Our Technical Director, Alan Sowden, provides his usual overview and some planning points for your consideration.
Chancellor Philip Hammond presented his first Spring Statement on 13th March 2018. As announced in the Autumn Statement 2016, the Spring Statement will be generally confined to reporting to Parliament on the state of the economy and Government finances.
Other than the announcement of a number of consultations on specified areas, there was little to note from a tax and business perspective. Further changes to the Business Rates system were announced in terms of revaluation dates but, thankfully, no significant new taxation measures were announced.
However, with the new tax year nearly upon us, it is a good time to revisit some changes previously announced which have recently been implemented or come into effect in the near future and to consider how these might affect you.
Companies and Small Business
- Research and development tax credits
- Indexation allowance for companies frozen
- Changes to National Insurance for employees and employers
- National Minimum Wage/National Living Wage
- Auto-enrolment contribution increases
- New trading and property income allowances
- Capital allowances on cars
- Cash accounting limits
- Making Tax Digital
Personal Tax
- Income tax rates and allowances
- Dividend tax changes
- Changes to savings taxation
- Lifetime ISA
- Car Benefit in Kind
- Pension changes
- Changes to the taxation of rental income
Other announcements
- Increased HMRC Compliance activity
- Update to Venture Capital Schemes
- VAT threshold update
Companies and Small Business
Research and Development tax credits
It was announced in the Autumn 2017 Budget that for expenditure incurred on or after 1st January 2018, companies operating the Research and Development Expenditure Credit (RDEC), also known as the “Above The Line Credit”, will benefit from an increase in the rate of this credit from 11% to 12%. This will increase the value of R&D claims for companies that are unable to use the more generous SME scheme either due to their size, or due to receipt of certain grant funding etc.
Planning point: Many companies fail to claim R&D tax credits to which they are entitled. If your company incurs costs in overcoming technical uncertainties, then you may have a valuable claim to make. If you would like to arrange a free review of your circumstances, please contact Alan Sowden on 01865 379272. Alternatively, please see this article on our website for sector specific examples of qualifying cases: https://crmoxford.co.uk/rd-tax-relief-typical-claims-see-our-briefing-note
Indexation Allowance frozen for companies
A surprise announcement at Autumn Budget 2017 was that from 1st January 2018, Indexation Allowance will be frozen for limited companies. This means that any capital assets (for example residential or commercial property) disposed of at a gain will no longer benefit from the uplifting of original cost to reflect inflation arising from January 2018 onwards. As it stands, the benefit of Indexation Allowance already built up to December 2017 will be frozen and still available for later disposals so it is only future inflation which will be affected. However, you may recall that Indexation Allowance was frozen for individuals in April 1998 and a few years later it was scrapped all together, so watch this space!
Planning point: For assets held for a significant time, Indexation Allowance is a very valuable relief. For example, a property bought for £100k in March 1998 and sold for £300k today would benefit from Indexation Allowance of £71,200, reducing the corporation tax liability on the gain from £38,000 to under £25,000. If you hold assets in a company which would currently benefit from significant Indexation Allowance, then it may be sensible to review whether you wish to realise a gain on these assets in the short to medium term if you are concerned about the relief being abolished totally in the future. This could be by genuine third-party sale or by transfer to a related party.
National Insurance for employees and employers
The earnings threshold for both employees and employers will increase from its current level of £157 per week to £162 per week from April 2018. The Upper Earnings Limit will rise from £866 to £892 per week.
A reminder to all employers that the Employment Allowance, which provides exemption to businesses from paying Employer’s NIC, rose to £3,000 from April 2016. To qualify for this you do not need to employ any new staff; it is available to all employers, although groups of companies and companies under common control only get one allowance. This is designed to remove the Employer’s NIC cost of employing four full time employees on the National Living Wage (see later) and exempts the first £3,000 of Employer’s NIC which would otherwise be payable.
