The ‘big picture’ is that small and medium-sized enterprises (SMEs) as a whole are not likely to be very greatly advantaged or disadvantaged by the Chancellor’s Budget proposals, though some sectors will potentially be more affected than others.
SMEs in the business of building residential properties will be greatly interested in the November Budget statement, focusing as it does on the government’s ambitious aspirations to increase the supply of new homes dramatically over the next five years or so. And, specifically, Mr Hammond recognises the need to support the SME housebuilding sector, rather than remaining dependent on ‘the major national housebuilders that dominate the industry’. That said, none of the support measures are primarily tax ones.
The other main class of SME which may potentially prick up its ears at the Budget statement is the high-tech sector. The government seeks to encourage investment in knowledge-intensive companies (KICs) under enterprise investment schemes (EIS) and venture capital trust (VCT) schemes. It does so by doubling the amount an individual may invest to £2m, provided any excess over £1m is invested in KICs, and doubling the annual investment limit for such companies to £10m (albeit leaving the lifetime limit at £20m).
Further, ‘slow burning’ KICs benefit from a change that effectively allows the period before their turnover reaches £200,000 to be ignored when applying the ‘permitted maximum age’ rules. All of these changes come in from 6 April 2018 and are subject to EU state aid rules.
Further targeting of EIS, seed enterprise investment schemes (SEIS) and VCT investment on higher-risk, higher-growth investments (though not specifically KICs) is seen in the proposal that the reliefs will be restricted to companies where there is a ‘real risk’ to the capital being invested and will exclude arrangements intended to provide ‘capital preservation’. This follows from a consultation document published in August. Subject to seeing the legislation, the proposal looks at first glance as if it will require a horribly subjective assessment; and the examples given by HMRC in its response to the consultation document, published on Budget day, do not give much reassurance in that regard.
To make things worse, although the change applies only to investments made either after royal assent to Finance Bill 2017/18 or after 5 April 2018 (depending on which HMRC publication you believe – different dates are given!), HMRC says that once detailed guidance has been published (shortly after publication of Finance Bill 2017/18) it will cease to provide advance assurance for any investment where it appears that the new condition would be failed, were it already in force.
Following consultation earlier this year, a government response on the scope for streamlining the advance assurance service generally is to be published on 1 December 2017. And there will be consultation in 2018 on the introduction of a new knowledge-intensive EIS fund structure in which funds would have the flexibility to deploy capital raised over a longer period. Again, this is subject to EU state aid rules, though by the time any such funds come into existence, such rules may no longer be relevant to the UK.
At present, an entrepreneur may find that the consequence of raising much needed external finance to develop the business will have the effect of reducing his or her shareholding below 5% and so denying entrepreneurs’ relief on an eventual sale. It is reassuring that the government has recognised this as a problem and has promised consultation in spring 2018 on ways to change the legislation to address it.
Companies entitled to claim payable tax credit on their R&D expenditure (broadly, large companies) benefit from a 1% increase to 12% from 1 January 2018 – helpful rather than game-changing. At least as valuable in the R&D field is the piloting of a new advanced clearance service for R&D expenditure credit claims, to provide pre-filing agreement, alongside a campaign to increase awareness of eligibility for R&D tax credits among SMEs.
One unexpected change is the abolition from 31 March 2018 of disincorporation relief (or, more accurately, the failure to renew it: it was always a limited-time relief). It was of limited value and little used: few will regret its demise.
A couple of dogs didn’t bark. Mr Hammond (probably wisely) backed down from the widely trailed proposal to reduce the VAT registration threshold to the kind of level common in other EU countries, and confirmed that the present £85,000 will be maintained until 31 March 2020. There is to be consultation on ‘the design of the VAT threshold’ – presumably to see if concerns that have been expressed about the ‘cliff-edge’ effect can be addressed. While structural alteration may be difficult while the UK remains in the EU, Brexit may perhaps permit a more bespoke design.
Another pre-Budget rumour concerned the extension to the private sector of the ‘off-payroll’ sector reforms recently introduced to the public sector. This, too, is to be the subject of consultation in 2018.
Finally, one small concession is that from April 2018 there will no longer be a benefit-in-kind charge in respect of electricity provided by an employer in workplace charging points for electric or hybrid cars owned by employees. This is helpful, if only because the difficulty of working out the cost will often be disproportionate to the tax charge.
It would be nice to suppose that the relief would remain available, in the case of SMEs where the workplace (or one of them) is at the SME owner’s home, in respect of charging the SME owner’s car. Sadly, experience suggests not.
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This article was originally published in Tax Journal’s Autumn Budget 2017 issue. It is also available on the Tax Journal website.
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