Impact on Owner Managed Businesses from the Autumn Budget 2018

This year's Budget covered many key things. We have tried to cut through the spin to find the announcements that may have a direct impact on you. We've read the whole budget document, but it will now take a few weeks of analysis of the small print to work out some of the less obvious items that have been put in there.  And, as always, there is debate following the budget - sometimes those key announcements can change in the coming weeks. We will keep you posted. If you're not already subscribed to our budget report mailing list please subscribe using the form below. 

 

Making Tax Digital

Changes to VAT submissions from April 2019 and other businesses from April 2020

I will start with the important item he didn’t mention! I feel like we have been talking about this for years but until now HMRC has used none of its budget on marketing this seismic change in the tax system to tax payers! They have instead relied on software providers and accountants to do their dirty work. It seems that with less than 6 months to go, there is still a reluctance from the official lines of communication to actually tell people what they have to do!

From April 2019 any VAT registered business with turnover above the VAT threshold will be required to keep digital records and submit their VAT returns from these digital records from April 2019. This is not just a case of clicking a button on your software. The legislation goes much deeper than this. If you are reading this thinking “my business isn’t VAT registered, I will skip this section” then be warned. From April 2020 this will affect all businesses irrespective of whether they are registered for VAT.

I will write a separate item regarding this in the coming weeks, but be under no pretence - from the next tax year there are new legal requirements to keep your businesses systems integrated. Legislation is in place to limit how much human hands can be involved in the data. And the submission to HMRC will be more than just the usual nine boxes. HMRC will get details of the totals for each type of transaction you are entering. Totals for journals, totals for credit notes, totals for “prior year adjustment”. HMRC will know when you missed something off last quarters VAT return and plonked it on this quarter.

We are continuing to run events on this subject, the next being at the London Vet Show on the 16 November 2018, followed by a general event at our office on the 30th November. More dates to follow. There is, at most, only two VAT Quarters to go before this legislation comes into place. 

THERE IS NO TIME TO LOSE. YOU MUST GET PREPARED!

Income Tax Rates and Optimal Drawings for Limited Company Owner Managers

The personal allowance will increase by more than inflation to £12,500 from April 2019. Likewise, the higher rate threshold for Income Tax will increase to £50,000. This means that the chancellor can claim to have met a manifesto pledge, but also constitutes a tax cut for all people.

The basic, higher and additional rates of Income Tax will remain at 20%, 40% and 45% respectively, with the exception of dividends (remaining at 7.5%, 32.5% and 37.5% respectively). No changes to the dividends allowance of £2,000 were announced. This remains, effectively, the tax free amount for dividends.

For the majority of Director/Shareholders, the optimal level of drawings is made of salary and dividends. However, in a further break with tradition, the treasury has not released its full tax tables for us to give an indication of how this would be split. This is because the salary is defined by the national insurance banding not the income tax banding.

We will update you in the near future - but for now it would appear for 2019/20 drawings of up to c. £4,160 per month, which equates to £49,920 per year in the optimal tax banding (and anything above this) would be taxed at higher rates of at least 32.5% of the additional amount drawn.

The above figures presume no other sources of income personally. Owner-managers who are also self-employed, or who have significant levels of income from other sources, should contact their Principal Adviser for further advice on their optimal drawings strategies from April 2019.

 

Corporation Tax unchanged - Should you incorporate?

No changes were announced in respect of Corporation Tax, with the rate of Corporation Tax remaining at 19%, and expected to fall further to 17% from April 2020.

Sole traders and partnerships may therefore seek to incorporate rather than remain as self-employed to take advantage of both limited liability and the reduction in the tax rate. However, it is not something that will suit all people. The equation for working out when incorporation might be beneficial can be complex, depending on how your business operates, its profitability and how much money is tied up in working capital.

If you are currently trading as a sole trader or partnership and want to consider whether incorporation is right for you, why not give one of our Principal Advisers a call?


Research & development (R&D) tax credit restriction

In a return to the previous legislation, businesses claiming R&D tax credit has been restricted for loss-making businesses.

There is no change to the “option 1” treatment whereby the tax credit on R&D expenditure is used to offset trading profits, which either reduce your current year corporation tax liability or give you the ability to carry back a year - or carry forward to future profit making years, should the company be loss-making in that year.

However, “option 2” has been the preferred treatment for loss making companies. In this treatment, the R&D credit can be used to get a refund of tax despite having paid no corporation tax. There was a calculation needed to work out what was claimable, but this is now more complicated, as the refund, from April 2019, cannot exceed 3 times the annual NI and PAYE liability of the company.

Although the complexity for calculating a refund for companies which are already loss-making is now more complicated, the new rules are not quite a return to the past, as they are still more lenient than the old rule where there was no three times multiple regarding the PAYE. 

Additionally, as this rule isn’t one that applies from today there is still time to plan around this.