A reminder that where a sole director is the sole employee in respect of whom Employer’s NIC is payable, the Employment Allowance ceased to be available from April 2016.
Planning point: This is designed to counteract a complex NI avoidance scheme. If you are a genuine “one man” company, it appears that appointing a family member as say Company Secretary and paying £1 of Employer’s NIC in respect of them may avoid the removal of the Employment Allowance.
Planning point: If you have a group of companies (a holding company with one or more subsidiaries), or are involved with more than one company, please get in touch with your usual contact at CRM to see how the allowance will work best for you
Planning point: If you are not the sole employee/director of your own company (or as outlined above, could include a second employee going forwards) and currently pay yourself below the NIC threshold, you may wish to consider increasing your salary to utilise your personal allowance in full. This will result in a net gain, since corporation tax relief at 20% will exceed the employee NIC suffered at 12% and the 13.8% employer NIC will not be due. If you already pay more than £3,000 employers NIC for other employees, you will not benefit from this option. Please see the point above regarding restriction of the allowance from April 2016.
National Minimum Wage/National Living Wage
There will be a rise in the National Living Wage from £7.50 to £7.83 per hour for over 25s from April 2018. There are also to be increases in the National Minimum Wage from 1st April 2018 to £7.38 per hour for 21-25 year olds (from £7.05), £5.90 per hour for 18-20 year olds (from £5.60), £4.20 per hour for 16-17 year olds (from £4.05) and an increase in the apprentice rate from £3.50 to £3.70 per hour. A reminder that this and future increases apply from April each year.
Auto-enrolment contribution increases
A reminder that the minimum contributions under auto-enrolment are due to increase in April 2018 (2% employer, 5% total) and April 2019 (3% employer, 8% total) from their current levels of 1% employer contribution, 2% total contribution.
Planning point: If you have a significant number of employees contributing to a scheme, you may wish to consider making the contributions on their behalf via a salary sacrifice scheme in order to save both the employee and employer NIC on these amounts. From April 2018, an employer with 10 employees earning the UK average earnings of £26,468 (per the ONS), utilising a salary sacrifice scheme would save approximately £850 p.a. Employer’s NIC, and save each employee around £75 employee NIC.
New trading and property income allowances
As announced in Autumn Statement 2016, from April 2017, trading income and property income under £1,000 each will not need to be declared to HMRC nor tax paid on it. If you have such income over £1,000, you can deduct £1,000 from your taxable income instead of your exact expenses. This is designed to prevent people with small amounts of income from sources such as renting out their home whilst on holiday from having to complete a tax return purely for this reason.
Planning point: Note that these allowances are in respect of income/turnover, not profit. If you have property income of £1,500 and expenses of £700, you will need to declare this income. Note though that you could opt to offset the £1,000 allowance against the £1,500 income instead of your actual expenses of £700, leaving a taxable profit of £500 rather than £700.
Capital allowances on cars
A reminder that the 100% First Year Allowance on low emission cars (less than 75g/km of CO2) will be extended for a further three years to 31st March 2021, although the threshold will reduce to 50g/km of CO2 from 1st April 2018.
Furthermore, the limit of CO2 emissions at which a car is put in the special rate pool attracting 8% capital allowance rather than 18% in the main pool will reduce from 130g/km to 110g/km from 1st April 2018.
Planning point: You can check the CO2 emissions of your car here with the registration number and manufacturer: www.vehicleenquiry.service.gov.uk. Otherwise you can use websites such as www.comcar.co.uk to check CO2 of cars you are thinking of buying. The decision as to whether you have a company car or own a car personally and reclaim mileage involves a number of factors and we would recommend you speak to your usual contact at CRM in order to advise on the best route for you.
Cash accounting limits
From 6th April 2017, unincorporated businesses with turnover of up to £150,000 have been able to report their taxable profit on a cash basis. Previously this limit was £83,000. Once you are in the scheme, you will not be forced to leave until your turnover reaches £300,000. See https://www.gov.uk/simpler-income-tax-cash-basis/overview for more details.
