Autumn 2018 Budget Review
In a confident speech, lasting about an hour and a quarter, Philip Hammond laid into the opposition, scoring points off Labour’s John McDonnell again and again. So far as we know, we are not expecting an election before Christmas, but we might as well have been, for this was to all intents and purposes an election budget. The Conservative party’s hold on power is rather tenuous and overshadowed by Brexit negotiations; if these fail we may yet see a much more challenging budget.
The speech dwelt heavily on improvements in the economy since 2010, on falling debt as a percentage of GDP, and on unexpectedly good net revenues this year. So prizes for everybody are to be funded from these savings, with bad news for just a few: profitable digital corporations (Amazon, Apple and Google, perhaps just a few more); and a further clamp down on IR35, but only for large and medium organisations.
There is now mandatory rates relief for public lavatories, giving Mr Hammond many opportunities to demonstrate that schoolboy humour lives on. He was relieved that this was one of the few budget announcements not to have leaked.
The manifesto pledge to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 will be effective from April 2019, one year earlier than expected. The thresholds will be kept at this level for both 2019/20 and 2020/21 and will then be increased annually by CPI.
National Insurance Contributions
From April 2020, the Employment Allowance will only be available to employers with an employers’ NIC bill below £100,000 in the previous tax year. This enables the £3,000 allowance to be targeted to smaller businesses.
As previously reported, Class 2 NICs will not be abolished during this Parliament.
HMRC’s 2017/18 tax calculation shambles
A year ago we wrote about HMRC’s 2016/17 tax calculation shambles, whereby they forced all the software companies who provide online tax returns to calculate tax bills in precise accordance with their rules – which were often incorrect. So we’d better let you know that they did it again in 2017/18. At LFF, we are checking the returns carefully, and will let you know if yours is an “exception” that cannot be filed online.
Will they eventually get it right, or has the tax system reached the point where even HMRC are simply defeated by its complexity? Watch this space.
IR35 (named after a press release issued about 15 years ago) is the name for long and difficult legislation intended to ensure that people in a working relationship that looks like employment pay tax and NIC under PAYE. It has enjoyed some success, and more revenue has been raised by transferring the burden of compliance from workers to public sector “employers”. As long predicted, something similar is now going to be imposed on to the private sector, but not until 2020, and only on medium and large “employers”.
When this was implemented for the public sector, there was a huge sway towards putting everyone on the payroll “to be on the safe side” before things normalised and employers began to review and apply the rules properly on a case-by-case basis. HMRC have promised to provide more support and guidance to medium and large organisations ahead of implementation, presumably to try to encourage a more orderly application.
It was expected that Rent-a-Room Relief would be restricted to counter ‘Airbnb’- type letting. In fact there is to be no new legislation, but the existing rules (about the relief applying to a ‘main residence’) will perhaps be enforced more strictly.
Lettings Relief is a useful relief that reduces Capital Gains Tax when a property which is your main home for only part of your period of ownership is let out for a period. From next April this is to be restricted to period of shared occupation with the tenant.
Additionally, the final period of ownership that is tax free where a time apportionment applies, once 36 months, now 18 months, goes down again to 9 months.
The Budget has confirmed that the Corporation Tax rate is set to fall to 17% in 2020.
R&D Relief for SMEs is the subject of further tinkering – from April 2020, the amount of payable R&D tax credit that can be claimed is limited to three times the company’s total PAYE and NICs liability for the year. This measure is to prevent perceived abuse of the current system.
The Annual Investment Allowance (AIA) gives businesses tax relief on investment in most fixed assets. The annual limit is currently £200,000 but it goes up to £1m for two years from 1 January 2019.
If you are planning significant capital investment, talk to us first as there will be complex rules in place for businesses whose accounting years do not match up with the calendar year – as always, timing will be everything!
There will be a new Structures and Buildings Allowance giving relief at a rate of 2% for non-residential structures and buildings. This will be available where all contracts are entered into on or after 29 October 2018.
The “special rate”, alternatively known as the “paltry rate”, of capital allowances for certain types of plant and machinery such as fixtures reduces from 8% to 6%.
This applies a 10% rate of Capital Gains Tax to qualifying business gains. This has survived (it will vanish overnight if Labour take over!) but the qualifying holding period doubles from one year to two.
Forward planning is essential to maximise the benefit of this very important business relief. To qualify for ER, shareholders must be entitled to 5% of the company’s distributable profits and net assets, as well as dividends / voting rights, as of today’s date.
The government will be publishing a consultation on the taxation of trusts, with a view to making it “simpler, fairer and more transparent”. These are three words not often associated with the complexity of the UK’s tax system, so we await the results with a due sense of jaded cynicism.
From April 2019, the limits that apply before charities are taxed on trades outside their main purpose will increase. Where the charity’s total income is less than £20,000, the trading turnover limit will increase from £5,000 to £8,000; and where total income exceeds £200,000, the trading turnover limit will increase from £50,000 to £80,000.
The Gift Aid Small Donations Scheme (GASDS) limit will increase to £30 per gift.
Making Tax Digital (MTD)
Those of you with businesses will have received our communication last week with an update on HMRC’s much-anticipated retirement hastener, Making Tax Digital. VAT is the first tax in the firing line, with implementation due on 1 April 2019, but HMRC have not forgotten about income tax and this will follow in due course – we are told not before 1 April 2020.
HMRC have recently announced a six-month deferral for “more complex” organisations, including trusts, unincorporated not-for-profits, VAT groups, traders based overseas, those making payments on account and annual accounting scheme users. However, it is essential that whatever your business, you can start preparing now for implementation.
MTD for VAT will affect businesses who are making taxable supplies over the current registration threshold of £85,000 (the Chancellor confirmed today that this threshold will remain for 2 years, to provide certainty). If you are below the threshold, the new provisions won’t apply to you until such time as you do exceed it – and once you’re in the system, the only way out is deregistration.
The main requirement is for digital record-keeping and submission to HMRC. You can still keep your paper files of invoices if you have not yet fully embraced paper-freedom, but all transactions must be captured digitally, in a spreadsheet or accounting software. This must then be capable of transmission of a VAT return to HMRC without manual re-keying.
Be aware that major software providers such as Sage and QuickBooks will only be supporting MTD for VAT on their latest versions. If you are using an old off-the-shelf package it is time to think about upgrading. It seems that almost all products and services are moving to a monthly subscription model, from groceries to shaving kits, and accounting software is no exception. Do review the version you are on and check it is going to be compliant. At LFF we recommend cloud accounting software – particularly Xero, in which we have adviser certification, but we are happy to help with all such packages.
Many clients keep records on spreadsheets and this is still acceptable, but you will need “bridging software” to enable you to submit the VAT return digitally to HMRC’s system. HMRC have a list of software providers on their website; we have recently acquired a piece of bridging software and are currently preparing to test it.
If we help you with your VAT returns, we will guide you through the process of any changes needed to comply with the new regime. If not, we are able to help with everything from a review of your current systems and requirements, through to implementation of new software with training, and a fully outsourced bookkeeping / VAT service. Come and talk to us if you would like help.
Thank you for reading this far
We are living through very uncertain times, and Brexit may yet turn out to be the least of our problems. We will be here to advise through thick and thin, and will always seek to turn challenges into opportunities. Amy and John have co-authored this newsletter; it’s a rapid reaction, so there is time for further thought. Please let us know if we can provide any further information.