The Budget 2016 – is it good or bad for your business?
You’ll know from previous blogs that, unlike a lot of our competitors, we’ve always been critical of George Osborne’s heightened focus on using the budget as a means to make political statements - rather than contemplating what is good for business overall.
Martin Wolf from the Financial Times was equally scathing of Osborne’s latest Budget stating that “nothing the Chancellor of the Exchequer announced in the Budget is of great relevance to the economic or fiscal health of the country” - so it appears everyone is now jumping on the bandwagon!
Arguably this has proven to be the most political of George Osborne’s Budgets to date. Although is the Chancellor now in danger of losing his magic touch – especially given his latest reluctance to appear before the House of Commons to defend his Budget?
Because of the increased focus on the aftermath of the latest Budget, we decided to wait to see where the dust settled before giving our view of the budget.
So as we head towards Easter and the end of the current tax year, you’ll find the main points of interest to consider below.
Office of Tax Simplification - small companies review
The Office of tax simplification (or OTS for short) has completed its review of small companies, which has now been received and considered by the government. It is expected that nearly all recommendations outlined in the review will be accepted.
The recommended administrative changes include:
• Align filing and payment dates for different taxes, e.g. PAYE and VAT, plus annual returns and corporation tax;
• Extra administrative and technical support from HMRC at weekends and evenings when smaller company owners are more likely to be reviewing their tax affairs;
• Save small companies from having to provide the same information to different government departments which should be sharing the information; and
• Consider the feasibility of advance clearances for VAT
Areas for further work include:
• Test whether taxing the profits from small companies on the shareholders rather than the company could be simpler;
• Develop an outline for a new ‘sole enterprise protected asset’ vehicle which will give some limited liability protection without the need to formally incorporate; and
• Simplify the corporation tax computation, potentially calculating corporation tax on a cash basis for the smallest companies.
Whilst some measures appear to be a sensible (e.g. consideration of cash basis for smaller companies), call us cynical but surely aligning payment dates also means that HMRC will be looking to obtain their tax take more quickly. Furthermore given that HMRC appear to be stretched at the moment, where will they find the resources to supply additional technical support?
Further cut in corporation tax
Last year the government announced reductions to the CT rate from 20% to 19%, starting from 1 April 2017, with a further reduction to 18% for the financial year beginning 1 April 2020.
Legislation will be introduced to reduce the rate of CT for all non-ring fenced profits to 17%, instead of 18%, for the financial year beginning 1 April 2020.
The measure will mean that the UK will have the lowest tax rate in the G20. The reduction will benefit over a million companies large and small when it eventually becomes effective.
This is a welcome change for small company owners and will certainly make the UK an attractive place to do business for serial entrepreneurs - especially those coming from outside the UK. However a number of small business owners we’ve spoken to are unhappy because, unlike them, they think larger businesses are able to dictate how much tax they pay in the UK (especially if media coverage is to be believed).
As you’re probably aware, dividends are currently taxed at special rates with a notional 10% non-refundable tax credit.
As previously announced, the latest Budget will include legislation to repeal the dividend tax credit and to introduce a new dividend allowance of £5,000. In addition, new rates of income tax will apply. These new rates can be summarised as follows:
• 0% for the first £5,000
• 7.5% for dividends falling within the basic rate band
• 32.5% for dividends falling within the higher rate band
• 38.1% for dividends falling within the additional rate band.
The introduction of the dividend allowance will provide an opportunity for those receiving small amounts of dividends to benefit from the changes. However, those who receive dividends in excess of £5,000, which includes many owners of small or medium-sized enterprises, will find their tax liability will increase from 6 April 2016.
Unfortunately there has been no U-turn by the Chancellor on this measure. The petition started last year against the dividend tax didn’t reach the 100,000 mark which was needed for it to be debated in Parliament – see here.
Judging from this, it would seem most small business owners (there are currently over 5 million in the UK) are resigned to accepting the dividend tax as an extra ‘cost’ to their business – although we have heard that some small business owners weren’t aware of this change or the impact on them.
So as this measure is now going through, you should be thinking now about what steps you can take to mitigate the tax liability on the dividends you receive from your company going forward.
