Lisa Wilson, Head of Tax at Cowgill Holloway gives her view on the Spring Budget 2017.
The Chancellor Philip Hammond’s first Spring Budget was not expected to deliver widespread tax changes and other than some tweaking at the edges, there wasn’t much of note.
Increase to Class 4 National Insurance contributions (NICs)
The main rate of Class 4 NICs will increase from 9% to 10% in April 2018 and to 11% in April 2019. This is to coincide with the abolition of Class 2 NIC. The Government’s stated aim is to reduce the gap in rates paid by self-employed and employees.
It was recognised by the Chancellor that traditionally the deficit was due to self employed individuals not benefiting fully from statutory benefits and the full state pension. The pension element has been addressed with the introduction of the new State Pension to which the self-employed have the same access as employees but the Chancellor stated that more legislative change was required to ensure that discrepancies to access such as parental leave was required to level the playing field.
Self-employed individuals with profits above £16,250 will have higher NIC bills to pay from April 2018.
Our view – the equalisation of the NIC rates had been anticipated and eventually it is expected that the rates will mirror each other. What the Chancellor has not addressed are benefits such as sick pay that the self-employed do not benefit from nor has he recognised the very real risk of failure and economic loss that individuals face by setting up their own businesses. We believe by increasing the rate of NIC it may deter entrepreneurs when considering the pros and cons of setting up on their own.
It was announced that the tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018. This is a reduction to an allowance which was only recently introduced, as a compensatory gesture for the removal of the notional tax credit (the justification for this being that the corporation tax rate is so low that the notional tax credit was too generous).
The current rate of dividend tax is as follows:-
|Dividend Allowance||0%||Up to £5,000 (£2,000 from April 2018)|
|Basic Rate||7.5%||£5,001 to £43,000 (£2,001 from April 2018)|
|Higher Rate||32.5%||£43,001 to £150,000|
|Additional Rate||38.1%||Over £150,000|
This measure is aimed at reducing the tax differential between the employed and those remunerating themselves via dividend through a company.
Our view – this is a real blow to small business. Having measures which encourage incorporation but then punish individuals when they take that opportunity to reduce their tax bill seems unfair.
Today the Government addressed the issue of business rates which has been in the news frequently over the past couple of weeks. The announcements include permanently doubling the Small Business Rate Relief and extending the thresholds of the relief so all businesses with a rateable value below £12,000 will pay no business rates. This measure will remove 600,000 businesses from the business rates.
The amount payable depends on the rateable value of the property which is currently valued every five years. The Government has announced that it aims to revalue properties more frequently – every three years. The business rates revaluation will take effect from April 2017.
For those businesses that will lose out on the Small Business Rate Relief due to the revaluation, the Government will limit the increases in their bills to a maximum of £50 a month.
Our view – This is a welcome measure by the Chancellor to allay concerns that the rise in property values would have resulted in a significant charges to small business. The announcement that the process will be reviewed to mitigate the swings currently experienced with the four year review process are also welcome.
Research and development (R&D) tax relief
The Government have announced that they are to dispense with some of the bureaucracy experienced by business when claiming the R&D tax relief.
This is all part of the Government’s ambition to drive up the level of private investment in science, research and innovation across the economy.
The current benefit to a profitable company is a 26% Corporation tax saving(24.7% for expenditure incurred post 1 April 2017, due to reduction in Corporation tax rate to 19%). It is also possible to relinquish losses to get cash from HMRC.
To further support investment, the government will make administrative changes to the Research and Development Expenditure Credit to increase the certainty and simplicity around claims and will take action to improve awareness of R&D tax credits among SMEs.
To find out more about R&D tax credits visit our website www.cowgills.co.uk/services/tax-solutions/rd-tax
Our view – R&D is a great tax relief, but only 10% of eligible businesses claim it due to perceptions around it being for scientific research only. Claims by manufacturing companies make up the majority of claims and therefore any measure to encourage business to make the claim is welcome.
National Minimum Wage
The National Living Wage for individuals aged 25 and over will increase 4% from £7.20 per hour to £7.50 per hour from April 2017. This amounts to a saving of £1,400 a year for a full time worker previously earning the National Minimum Wage.
In addition to the National Living Wage rises, The National Minimum Wage will also increase from April 2017 and the new rates are as follows;
- for 21 to 24 year olds – from £6.95 per hour to £7.05
- for 18 to 20 year olds – from £5.55 per hour to £5.60
- for 16 to 17 year olds – from £4.00 per hour to £4.05
- for apprentices – from £3.40 per hour to £3.50
These above figures display an annual salary increase of around 1.4% for 21 to 24 year olds, 0.9% for 18 to 20 year olds and 1.2% for 16 to 17 year olds.
The apprenticeship minimum wage is also in line for an increase of 2.9% further empathising the government’s commitment to increasing production levels throughout the labour market by making apprenticeships look a more appealing alternative to the younger generation.
Disposals of land in the UK
New legislation was introduced at Budget 2016 to ensure that all profits from dealing in or developing land in the UK were brought into charge to UK tax. The legislation took effect for disposals made on or after 5 July 2016, with an exception where the contract for disposal was entered into before 5 July 2016.
However some long term contracts contract still have not completed since that date and these disposals are therefore not within the charge.
The legislation is amended to include these long term contracts so all profits recognised in the accounts on or after 8 March 2017 will be brought into the charge to UK Corporation Tax or Income Tax regardless of the date the contract was entered into.
VAT registration threshold
The government announced an increase to the VAT registration threshold in line with inflation from £83,000 to £85,000. Those trading below the threshold can still choose to register voluntarily.
The deregistration threshold for taxable supplies is currently £81,000 and will be replaced by the new threshold of £83,000. Each of these changes will take effect from 1 April 2017.
Increase to the cash basis threshold for unincorporated businesses
Individuals who are self-employed or are in partnership with trading income within the cash basis thresholds will be given the choice to use the simplified cash basis of calculating profits.
Cash basis accounting is an optional and simplified method for calculating taxable profits for trading businesses with relatively straightforward tax affairs.
This new measure increases the entry threshold for the cash basis from £83,000 to £150,000 and will take effect from 6 April 2017. The threshold for exiting the scheme will continue to be set at double the entry threshold and as such will increase to £300,000.
The Chancellor today confirmed that the basic and higher rate band thresholds will increase in line with inflation up to 2020. He further confirmed that the personal allowance would continue to increase up to £12,500 by 2020.
This means that by 2020 the first £12,500 on income will be tax free, the next £50,000 will be taxed at the basic rate and the balance up to £150,000 will be taxed at the higher rate. The additional rate band threshold remains unchanged at £150,000 with income in excess of the threshold being taxed at the additional rate.
In 2015 the Government announced a reduction in the CT rate from 20% to 19% for the Financial Years beginning 1 April 2017, 1 April 2018 and 1 April 2019, with a further reduction from 19% to 18% for the Financial Year beginning 1 April 2020.
Today the Chancellor confirmed his commitment to the above reductions and as announced during the March 2016 Budget the corporation tax rate will reduce further to 17% from the financial year beginning 1 April 2020.