A Budget that’s good for business?
The ‘Summer Budget’ was finally unveiled on Wednesday this week and now that the dust has settled and, contrary to what some websites were saying initially we’re left wondering whether it really is that good for business?
We think it’s fair to say opinion is divided on this point, especially if you’re a property investor or you operate a personal service company (and you can probably add non-UK domiciles to that list as well).
Although details had been leaked by the media beforehand, typically George still had one or two tricks up his sleeve to wrong foot the opposition.
Much has been reported in the media about George’s ‘living wage’ However it appears to have caused a lot of consternation amongst small business owners judging by this report here on the BBC News website.
This issue may come back to bite the Chancellor and other members of the Government whose reaction should have been a little more measured when this announcement was made.
As far as the ‘Summer Budget’ is concerned, we don’t propose to regurgitate all the facts and figures as you’re probably sick (sorry - bad pun) of them already.
So we’ll just stick to commenting generally on some of the more interesting points which may affect you and your business.
Please or offend we don’t like to sit on the fence with bland commentary and this is just our own personal (and occasionally light-hearted) view..
Taxation of dividends received by individuals
At the moment, dividends carry a notional 10% credit for income tax purposes.
This means that if you’re a basic rate taxpayer, you don’t suffer any further tax.
If you’re a higher rate taxpayer (40%) you pay income tax at 32.5%, and if you’re an additional rate taxpayer (45%) you’ll pay tax at 37.5% on the gross dividend. When you deduct the 10% credit from your tax liability, this works out at effective tax rates of 25% and 30.56% respectively.
If you’ve only just got to grips with these rules, you’ll be delighted to learn that George intends to abolish the Dividend Tax Credit from April 2016.
This will be replaced by a new Dividend Tax Allowance (DTA) of £5,000 a year for individuals. The new rates of tax on dividend income above this allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
The DTA is in addition to the Personal Savings Allowance of £1,000 and the Personal Allowance of £11,000, giving potential total tax free income of £17,000 for 2016/17.
Inevitably, this will make tax planning involving dividends far less attractive, and we’re likely to see a move towards paying salary rather than dividends. Along with the changes to the tax treatment of goodwill (see below) this will make incorporation a much less attractive option for smaller businesses.
Pensions and ISAs will be unaffected, and the impact on trusts will be broadly neutral as regards net income available to beneficiaries.
We wait to see how the tax on investment income will be calculated in light of these changes, though surely this is a job for ‘The Office of Tax Simplification’ (we call it TOTS) - an oxymoron if ever we’ve heard one...
Employment Allowance to increase from April 2016
This is a relief that businesses claim in order to reduce their bill for employer’s NIC (or ‘job’s tax’ as David Cameron used to call it when he was in opposition); at the moment an employer is able to deduct £2,000 from their employer’s NIC liability.
From April 2016, the Employment Allowance will increase to £3,000, though where the director is sole employee of the company, the Employment Allowance will no longer be available
If you haven’t already put your husband or wife or another family member on the payroll maybe it’s time to start thinking about it? Though a word of caution, until the legislation is finalised there’s no guarantee family members employed by your business will qualify for the deduction.
Whilst it will appeal to smaller employers, any benefit is likely to be far outweighed by the increased costs of employment resulting from George’s living wage (see above).
Tax lock on VAT, income tax and NIC
Before the Summer Budget announcement, the rates of VAT, income tax and NICs could be amended by the existing parliament.
New legislation is being introduced to lock the existing rates of VAT, income tax and Class 1 NICs so that they cannot legally be increased for the duration of this Parliament. This will have the following effect:
The standard rate can be set no higher than 20%.
The reduced rate can be set no higher than 5% and nothing can be removed from the reduced rate.
Supplies specified in Schedule 8 (zero rate supplies) cannot be removed from that Schedule.
The basic, higher and additional rates of income tax cannot be increased beyond 20%, 40% and 45%.
This will apply to earnings income in England, Wales and Northern Ireland and to UK-wide savings income as expressed in Section 6(1), Income Tax Act 2007.
National Insurance Contributions (NIC)
Class 1 NIC rates payable by employers and employees will not be increased. Legislation will also be introduced to ensure the Upper Earnings Limit (UEL) for Class 1 contributions does not exceed the Higher Rate Tax threshold (HRT).
In case you’re wondering the UEL is the point at which employees' earnings no longer count toward contributory benefits and they start to pay Class 1 NICs at 2%.
The above changes will also apply to Northern Ireland.
Once the 'tax lock' is in place, no Chancellor in this Parliament will be able to increase taxes on individuals and businesses via VAT, income tax and NICs. It will also be illegal to increase taxes by removing supplies from the zero or reduced rate.
Call us cynical, however we think it’s debatable as to whether George could simply repeal this 'tax lock' legislation if he wanted to raise taxes. Also given the Office of Budget Responsibility’s track record of predicting UK economic growth, can he really state with absolute certainty no further tax rises will be necessary in the next 5 years?
What is certain is that this ‘tax lock’ signals a political statement: i.e. to make savings rather than increase taxes. However it conveniently glosses over the fact that we appear to have a ‘new’ tax on dividends (see above).
Special exemption for 2015 London Anniversary Games
As Wimbledon is topical at the moment we thought we’d digress and mention that currently non UK resident sportspeople are subject to UK income tax on income received for their performance at UK sporting events and also on a proportion of their worldwide sponsorship income.
New rules are being introduced to provide an exemption for performance earnings and sponsorship income earned by non-resident sportspeople, where that income relates to the 2015 London Anniversary Games. The existing rules have been roundly criticised by sports people who feel that by being taxed on their sponsorship income in the UK they are effectively losing money by performing in the UK.