Changes in the rate of tax for loans to shareholders
Currently any loans or advances made to a shareholder, or their associates, of a close company (broadly speaking one controlled by 5 or fewer shareholders) which remain unpaid nine months after the year end give rise to a 25% charge.
The government is concerned that the new dividend tax (see above) will lead to an increase in company loans aimed at avoiding the higher dividend rates. They have therefore decided to increase the above tax charge to 32.5% for all relevant loans made or benefits conferred by close companies on or after 6 April 2016.
This was inevitable given the introduction of the dividend tax from 6 April 2016 and so, as we’ve already pointed out in our guide to director’s loans, it’s even more important to stay on top of your company’s finances. Please contact us if you would like a copy of this guide.
Company car tax
Company cars made available for private use give rise to a benefit in kind charge which, in broad terms, depends on the list price of the car (plus accessories) adjusted for the level of CO2 emissions the car produces.
Different rates apply depending on the age of the car and whether or not the car has a CO2 emissions figure.
Legislation will be introduced to make the following changes to company car rates for the three years to 2019/2020.
Cars with CO2 emissions – From 6 April 2019, the graduated table of company car tax bands will provide for several additional tax bands - a 16% band for cars with emissions of 0-50g CO2 per km, a 19% band for cars with emissions of 51-75g and a 22% band for cars with CO2 between 76g – 94g. There will be a 3% increase for each rise in emissions of 5g thereafter to a maximum of 37%.
Cars which have neither a CO2 emissions figure nor an engine cylinder capacity and cannot produce CO2 emission –From 6 April 2017, the appropriate percentage for these cars will be set at 9%. This will increase to 13% from 6 April 2018 and to 16% from 6 April 2019.
Cars without CO2 emissions – From 6 April 2019, the appropriate percentage for the lowest band (cars up to 1,400cc), will be set at 23%. For cars in the medium band (cars 1,400cc – 2,000cc) the percentage will be set at 34% and for all other cars, the appropriate percentage will remain at 37%.
Cars registered before 1 January 1998 – from 6 April 2019, for cars with cylinder capacity of:
• up to 1,400cc - 23%;
• between 1,400cc and 2,000cc -34%; and
• above 2,000cc - 37%.
This measure is clearly aimed at encouraging employers and employees to purchase ultra-low emission company cars. The changes demonstrate the range of tax rates and you would therefore be advised to review your company car policy carefully in order to benefit from these changes.
Abolition of Class 2 NICs
At the moment if you’re a self-employed individual operating as a sole trader, or a partner in a limited or unlimited liability partnership, you pay two types of National Insurance Contributions (NIC): Class 2 and Class 4 as follows:
• Class 2 is £2.60 per week
• Class 4 is 9% on profits between £8,060 and £42,385 and 2% on profits over £42,385
The government has confirmed that from April 2018, Class 2 NICs will be abolished.
This change will simplify the NIC system and reduces the administrative burden on self-employed individuals.
Historically paying Class 2 NIC enabled self-employed individuals to access certain state benefits (e.g. maternity allowance) and counted as contributions towards their state pension. Class 4 NIC did not and it could have been argued that this is effectively a tax on the self-employed.
However the current proposals are that the new Class 4 contributions will now enable the self-employed the access the state pension.
In theory this should leave a sole trader or partners with the ability to access the state benefit system (including state pension) by paying Class 4 NIC only from April 2018. However could the Chancellor use this is an opportunity to justify a hike in NIC on the self-employed going forward?
Enterpreneurs' relief and long term investors
Currently, individuals who dispose of shares in unlisted trading companies pay CGT at the full rate of 18% or 28%, unless they are able to claim entrepreneurs’ relief (ER).
However, in order to claim ER you would have to be an officer or employee of the company for at least a year leading up to the date of your share sale (or up to the date of cessation if you are winding up your company).
Alternatively, if you have claimed income tax relief on a share acquisition, for example under EIS, the gain on disposal of the shares is exempt from CGT.
From 6 April 2016 ER is going to be extended with the introduction of an investors’ relief for outside investors in unlisted companies.
