Following the Autumn 2017 budget announcements, we’ve created this budget overview covering the areas that are most likely to affect UK Limited Company contractors, both in their business and personal lives. The summary concentrates on the tax measures announced which include:
- increases to the personal allowance and basic rate band
- more tax relief for investment in certain Enterprise Investment companies
- proposed changes to Entrepreneurs’ Relief
- improvements to Research and Development tax credit regimes
- VAT limits frozen for two years
- support for businesses to cope with the effects of business rates revaluation and the so called ‘staircase tax’.
Previously announced measures include:
- plans for Making Tax Digital for Business
- the reduction in the Dividend Allowance
- changes to NICs for the self-employed
- capital allowance changes for cars from April 2018.
The Budget proposals may be subject to amendment in the Spring Statement and subsequent Finance Act. You should contact us before taking any action as a result of the contents of this summary.
Making Tax Digital for Business: VAT
In July 2017, the government announced significant changes to the timetable and scope of HMRC’s digital tax programme for businesses. VAT will be the first tax where taxpayers will keep digital records and report digitally to HMRC. The new rules will apply from April 2019 to all VAT registered businesses with turnover above the VAT threshold.
As with electronic VAT filing at present, there will be some exemptions from Making Tax Digital for VAT. However, the exemption categories are tightly-drawn and unlikely to be applicable to the generality of VAT registered businesses.
Corporation tax rates
Corporation tax rates have already been enacted for periods up to 31 March 2021.
The main rate of corporation tax is currently 19%. The rate for future years is:
- 19% for the Financial Years beginning on 1 April 2018 and 1 April 2019
- 17% for the Financial Year beginning on 1 April 2020.
Self-employed NI contributions
Several changes have been on the cards for sole traders and partners NI contributions:
- Class 2 National Insurance contributions (NICs): The 2016 Budget announced that Class 2 NICs will be abolished from April 2018. The legislation to effect this measure was intended to be introduced this year. In November 2017 the government decided to implement a one year delay so that Class 2 NICs will be abolished from April 2019.
- Class 4 NICs: The Chancellor announced in the 2017 Budget proposals to increase the main rate of Class 4 NICs from April 2018 but was forced to make a subsequent announcement that the increase would not take place and there will be no increases to NICs rates in this Parliament.
The government will legislate to give unincorporated property businesses the option to use a fixed rate deduction for every mile travelled by car, motorcycle or goods vehicle for business journeys. This will be as an alternative to claims for capital allowances and deductions for actual expenses incurred, such as fuel. The changes will have effect from 6 April 2017.
A disincorporation relief was introduced in April 2013 for five years. Broadly, the relief is aimed at certain small companies where the shareholders want to transfer the business into sole tradership or a partnership business. The relief removes the tax charge arising on the disposal of the company’s assets of land and goodwill if qualifying conditions are met. The government has decided not to extend this relief beyond the current 31 March 2018 expiry date.
Improving Research and Development (R&D)
A number of measures have been announced to support business investment in R&D including:
- an increase in the rate of the R&D expenditure credit which applies to the large company scheme from 11% to 12% where expenditure is incurred on or after 1 January 2018
- a pilot for a new Advanced Clearance service for R&D expenditure credit claims to provide a pre-filing agreement for three years
- a campaign to increase awareness of eligibility for R&D tax credits among SMEs
- working with businesses that develop and use key emerging technologies to ensure that there are no barriers to them claiming R&D tax credits.
Capital gains indexation allowance
This measure changes the calculation of indexation allowance by companies so that for disposals of assets on or after 1 January 2018, indexation allowance will be calculated using the Retail Price Index factor for December 2017 irrespective of the date of disposal of the asset.
Changes to termination payments
The government previously announced changes to align the rules for tax and employer NICs by making an employer liable to pay Class 1A NICs on any part of a termination payment that exceeds the £30,000 threshold that currently applies for income tax.
In addition, ‘non-contractual’ payments in lieu of notice (PILONs) will be treated as earnings rather than as termination payments and will therefore be subject to income tax and Class 1 NICs. This will be done by requiring the employer to identify the amount of basic pay that the employee would have received if they had worked their full notice period.
All these measures were due to take effect from April 2018. In November 2017 the government decided to implement a one year delay for the Class 1A NICs measure so the change will take effect from April 2019.
The government will legislate to ensure that employees who are UK resident in the tax year in which their employment is terminated will not be eligible for foreign service relief on their termination payments. Reductions in the case of foreign service are retained for seafarers. The changes will have effect from 6 April 2018 and apply to all those who have their employment contract terminated on or after 6 April 2018.
Currently ‘non-contractual’ PILONs may be treated as part of a termination payment and therefore exempt from income tax up to the £30,000 threshold and not subject to any NICs. Note that the changes to the treatment of PILONs for income tax and Class 1 NICs will still apply from April 2018.
Employer provided cars
The scale of charges for working out the taxable benefit for an employee who has use of an employer provided car are now announced well in advance. Most cars are taxed by reference to bands of CO2 emissions. Currently there is a 3% diesel supplement. The maximum charge is capped at 37% of the list price of the car.
In the current tax year there is a 9% rate for cars with CO2 emissions up to 50gm/km or which have neither a CO2 emissions figure nor an engine cylinder capacity (and which cannot produce CO2 emissions in any circumstances by being driven). From 6 April 2018 this will be increased to 13%, and from 6 April 2019 to 16%.