Making Tax Digital (MTD)
It was confirmed that MTD will be introduced from April 2019 for VAT. This will apply to businesses over the VAT threshold, but not those registered voluntarily. Any further roll-out of MTD will be from April 2020.
Planning point: You may need to fundamentally change how you keep your business records in order to comply with your responsibilities under MTD. We will be in communication with details of support we will be offering to you once the full scope of MTD requirements is announced, but please do speak to your normal contact in the meantime to find out more.
Personal Tax
Income tax rates and allowances
The current personal allowance of £11,500 is to rise to £11,850 from 6th April 2018. Furthermore, the basic rate band for 2018/19 is to be £34,500 (currently £32,000).
This, together with extensions to the basic rate band, means that the higher rate tax threshold (including the personal allowance and basic rate band) is to rise from £45,000 from April 2017 to £46,350 from April 2018. The higher rate threshold is still expected to be £50,000 by the end of this parliament. The NIC upper limit will continue to align with the higher rate threshold.
The additional rate of income tax remains at 45% for taxable income over £150,000 (barring dividends – see below).
Furthermore, the personal allowance will still begin eroding when income reaches £100,000, meaning people with incomes of £100,000-£123,700 (for 2018/19) will suffer an effective 60% tax rate within this bracket.
As previously announced, from 2015/16 married couples (and those in a civil partnership) will be able to transfer 10% of their personal allowances to each other, helping couples where one person does not fully use their own allowance. However, where one of the couple is a higher rate or additional rate taxpayer, this facility will not be available.
Planning point: If you are married or in a civil partnership, it remains best practice to utilise both spouses’ personal allowances and basic rate bands where possible, whether this be by paying income from your business to both spouses within legitimate boundaries, or by transferring investment assets between spouses.
Planning point: If your income is at or near the higher rate, additional rate or £100,000 limit, there may be options for mitigating the impact of these tax rates depending on your personal circumstances. Please get in touch if you would like a review carried out to ensure your tax bills are kept to a minimum.
Planning point: If you currently take a minimal salary from your own company, then the increase in personal allowance needs to be considered in conjunction with NIC limits. From April 2018, we would suggest that a salary in the region £8,520 p.a. (£710pcm) could be considered optimum for these purposes. At this rate you will pay a small amount of NIC. To avoid NIC entirely, a salary of up to £8,424 p.a. may be taken. Please see the comments on Employment Allowance above – if you do not pay over £3,000 in Employers NIC already (and do not utilise your personal allowance on other income such as rental income), then you may benefit by paying up to the £11,850 personal allowance as a salary from April 2018. Please see the comment in the National Insurance section regarding Employment Allowance if a sole director is the only employee in respect of whom Employers NIC is payable.
Planning point: If your income is regularly in the 60% effective bracket (£100-123k approx.), and you have a degree of control over it (for example if you run your own company), it may be sensible to defer income in excess of the threshold until April 2018 where practical (e.g. by delaying dividend or bonus payments), or to accelerate pension contributions to bring income below the relevant threshold (subject to contribution limits). Alternatively, you could consider bringing forward the excess income from next year into 2017/18 in order to get below the threshold next year. By doing this, you can seek to get your income under the relevant limit every other year and reduce the average tax rate on your income over the years.
Reduction in dividend allowance
A fundamental change to the taxation of dividends took place with effect from April 2016. Since then, the 10% tax credit on dividends has been abolished, and the effective tax rate on dividend income was increased by 7.5% across all income levels (to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers). From the same date, the introduction of the dividend allowance has effectively exempted the first £5,000 of dividend income per taxpayer per year from tax (although it still uses up basic rate/higher rate band). From 6th April 2018, this allowance is to be cut to £2,000.