Individuals eligible for investors’ relief will pay CGT at 10% on gains on the disposal of ordinary shares that have been:
• subscribed for by the individual (for new consideration) on or after 17 March 2016; and
• held for at least three years from 6 April 2016.
The relief will be subject to a lifetime cap of £10m.
This relief will also be available to beneficiaries of trusts.
There will be anti-avoidance provisions to ensure that shares are subscribed for by individuals for bona fide commercial purposes and not for the avoidance of tax.
This is a welcome move as it is a relief designed to encourage long term investment in unlisted trading companies where venture capital reliefs are not available and where the individual is not an officer or employee of the company.
Entrepreneurs' relief on goodwill on incorporation
Last year’s Budget introduced changes which prevented individuals from claiming ER on incorporation of a trade where the proprietor became a related party - for example when an existing sole trader or partnership (with the same partners involved) decides to continue trading albeit via a limited company
New changes introduced by the latest budget will enable an individual to claim ER in respect of gains on the disposal of goodwill to a company where the individual owns less than 5% of the shares and less than 5% of the votes in the acquiring company.
Relief will also be available where the individual holds 5% or more of the shares or votes if the incorporation is part of arrangements for the company to be sold to a new independent owner.
These changes will apply retrospectively to disposals on or after 3 December 2014.
Unfortunately this isn’t a complete U-turn by the Chancellor. However it does enable you to retain a small interest in a company acquiring your business in order to facilitate a smooth transition to the new owners. Quite often a purchaser will only be interested in purchasing a business which is already incorporated and will want the existing owners to remain involved in the business – often via a minority shareholding. So if you incorporate your business to facilitate a sale, without this relaxation you would be denied ER on a commercially driven third party sale.
However this is of little comfort to those growing small businesses who choose to switch to limited company status for commercial reasons and then later look to sell their business.
Changes to CGT rates
Currently CGT is charged at 18% for individuals who are basic rate taxpayers, and 28% to the extent that an individual is a higher rate taxpayer or the gain exceeds the unused part of the individual’s basic rate band. Trusts and personal representatives are liable to a 28% rate of capital gains tax.
These rates will be reduced to 10% for basic rate taxpayers and 20% for higher rate taxpayers for gains accruing on or after 6 April 2016. The rate for trusts and personal representatives will be reduced to 20%. There will be an additional 8% surcharge on gains arising from ‘carried interest’ or from residential property where private residence relief is not available.
Where you are considering the disposal of assets, it may be advisable to defer the disposal until 6 April 2016.
The Public Sector and Intermediaries Legislation
These rules are designed to ensure that individuals that work through an intermediary (for intermediary read limited company) pay broadly the same tax and NIC as employees, in circumstances where they would have been an employee if they had provided their services directly.
So from April 2017, it will be up to the public sector employer, agency or third party that pays the individual to decide whether the rules apply. Individuals working through their own company in the public sector will no longer have the responsibility.
This responsibility (or burden) will instead lie with the public sector employer, agency or third party that pays the worker’s company. The closest party to the worker’s limited company in the supply chain will be required to comply with the rules.
Where the public sector organisation engages directly with the individual’s company, the public sector organisation will be responsible for operating the new rules and collecting and paying the tax and NIC. Where the engagement is via a third person (agency) that third person is responsible for operating the new rules.
HMRC will provide help for employers and a digital tool to provide a real-time view on whether the rules need to be applied. This is part of the government’s broad reform of the way intermediaries are taxed. The measure is aimed at improving the effectiveness of the legislation in relation to the public sector by moving the responsibility away from the intermediary.
As the burden of responsibility has fallen on private sector organisations for many years it naturally seems appropriate that Public Sector bodies should also have the same responsibility to ensure that people working for them are paying the right tax.
How this will work in practice remains to be seen. It could either result in a knee-jerk reaction with the Public Sector body categorising an individual’s status as an employee by default. Or, on the other hand, it could lead to a reluctance to recruit outside expertise in order to keep additional costs down. The NHS is one particular Public Sector body we can think of that is going to be particularly affected by these new proposals.
Once again we’re left underwhelmed by this ‘smoke and mirrors’ Chancellor’s Budget. However if you’d like to discuss 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.