For other bands of CO2 emissions there will generally be a 2% increase in the percentage applied by each band from 6 April 2018. For 2019/20 the rates will increase by a further 3%.
The government announced that they will legislate to increase the diesel supplement from 3% to 4%. This will apply to all diesel cars registered from 1 January 1998 that do not meet the Real Driving Emissions Step 2 (RDE2) standards. There is no change to the current position that the diesel supplement does not apply to hybrid cars.
The change will have effect from 6 April 2018.
Capital gains tax (CGT) rates
The current rates of CGT are 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher rates of 18% and 28% apply for certain gains; mainly chargeable gains on residential properties with the exception of any element that qualifies for private residence relief.
There are two specific types of disposal which potentially qualify for a 10% rate, both of which have a lifetime limit of £10 million for each individual:
- Entrepreneurs’ Relief (ER). This is targeted at working directors and employees of companies who own at least 5% of the ordinary share capital in the company and the owners of unincorporated businesses.
- Investors’ Relief. The main beneficiaries of this relief are external investors in unquoted trading companies.
CGT annual exemption
The CGT annual exemption is £11,300 for 2017/18 and will be increased to £11,700 for 2018/19.
CGT payment window
The government had previously suggested that capital gains tax would have to be paid within 30 days of the sale of a residential property but this proposal has now been deferred until April 2020.
Inheritance tax (IHT) nil rate band
The nil rate band has remained at £325,000 since April 2009 and is set to remain frozen at this amount until April 2021.
IHT residence nil rate band
An additional nil rate band is now available for deaths on or after 6 April 2017, where an interest in a residence passes to direct descendants. The amount of relief is being phased in over four years; starting at £100,000 in the first year and rising to £175,000 for 2020/21. For many married couples and registered civil partners the relief is effectively doubled as each individual has a main nil rate band and each will potentially benefit from the residence nil rate band.
The additional band can only be used in respect of one residential property, which does not have to be the main family home, but must at some point have been a residence of the deceased. Restrictions apply where estates are in excess of £2 million.
Where a person died before 6 April 2017 their estate did not qualify for the relief. A surviving spouse may be entitled to an increase in the residence nil rate band if the spouse who died earlier had not used, or was not entitled to use, their full residence nil rate band. The calculations involved are potentially complex but the increase will often result in a doubling of the residence nil rate band for the surviving spouse.
The residence nil rate band may also be available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets of an equivalent value, up to the value of the residence nil rate band, are passed on death to direct descendants.
Stamp Duty Land Tax (SDLT)
Relief for first time buyers
The government has announced that first time buyers paying £300,000 or less for a residential property will pay no SDLT.
First time buyers paying between £300,000 and £500,000 will pay SDLT at 5% on the amount of the purchase price in excess of £300,000. First time buyers purchasing property for more than £500,000 will not be entitled to any relief and will pay SDLT at the normal rates.
The new rules apply to transactions with an effective date (usually the date of completion) on or after 22 November 2017.
This measure does not apply in Scotland as this is a devolved tax. This measure will apply in Wales until 1 April 2018, when SDLT will be devolved to Wales.
Higher rates: minor changes
New rules were introduced to impose an additional SDLT charge of 3% on additional residential properties purchased on or after 1 April 2016. Broadly, transactions under £40,000 do not require a tax return to be filed with HMRC and are not subject to the higher rates.
For transactions on or after 22 November 2017, relief from the extra 3% will be given in certain cases including where:
- a divorce related court order prevents someone from disposing of their interest in a main residence
- a spouse or civil partner buys property from another spouse or civil partner
- a deputy buys property for a child subject to the Court of Protection and
- a purchaser adds to their interest in their current main residence.
The changes also counteract abuse of the relief when someone who changes main residence retains an interest in their former main residence.
Changes to the filing and payment process
The government has confirmed that it will reduce the SDLT filing and payment window from 30 days to 14 days for land transactions with an effective date on or after 1 March 2019. The government is planning improvements to the SDLT return that aim to make compliance with the new time limit easier.
Welsh Land Transaction Tax (LTT)
LTT will be introduced from 1 April 2018 and replace Stamp Duty Land Tax (SDLT) which continues to apply in England and Northern Ireland. The principles and rates of the tax are similar to SDLT.
There had been some speculation leading up to the Budget that the VAT registration limit would be significantly reduced. The Chancellor has announced that the VAT registration and deregistration thresholds will not change for two years from 1 April 2018 from the current figures of £85,000 and £83,000 respectively.
In the meantime, the government intends to consult on the design of the threshold.
Compliance and HMRC
The government is investing a further £155m in additional resources and new technology for HMRC. This investment is forecast to help bring in £2.3bn of additional tax revenues by allowing HMRC to:
- transform their approach to tackling the hidden economy through new technology
- further tackle those who are engaging in marketed tax avoidance schemes
- enhance efforts to tackle the enablers of tax fraud and hold intermediaries accountable for the services they provide using the Corporate Criminal Offence
- increase their ability to tackle non-compliance among mid-size businesses and wealthy individuals
- recover greater amounts of tax debt including through a new taskforce to specifically tackle tax debts more than nine months old.
In 2016 a consultation into how penalties for late submission of returns could be used to encourage more compliance. It looks as though Government has recognised the current method of penalty does not work and will be looking at introducing a points based system. It appears that a series of late submissions will ultimately lead to penalties with different steps to escalate noncompliance perhaps with additional means to encourage compliance.