Planning point: Many people operating through limited companies will see significant tax rises on their income under the new system. It would be an opportune time to review whether shares should be held by spouses or other family members in order to utilise all available allowances and basic rate tax bands as fully as possible.
Changes to savings taxation
A reminder that a “Personal Savings Allowance” has been in place since April 2016. Under this scheme, interest income of £1,000 for basic rate taxpayers, or £500 for higher rate taxpayers, will be exempt from tax. Additional rate taxpayers (with income over £150,000) will not benefit from this exemption. Automatic deduction of tax at source by banks will cease.
Planning point: For many people, this allowance may make a cash ISA irrelevant. With current low interest rates, funds of around £65,000, or £32,500 for a higher rate taxpayer, would be needed to exceed this limit. However, if rates rise, then at say 5% interest, this would drop to £20,000 or £10,000 for a higher rate taxpayer. Furthermore, it is arguably more likely that this exemption could be reversed in the future than the whole ISA regime, so you should take a balanced view before dispensing with the ISA.
Planning point: Many small business owners may not have significant personal savings outside of an ISA to utilise this allowance, but may be owed a significant amount by their trading company. If, for example, your company owed you £25,000, you may decide to charge the company say 4% annual interest from April 2016. As long as you are charging no more than a market rate of interest, then the company should obtain a tax deduction for the £1,000 interest paid in this example, and as a basic rate taxpayer, no income tax is payable by you personally. For a higher rate taxpayer, it would likely be preferable to reduce the rate charged to generate interest within the £500 reduced allowance for a higher rate taxpayer.
New Lifetime ISA
From April 2017, people under 40 have been able to open a “Lifetime ISA (LISA)”. These will run alongside the normal cash and shares ISAs. Contributions into a LISA up to the age of 50 will be part matched by the government with a 25% bonus.
Up to £4,000 may be saved into a LISA each year, out of a revised total ISA allowance from April 2017 (and no change for 2018) of £20,000 (2016/17: £15,240). Funds from a help to buy ISA will be transferrable into a LISA from April 2017. Based on the rules as announced, it would seem to be a generally beneficial idea to do this, as with a help to buy ISA you cannot contribute to a normal ISA in the same tax year, and thus your unused ISA allowance is lost, although individual consideration is of course necessary.
Funds from a LISA may be used to buy your first property (costing up to £450,000) or to use in retirement (defined as from age 60). Although you can withdraw funds for any other reason, this would result in a loss of the bonuses already paid plus any associated income/gains on these.
In any case, funds taken from a LISA will be free of income or capital gains tax, including the government bonus.
The LISA is designed to run alongside the current pension regime, although initially the government consulted on such a system replacing the current pension system entirely
Planning point: The 25% contribution from the government is equivalent to the basic rate tax relief on pension contributions. However there is no extra relief for higher rate or additional rate taxpayers. Basic rate taxpayers may therefore consider it great value for money to get the same upfront tax benefits as a pension but to access the entire pot tax free upon retirement (as opposed to 25% tax free in a traditional pension). Higher rate and additional rate taxpayers may weigh more carefully the lesser upfront tax relief against the tax free status later in life.
Planning point: For people with little or no pensionable income (e.g. people living from property income or during loss making years), this effectively means that you can put £7,600 gross into personal pensions and LISAs at a cost of just over £6,000, with the balance of £1,520 topped up by the government even if you pay no tax in the year.
Planning point: For people who have maximised their pension savings for the year or lifetime, this is an opportunity to get a small amount of further savings with the benefit of a government contribution.
Planning point: It is unclear whether the significant Inheritance Tax benefits enjoyed on undrawn pension benefits will also apply to LISAs but it is likely they will not.
Planning point: If you are nearing 40, it may be worthwhile to open a LISA with a small one-off contribution to keep your options open for the next 10 years.
