No Spring in the step of the last Budget
Friday, March 24, 2017
Delivered earlier this month, the Spring Budget made its final appearance, bowing out with less of a bang and more of a whimper. While no massive tax and business overhauls were on the cards, the Chancellor announced a handful of changes that will have ramifications for our members and their clients.
A change to National Insurance Contributions for the self-employed was the measure that prompted a raft of objections and negative publicity in the days after the Budget, culminating in a dramatic U-turn just a week later. Philip Hammond announced Class 4 NICs would increase from 9% to 10% from April 2018, and to 11% from April 2019. It was estimated that this measure would cost 1.6 million self-employed people an average of £240 a year. Not vast sums, but an increase nonetheless.
It flew in the face of the Conservative Party manifesto of 2015, which stated the party would not raise National Insurance (or VAT or income tax, for that matter). The proposed NICs increase prompted opposition parties and the media to pounce. And as back-benchers joined the revolt, there was a partial climb-down, and within a week the measure was scrapped entirely. In a letter to MPs, Mr Hammond stated that the tax hike was not in “the spirit of the commitments that were made.”
However, many think an NICs increase for the self-employed is inevitable. This is a Government keen to ‘square up’ the amount of tax that people in work pay – arguably the only surprise is that it didn’t happen in the 2016 Budget when Class 2 and Class 4 NICs were merged! The Chancellor, having dropped the proposed increase, said he would use the Autumn Budget to "fund in full" the £2bn lost from NICs.
While NICs may have been the initial headline-grabber, it is essentially a non-story now. The topic that has much more an impact on our members and their clients is the slash the Chancellor made to the dividend allowance. As of April 2018, the total dividends company directors and shareholders can receive tax-free will fall from £5,000 to £2,000. It is, by any other name, an increase in tax, which will pull in £930m for the Treasury.
Hacking back his predecessor’s dividend allowance, set by George Osborne in 2015, Philip Hammond’s reduction on the tax-free threshold means a basic rate taxpayer who takes £5,000 in dividends will now have to pay £225 more tax – and those in the higher tax bracket will see their bill go up by £975. This is designed to “address the unfairness” around the dividend allowance, which for some – those with share portfolios especially – are seen by the Chancellor as getting an “extremely generous tax break.”
For business owners who top-up small salaries with dividends, the new measure will hit them in the pocket and impact on their future tax planning. Those intentionally drawing a low wage but taking home tens or hundreds of thousands in dividends are unlikely to suffer much – this tax will be a minor annoyance – but the smaller, ‘average’ business owner will be disproportionately hurt. Pensioners using modest dividend payments to supplement their pensions will also lose out.
Many smaller traders go down the route of incorporation, paying themselves a wage and topping up through dividend payments, but the Spring Budget has made that option less attractive. Consequently, business organisations are up in arms; this pushes up the cost of running a small business at a time when the business community least needs it. And we know it will be a blow to our members who own practices too.
For practitioners, it means more options need to be explored for clients considering whether to go forth as a sole trader, partnership or limited company – and more tax calculations undertaken. This may be the prompt for owners of smaller enterprises to think again about incorporation, as it will make getting money out of the business more difficult.
However, the Government is looking to level the playing field with tax, and what seems advantageous now could change in a couple of years. Any sort of business tax advantage, incentive or relief is not a permanent guarantee – the goalposts shift from Budget to Budget – and can’t be the only factor in determining the set up and running of a business.
A momentous but relatively small part of the Budget was the announcement that Making Tax Digital will be deferred for a further year for unincorporated businesses, self-employed professionals and landlords with turnovers below the new VAT threshold. There was a palpable sigh of relief from the accounting community the moment Philip Hammond announced this. The narrow lead time for MTD has been a concern for many practices and is an issue the CPAA has raised with HMRC, so a reprieve is welcome news for practitioners.
Given the Budget was delivered a mere five weeks after the MTD consultation response, there was nothing new to be learnt, beyond the Chancellor magnanimously delaying the inevitable for smaller firms. For bigger, VAT registered companies, the start date remains April 2018 - the clock is ticking! For members, this means not putting MTD back on the self until it becomes a more pressing priority. We have covered the topic of MTD in more detail within this edition of Practicing Accountant.
Elsewhere in the Budget, announcements were made that the VAT threshold will rise almost immediately, from £83,000 to £85,000. And the CGT annual exemption will also increase this April, going from £11,100 to £11,300. There was also some interesting tinkering to business rates. A cap was introduced so rates rise by no more than £50 a month for SMEs losing rate relief, pubs will get a discount on business rates of less than £100,000 rateable value, and a £300m fund was announced for relief for local authorities.
Continuing the theme of several recent Budgets, tax avoidance, evasion and non-compliance cropped up. Since 2010, these measures have raised £140bn for HMRC and this Budget brought in a handful of extra steps, which will take immediate effect. Businesses will no longer be able to convert capital losses into trading losses. And a new financial penalty will be introduced for professionals who create schemes defeated by HMRC. Accountants that help businesses dodge their tax responsibilities will pay the price.
Pensions were also in the firing line. Rejecting calls to reverse forthcoming cuts to the money purchase annual allowance, which falls from £10,000 to £4,000 next month, the Chancellor will continue. Added to which, it was also announced that a 25% tax levy will be imposed on all transfers of UK pensions to qualifying recognised overseas pension schemes (Qrops). Although, there may be exemptions for those with a genuine need to transfer their pension.
So, what can we expect from the next outing of the ‘red book’ later this year in place of the old Autumn Statement? Presumably Brexit – due to be triggered any day – will weigh heavily on the Chancellor’s mind, so expect measures designed to protect and stabilise. More might be revealed or refined on MTD. Compensating for the £2bn lost from the NICs U-turn will see some sort of levy introduced somewhere. And Philip Hammond also hinted at the possibility of business rates reform. In the unusual year of two formal Budgets, whatever is on the cards, we won’t have long to wait.