We have helped many clients claim R&D credits and reduced their tax bills as a result. Please speak to your Principal Adviser if you are involved in any new development work that you think is unique and innovative. No matter how small, there may be a tax credit you didn’t realise you could get.

Restriction to lettings relief from April 2020

From April 2020 this relief will be heavily restricted. Previously, this relief reduced taxable capital gains for some people by £40,000 where they had previously lived in a house and then rented it out commercially.

From 2020 this relief will be heavily clipped, making it only applicable where the owner of the property cohabited with the tenant – certainly not common in most of the cases I have seen where this relief has been applied.

A further reduction (where a house was previously owner-occupied) was also announced which reduces from 18 months to 9 months the additional period where a capital gain on the property is exempt.  This is perhaps the bigger blow in some cases.


Entrepreneurs Relief

I am not convinced this tax change will release much extra cash for the treasury. It does make our job more complicated for proving that entrepreneurs relief still applies for people selling a business. Entrepreneurs relief remains lucrative. In most cases it reduces a capital gain from 20% to 10% when selling trading business assets. However, one of the rule changes takes effect today (29/10/2018), even though it wasn’t stated in the speech, so there may be people unwittingly paying more tax on a deal without being prepared.

There are now some additional rules:

  1. You must now have had involvement in the business for 24 months, this was previously just 12 (this rule comes into play from April 2019)
  2. You must have at least 5% interest in the capital, voting rights and distribution of the business asset (appears to be a test for companies only).This is a bit of a technical change and although it won’t impact the majority it does have an impact where staff have shares or shareholders face restrictions in their rights. 

It adds an additional layer of checks. If you have any customised staff incentive schemes in place, you might want to review where things stand now so that your team know the implications.


IR35 Changes

Last year saw a squeeze on public sector employers, where workers who could be deemed staff had to be employed rather than subcontracted. The budget has announced that a role-out of this same rule to the private sector will happen in April 2020.

The intention is for this to only apply to medium to large companies, but the impact will be that larger contractors will no longer issue contracts to one-man limited companies where there is a question of IR35 / disguised employment being possible. Alternatively, there may be contracts issued where the contractor falls liable to any taxes that end up being due. 

We will know more when the legislation is released, at which point we will update you.


National Living Wage

From April 2019, individuals aged 25 and over will be entitled to a National Living Wage of £8.21.

The National Minimum Wage will continue to apply for individuals under 25 years of age, with the rates increasing from April 2018 as follows:

  • 21 to 24 year olds will increase to £7.70 per hour
  • 18 to 20 year olds will increase to £6.15 per hour
  • 16 to 17 year olds will increase to £4.35 per hour
  • Apprentice rate will increase to £3.90 per hour

This should be considered for all staff, not just those paid on an hourly basis, as the increase usually means that junior staff members for our clients have to receive a slight pay increase to remain in line.


VAT threshold

Philip Hammond confirmed that the VAT registration threshold will remain at £85,000 for the next two tax years, despite this being much higher than most other European countries. This means that in real terms, i.e. compared to inflation, the VAT rate is getting slightly lower. If you were near the threshold and need to inflate your prices then this could be a serious matter.

If you are concerned that your businesses is nearing the VAT threshold, talk to you your Principal Adviser who can discuss strategies for coping with one of the seismic changes your business will face as it grows.

HMRC to become a preferred supplier in insolvency cases

This is clearly an attempt to end the practice of business that liquidate having left unpaid items to HMRC.

This legislation means that if your customer (or supplier) owe HMRC money and go bust then it will restrict you on what you get back from that contact, reducing the pence in the pound you might get as part of an insolvency procedure.

This is a serious change in law. I'm sure our partners in the insolvency practice world will advise on the minute implications.  For now it appears more important than ever to ensure you understand the credit worthiness of your key customers and suppliers.

Annual Investment Allowance

Currently you can spend up to £200,000 on business assets and have the whole lot reduce your tax bill that year (provided it isn’t a car!) but from January 2019 this will be increasing, on a pro-rata basis, to go up to £2million!

If you happen to have that much money in the business to spend on plant and machinery and such like, then I would advise not to spend it all in January 2019. The way that this tax rule works is complicated, as it is apportioned to your accounting year. If your accounting year runs to December each year, then this may be much easier to calculate. All other year ends...watch out!

If in doubt talk to your client manager who can help advise on the calculations of what your allowance will be during the transition, and again when it ends in two years’ time.

Non-UK residents to pay Capital Gains Tax on Property disposals

The budget also announced that UK property owners living outside the UK, and treated as a non-resident for tax purposes here, will still have to pay capital gains tax on any sale of property. Looking at the budget write-up, this includes commercial property and land.

There is a much more detail yet to be announced, and with the budget ending so close to the end of the business day, it appears many of our usual official channels of information from HMRC had clocked off before releasing further updates. Tomorrow may hold further information! We will keep you informed.

 

2018 Budget Summary written by Josh Curties BA (Hons) ACA, Partner and Principal Adviser at A4G.