become available to unincorporated landlords.
The Government also plans to simplify the rules on capital and revenue expenditure within the cash basis, to make it easier for businesses to work out whether their expenditure is tax-deductible.
Business rates – England only
In the 2016 Budget, the Government announced reductions in business rates, which included permanently doubling Small Business Rate Relief and extending the thresholds of the relief, to make sure 600,000 businesses wouldn’t have to pay business rates.
Business rates in England will be revalued from April 2017. As well as the £3.6 billion of transitional relief announced in November 2016, the Government will also provide an extra £435 million of support to businesses facing large cost increases due to the revaluation.
- Help for small businesses losing Small Business Rate Relief to cap any cost increases at £600 or the real terms transitional relief cap each year, whichever is the greater.
- Giving English local authorities the funding to supply £300 million worth of discretionary rate relief, so they can help individual businesses in their local area who are struggling.
- A £1,000 discount in business rates for pubs with a rateable value up to £100,000, subject to state aid limits for companies with multiple properties, i.e. pub chains. The discount will apply in 2017/18 only.
In the Autumn 2017 Budget, the Government will set out its planned approach to carry out property revaluations more frequently – at least every 3 years. A consultation process will take place before the next revaluation is due in 2022.
Research & development (R&D) tax credits
Changes will be made to the research and development (R&D) expenditure credit to increase certainty and simplicity around claims. The Government will also work to increase awareness of R&D tax credits amongst smaller businesses.
Businesses must register for VAT once their taxable turnover for any 12-month period exceeds the VAT registration threshold. They can deregister if their turnover falls below the de registration threshold.
From April 2017
- VAT registration threshold £85,000
- VAT deregistration threshold £83,000
From April 2016
- VAT registration threshold £83,000
- VAT deregistration threshold £81,000
These changes are effective from 1 April 2017 and will prevent around 4,000 businesses from having to register for VAT in 2017/18.
VAT Flat Rate scheme
From April 2017, businesses that are eligible for the Flat Rate scheme, but which are classed as ‘limited cost’ businesses, must account for VAT at a new rate of 16.5% of their gross turnover for relevant goods and services.
The changes are designed to make the system fairer and stop businesses taking unfair advantage of their current VAT rate and classification.
Personal Allowance and tax bands
The personal allowance for 2017/18 will be £11,500. The 20% basic rate tax band will go up to £33,500, so the 40% tax band will apply to income over £45,000.
The Government plans to increase the personal allowance to £12,500 and the basic rate tax band to £37,500, meaning that an individual could earn up to £50,000 before paying 40% tax.
The Government will hold a consultation on plans to change the rent-a-room relief system, so it’s better-placed to support longer-term lettings. This will make the relief more effective in its aims of increasing the amount of affordable long-term lets that are available. The changes could mean that guest houses and B&Bs no longer qualify for relief.
Other key tax announcements
- The standard rate of insurance premium tax will increase from 10% to 12% from June 2017.
- The annual capital gains tax exemption increases by £200 to £11,300.
- There were no changes to VAT rates and no new announcements on Inheritance Tax.
- The Government is delaying the reduction in the stamp duty land tax filing and payment window until 2018/19.