Car benefit in kind
It was announced that from April 2018, the surcharge in calculating a benefit in kind for a diesel car will rise from 3% to 4% with the maximum percentage to be used remaining at 37% of the list price of the car. This does not apply to cars meeting the RDE2 standard, but it is unclear currently whether any available cars actually meet this standard currently. Therefore, this looks to be a tax rise for all drivers of diesel company cars (but not vans).
Planning point: For many business owners, having a company car, and in particular private fuel provided for a company car, may not be a tax efficient solution. Please speak to your usual contact at CRM if you would like to review your company car position.
Pension changes
Remember that from April 2016, there is a reduction in the Annual Allowance (the amount which you or your employer can contribute to a pension scheme) where Adjusted Income (which includes employer pension contributions) exceeds £150,000.
Affected individuals will find their allowance reduced by £1 for every £2 of income over this threshold, down to a minimum of £10,000. This effectively is a sliding scale from £150,000 to £210,000.
Please see the factsheet available from the News section of our website for full details and examples.
Planning point: If you are caught by the new rules, you may wish to consider increasing your contributions, or your company contributions, in the current tax year. You may have unused relief brought forward from a previous tax year.
For people who have drawn certain pension benefits, the money purchase annual allowance reduced from £10,000 to £4,000 from April 2017. This means that once you have drawn certain pension benefits, you can only contribute a further £4,000 per year into a pension scheme. You should also be wary of pension lump sum recycling rules if you have already taken a lump sum and continue to contribute to a pension scheme.
Changes to taxation of rental income
As announced in the 2015 Summer Budget, tax relief on interest payments will be restricted to the basic rate from 2020/21. This will be phased in equally over 4 tax years starting with 2017/18. This will not apply to commercial property, only residential “buy to let” properties. This restriction is applied by making the interest paid non-deductible, so you pay tax on rental profits before interest is deducted. The tax is then reduced by 20% of the interest paid. Even if you are currently a basic rate taxpayer, the mechanics of this restriction can actually push you into the higher rate of tax.
Planning point: Where your long-term plan is to build a portfolio of residential property, consider whether you should do this through a limited company. It is sometimes possible to move existing portfolios into a company tax efficiently with the correct planning. This is a complex area so please get in touch if you wish to discuss your options in this area.
Other announcements
Increased HMRC Compliance activity
Previously, an additional £800m funding was announced in the Autumn Budget 2017 as being made available to HMRC to achieve improved tax collection. In particular, £300m has been allocated to target Small and Medium businesses with a target of £2 billion extra tax revenue beyond that from normal compliance operations. A further provision of £740m was announced in the 2017 Budget to focus on perceived tax evasion and avoidance.
Therefore we expect tax, VAT and PAYE enquiries to increase for small business clients. Specifically, a review of IR35 rules has been announced, so the contracting and consultancy sector may be hard hit, but we expect increased HMRC activity across all sectors.
Planning point: You can protect yourself and your business from the cost of defending yourself from HMRC enquiries by subscribing to our tax investigation service. The cost for businesses starts at just £120 + VAT per annum. Please get in touch with your usual contact at CRM if you would like to find out more about this service.
Update to EIS and VCT schemes
A generous increase in the amount that individuals may subscribe to EIS/VCT investments from £1m to £2m was announced in the Autumn 2017 Budget. This extra allowance is only available to investments in qualifying knowledge intensive companies. Such companies will now be able to raise £10m rather than £5m under these schemes per year, with a lifetime limit of £20m. Further consultation on reliefs was announced in the Spring Statement 2018.
VAT threshold increases
The usual increase in VAT thresholds were put on hold and the registration threshold remain at £85,000 for the next two years and the de-registration threshold will remain at £83,000. A full review of the VAT system was announced.
As always, it is impossible to include every nuance in a publication such as this, so if you have a question about how a given measure may affect you or your business, or if you have a general tax query, please get in touch with us on 01865 379272. Please note that this is designed as a generic guide rather than specific advice.
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