THE MARCH 2017 BUDGET – Philip Hammond’s first – will probably be remembered for two main reasons: for being the last spring Budget, at least for the time being, and for the increase in national insurance for the self-employed which was dropped within a week.
However, while it was a quieter Budget than usual there is still plenty going on that small businesses need to be aware of.
Self-employment
It is clear that the government remains determined, in the long run at least, to narrow the differences between the tax treatment of income from employment and self-employment, and to reduce the tax incentives to incorporate.
Increases in National Insurance Contributions (NICs) for the self-employed may now be off the table for the rest of this Parliament, but the Chancellor’s announcement that the dividend allowance (the amount that can be taken in dividends tax-free from a company) will be cut from £5,000 to just £2,000 from April 2018 can be seen as part of this agenda.
The dividend allowance had only been introduced in April 2016, but the Chancellor has clearly decided that it is too generous. It gives tax advantages to those who take income as “director-shareholders” in the form of dividends, rather than as salary. (It will of course affect anyone with dividend income over £2,000 per annum, not just director-shareholders.)
More positively for the selfemployed, the abolition of Class 2 NICs, a weekly flat rate payment (£2.85 in 2017-18) also paid by the selfemployed, will go ahead in April 2018. The bad news is that those with small profits (under £8,164 pa) may need to consider switching to paying voluntary Class 3 NICs (£14.25 pw) to maintain their full State Pension entitlement – checking the state pension forecast and taking financial advice is likely to be essential.
Additionally, the government has promised to “consider whether there is a case for greater parity in parental benefits between the employed and self-employed”.
Further moves in this area are expected to come in the autumn once Matthew Taylor, chief executive of the RSA, has completed his review for the government of the wider implications of different employment practices.
Business rates
The most eagerly awaited Budget announcement for anyone with high street premises will probably have been the final word (we assume) on the business rates revaluation, which took effect in April 2017, including a further £435 million of transitional relief (in addition to the £3.6 billion announced in November).
Small businesses losing Small Business Rate Relief will see increases in their annual bills limited to the greater of £600 or the alternative transitional relief cap for small businesses each year.
Local councils in England will get funding to support £300 million of discretionary relief, to allow them to provide support to individual hard cases in their areas.
The government has also vowed to revalue more frequently in future – at least every three years. Whether more regular revaluations will reduce the overall pain remains to be seen.
Tax administration
Under pressure from small businesses, tax advisers and Parliament’s own Treasury Committee, the Chancellor announced that unincorporated businesses and landlords trading below the VAT registration threshold (currently £85,000) can have another year – until April 2019 – before they have to maintain digital records and submit quarterly updates to HMRC. Businesses above that threshold will still have to apply the new rules from April next year.
The start dates are now as follows:
- April 2018 – businesses with profits chargeable to income tax (turnover in excess of the VAT threshold) excluding larger LLPs.
- April 2019 – businesses with profits chargeable to income tax (turnover below the VAT threshold).
- April 2019 – businesses reporting VAT.
- April 2020 – businesses chargeable to corporation tax and larger LLPs.
Don’t be lulled into a false sense of security by how far away these start dates are. This is a substantial change, especially for those businesses which currently maintain accounting records in hard copy, and even for those which use spreadsheets such as Excel.
All businesses will need to familiarise themselves with the requirements of Making Tax Digital, obtain appropriate software or use an agent regularly, and seek advice to ease the transition.
One other thing worth mentioning on the admin side – the government is going to extend the range of businesses that can opt to file accounts on the “cash basis” (rather than the accruals basis) to all self-employed businesses and trading partnerships with incomes below £150,000.
Once in, you’ll be able to stay in until your income goes above £300,000. Filing on the cash basis may be a bit simpler, but it has restrictions on the deductions you can claim.
You will probably want to get advice on whether it is the best option for your business before taking the plunge.
VAT
There was little in the Budget on VAT: the registration threshold for 2017-18 will rise to £85,000 and the deregistration threshold to £83,000. However, many businesses will no doubt still be adapting to the revised Flat Rate Scheme (FRS), which came into effect in April.