Rafael Nadal has refused to compete in UK events in the past because of these tax rules and we’re sure there are some Tax Inspectors who felt his early exit from Wimbledon was just another tax planning wheeze…
Buy To Let landlords – interest relief restriction from April 2017
Under the current rules, individuals who use debt to finance the purchase of residential buy to let properties can claim a tax deduction for finance costs incurred in servicing that debt.
From April 2017, tax relief for interest and finance costs will be restricted for residential buy to let individual landlords.
The restrictions will be phased in gradually over a four years period, resulting in tax relief only being available for finance costs at the basic rate of income tax (currently 20%) from April 2020.
The restrictions will be phased in as set out below:
Tax Year % Fully Deductible Finance cost % Restricted to Basic rate of tax
2017/18 75 25
2018/19 50 50
2019/20 25 75
2020/21 0 100
It is not precisely clear how these new rules will operate in practice, though based on the current expected legislation they appear to be particularly onerous where an individual has either other income or low rental profits from their buy to let portfolio.
Coupled with the proposed changes to Wear and Tear allowance (see below) and the risk of rising interest rates, these restrictions on finance costs are likely to lead to increased rental demands by individual landlords in the short to medium term.
Interestingly enough these changes do not appear to affect qualifying furnished holiday lets, perhaps because they are generally regarded by the taxman as run along the lines of a business, rather than simply held as a long term investment.
Wear and tear allowance to be scrapped
When you let a residential property furnished, instead of claiming the actual cost of furnishings, you can elect to deduct the Wear and Tear Allowance (broadly speaking 10% of your relevant rental income) from your taxable rental income to cover the cost of replacing furnishings. You don’t get any Wear and Tear Allowance for unfurnished rental residential properties.
From April 2016, the Wear and Tear allowance will be replaced with a new relief that will be available to all residential landlords, whether the property is let furnished or unfurnished.
This relief will be based on the actual replacement cost of the furnishings concerned. Capital allowances will continue to apply to qualifying holiday lets. A full technical consultation regarding the form of the relief will be issued this summer.
This seems like a wise move as it will hopefully remove the tax anomaly for landlords between renting a property on a furnished and unfurnished basis. It is also hoped that by linking the relief to actual spend, it will encourage landlords to replace furnishings on a more regular basis.
Increase to Rent-a-Room Relief
These rules have been around for some time and were originally introduced as a means of providing relief from tax on rent and other associated receipts, relating to the use of furnished accommodation in an individual’s main residence.
This can also include a guest house or bed and breakfast establishment. Since 1997, the maximum relief on income received under rent-a-room has remained static at £4,250.
With effect from 6 April 2016, the relief will be increased so that an individual who qualifies for rent-a-room relief will be able to receive income of up to £7,500 in a tax year without it being charged to income tax.
Therefore, if all your children have ‘flown the nest’ maybe letting out your spare bedroom to a foreign exchange student is a safer bet than investing in a Buy to Let property.
Amortisation of goodwill
At the moment when a company acquires goodwill or customer related intangibles from an unrelated party, it can claim a Corporation Tax deduction for amortisation recognised in its profit and loss account. Or alternatively it can elect for a fixed deduction of 4% a year.
If, on disposal, the company makes a loss on goodwill, it usually forms part of the company’s trading profit or loss for the year.
Legislation is being introduced to withdraw relief for all goodwill and customer related intangibles acquired on or after 8 July 2015 (except where the acquisition is pursuant to an unconditional obligation entered into before that date).
Therefore if a loss arises on the disposal of assets falling into these new rules, it will be treated as a non-trade expense, meaning the cost can’t be set off against other profits in the year of disposal. It will also not be available to set off against trading profits in subsequent years.
Intangibles acquired before 8 July 2015 will continue to be treated under the old rules. So in other words a corporation tax deduction will continue to be available for amortisation, and any loss on disposal will be treated as part of the company’s trading profit or loss for the year of disposal.
These new rules have been introduced in order to remove the tax relief available when a business acquisition is structured as an asset purchase so that goodwill can be recognised. This will bring the rules for business asset purchases into line with those for companies who purchase only the shares of the target company.
These provisions more or less put companies back to the position they were before the introduction of the intangibles rules in 2002, except in this instance indexation is not available when goodwill is disposed of at a profit.
As a result, companies might have three different types of goodwill on their balance sheet:
1) Pre-2002 goodwill that is dealt with under capital gains tax principles;
2) Goodwill acquired before 8 July 2015 in respect of which amortisation can be deducted for corporation tax purposes;
3) “New” goodwill which is dealt with under the intangibles rules but for which amortisation is not deductible for corporation tax purposes.
Again we’re left wondering whether these new rules were run past TOTS beforehand? (see above).
Annual Investment Allowance permanently increased
The limit for AIA was due to be slashed from £500,000 to £25,000 with effect from 1 January 2016. Because George didn’t make any mention of this in the March Budget, there was much speculation as to what would happen.
However he’s obviously decided this uncertainty wasn’t going to keep the UK economy ‘on track’ now that ‘Britain has turned a corner’ (insert your own cliché..)
From 1 January 2016, the AIA will be increased on a permanent basis from £25,000 to £200,000. Transitional rules will apply for any chargeable periods which straddle 1 January 2016.
Therefore if your business is looking to invest in a significant amount of qualifying plant and machinery you might may wish to bring forward your spending so that it falls within the higher threshold of £500,000, which applies up to 31 December 2015.
You’ll also need to take care with respect to expenditure incurred within the chargeable period straddling the change in allowances in order to maximise AIA availability.
This particular Chancellor is known for his sleight of hand, so expect more details to come out of the woodwork once the taxes legislation gains Royal Assent.
In the meantime if you’d like more advice on how these changes might affect you, or would like to discover how we can help your business, simply email our friendly tax adviser, [email protected] or give us a call on 01202 048696.