Going out with a whimper
Some good news for advisers. This was the Chancellor’s last Spring Budget: not because he is resigning but because the ridiculous charade of announcing tax and fiscal changes biannually has ended. Henceforth, there will be an Autumn Budget where the proposals for the following year will be exposed in sufficient time to allow for proper examination, consultation and parliamentary scrutiny before implementation from the following April, and where the Finance Bill for a year will actually pass into law before the start of the year rather than halfway through it as now. So did Spring Budget go out with a bang or with a whimper?
Judging by the limited amount of new changes announced in the Budget, probably a whimper.
So, what has he changed? Well, not a lot really. There are many changes to tax law coming in from April this year but the large majority of these were announced in the Autumn Statement in November 2016. The only significant changes announced for the first time in the Spring Budget are the reduction in the dividend allowance from £5,000 to £2,000 from April 2018; an increase in Class 4 NIC from 9% to 10% from April 2018 and then to 11% from April 2019 and the introduction of two anti-avoidance provisions with effect from 8 March 2017, one preventing the conversion of capital losses to trading losses and the other a tightening up of the provisions introduced in 2016 on the profits from trading in and developing land.
Impact on Owner Managed Businesses and Private Individuals
So, what are the combined effects of the changes announced in the Autumn Statement and in the Spring Budget on owner managed businesses, employees and private clients from April?
The package of changes to business rates will be especially welcomed by beleaguered high street traders and pubs in particular. These include support for small businesses losing Small Business Rate Relief to limit increases in their business rates to £600 each year, providing English local authorities with funding to support £300 million of discretionary relief and introducing a £1,000 business rate discount for pubs with a rateable value of up to £100,000.
Levelling the playing field still figures prominently. The reduction in the dividend allowance reduces the tax advantages of trading through a corporate vehicle, although the increase in the rate of Class 4 NIC for the self-employed from April 2018 (and further in April 2019) goes the other way and increases the tax advantages. Also, as proposed previously, the rules on quasi-employees operating through limited companies or similar intermediaries (that is, the infamous “IR 35” rules) are to be tightened up. In the public sector responsibility for operating the rules, and paying the correct tax, will move from the workers’ company to the body paying the workers’ company with effect from 6 April 2017.
Still on the “levelling playing field” theme, as proposed previously, the tax and employer national insurance advantages of salary sacrifice schemes will be removed from April 2017, except for arrangements relating to:
- pensions (including advice)
- cycle to work
- ultra- low emission cars
This will mean that employees swapping salary for benefits will pay the same tax as individuals who buy them out of their post-tax income.
Tax evasion and anti-avoidance
The crackdown on avoidance and deferral continues apace. First, a new anti-avoidance measure applies from 8 March 2017 to stop conversion of capital losses into income. This applies where an investment such as land is appropriated into trading stock. From 8 March 2017 where the appropriation gives rise to a capital loss, it will no longer be possible to elect to roll this loss into the carrying value of stock. Second, hot on the heels of the changes to the profits from trading in and developing land in the UK introduced in the Finance Act 2016, amendments are made to bring all profits recognised in the accounts on or after 8 March 2017 into the charge to UK corporation tax or income tax, regardless of the date the contract was entered into.
Still on the land tax theme, there has been a welcome delay in the implementation of the proposed reduction in the filing and payment window for SDLT. The reduction in the filing and payment window from 30 days to 14 days will now be delayed until April 2018.
Meanwhile HMRC has confirmed that the previously announced changes to corporation tax loss relief, to the substantial shareholding exemption and to the tax deductibility of corporate interest expense, will be implemented, very much as previously proposed, with effect from 1 April 2017. So, with regard to the substantial shareholding exemption, with effect from 1 April 2017 the rules will be simplified to do the following:
- remove the investing company requirement
- remove the requirement that the investee company is a trading company immediately after the sale (where the sale is to an unconnected party)
- provide a more comprehensive exemption where the company is owned by qualifying institutional investors
With regard to the loss relief reform, companies will have more flexibility in the way they can use losses arising on or after 1 April 2017: when they are carried forward these losses will be usable against profits from different types of income and profits from other group companies but there will be a restriction on the use of losses carried forward by companies so that they can’t reduce their profits arising on or after 1 April 2017 by more than 50% if the company’s or group’s profits exceed £5 million. With regard to the tax deductibility of corporate interest expense, the new rules to be introduced from 1 April 2017 will affect few owner managed businesses (and none whose business is purely domestic) given the threshold of £2 million of interest expense. Where they apply the rules will limit deductions where a group has net interest expenses exceeding 30% of UK taxable earnings.
HMRC has also confirmed their intention to treat all payments in lieu of notice as taxable. Furthermore, NICs will be payable on any termination payments in excess of the £30,000 exemption which thankfully otherwise remains (aside from the abolition of Foreign Service Relief).
In recent years we have welcomed additional incentives introduced for film and television productions, orchestras and theatrical productions (although excluding shows involving wild animals or those designed to stimulate the audience, or possibly both). These reliefs are now to be extended to museums and galleries that develop new exhibitions. And for those who instead prefer sports, HMRC is to extend the circumstances in which companies can claim tax relief on contributions to grass roots sports. Going forward relief will be available for donations to wholly-owned subsidiaries of sports’ governing bodies.
The previously announced reforms to the taxation of non-domiciled individuals will proceed from April 2017. This is on the premise that “individuals who live in the UK and make use of public services should pay their fair share of tax” (a hackneyed phrase trotted out only as a substitute for argument or thoughtful analysis). Accordingly, from April 2017 non-domiciled individuals will be deemed UK domiciled for tax purposes if they had been resident in the UK for 15 of the past 20 years, or if they were born in the UK with a UK domicile of origin, with special rules for offshore trusts. From the same date, IHT will be charged on UK residential property when it is held indirectly by a non-domiciled individual through an offshore structure, such as a company or trust. On the bright side, the rules for business investment relief will change from April 2017 to make it easier for non-domiciled individuals who are taxed on the remittance basis to bring offshore money into the UK for the purpose of investing in UK businesses.
Making Tax Digital
Finally, HMRC has invested heavily in its much criticised Making Tax Digital initiative. Whereas many doubts remain as to whether they and the taxpayer are ready for such changes, HMRC has at least deferred the introduction of the scheme until April 2019 for businesses below the VAT registration threshold.
We also have a more comprehensive listing of measures in the Budget statement. To discuss how the changes may affect you or your business personally, please get in touch with your usual BKL contact or use our enquiry form.
Addendum: following the Chancellor’s NIC announcement in the week following the Budget, we’ve written a Budget 2017 update.