The FRS is intended to provide a simplified accounting scheme for small businesses. Under the scheme, an appropriate flat-rate percentage is applied to the VAT-inclusive turnover and only this VAT needs to be accounted for to HMRC. However, entitlement to input VAT recovery is restricted under the scheme.
From 1st April 2017, a higher flatrate percentage applies for “limited cost traders” at 16.5%. Whether this applies depends on the level of expenditure incurred on goods for the purpose of the business.
The changes are aimed at the service-only businesses which have been benefiting from an effective lower VAT liability. Any business which becomes subject to the higher percentage rate may need to review whether it is beneficial to remain in the scheme.
Pensions, savings and childcare
The annual allowance for tax-free pension contributions remains at £40,000 for most people in 2017-18 (though it tapers down to £10,000 if you have an income over £150,000). The amount of tax-relieved pension contribution that can be made by someone who has already started drawing down from their pension fund (officially the “money purchase annual allowance”) was cut from £10,000 to £4,000 in April 2017 amid concern about people getting a second round of tax relief.
Additionally, from April 2017, a new pensions advice allowance will allow individuals to take up to £500 tax-free from their pension scheme up to three times (although only once per tax year) to pay for retirement financial advice.
The limit for the 0% starting rate of income tax for savings will stay at its current level of £5,000 in 2017-18. The new Lifetime ISA came in in April 2017, with a generous government top-up of 25% of the money you put in.
It’s only available to the under-40s and there are tight rules on what it can be withdrawn for. For other adults – or anyone wanting to save more flexibly – the ISA limit rises to £20,000 in April.
And, after years in the planning, the government’s Tax-Free Childcare scheme is now finally being rolled out. Under the scheme, eligible families get 20% of annual childcare costs paid for by the government up to a total of £10,000 per child per year.
It replaces the existing Childcare Vouchers scheme, which was only open to employees and which will close to new entrants in April 2018.
Other tax changes
In the fuss about National Insurance, income tax has been almost forgotten. The Chancellor re-confirmed in the Budget that the personal allowance will rise to £11,500 for 2017-18 as a step towards an allowance of £12,500 by 2020.
The higher rate threshold (i.e. the point at which the rate goes up from 20% to 40%) will rise by £2,000 to £45,000 for 2017-18 as a step towards the manifesto commitment of £50,000 by 2020.
This latter figure does not apply in Scotland. For the first time since tax powers were devolved to the Scottish Parliament, there is now a difference between the income tax rules for those resident in Scotland and those resident in the rest of the UK. This follows the Scottish government’s decision to freeze the higher rate threshold at £43,000 for non-savings and nondividend income.
HMRC has also launched its new “check employment status for tax” online tool, which workers, engagers or agencies can use to check whether the intermediaries’ legislation (commonly known as IR35) applies to a particular engagement in the private or public sector.
The service can be used for current or future engagements and is aimed at determining whether a worker should pay tax through PAYE. HMRC has stated that it will stand by the results given, unless the information provided wasn’t accurate or was contrived.
Also in the pipeline, but not coming into effect immediately, are:
- Charging tax and NIC on the basic pay element of payments in lieu of notice (from April 2018).
- Charging employer NICs on other termination payments (though the first £30,000 will continue to be exempt from tax and all NICs) – from April 2018.
- Changes to rules for allocating profits to partners within a partnership for tax purposes (timing to be confirmed).
Lastly, some good news – corporation tax fell to 19% in April 2017 and is scheduled to drop to 17% in 2020.
In conclusion
Despite the NIC aftermath, all in all it was a fairly quiet Budget, with fewer new proposals than any Budget or Autumn Statement since at least 2010. Most taxpayers and tax advisers will be heaving a sigh of relief at this. (The Chartered Institute of Taxation urged the Chancellor to “do less and do it better” in a report back in January – http://tinyurl.com/betterbudgets.) However, there is more than enough already in the pipeline to keep us all busy for some time.
And if this isn’t enough for you, don’t worry – there will be another Budget in the autumn as the government moves the year’s main “fiscal event” to the pre-Christmas period. A good time for give-aways? Time will tell.
