Budget 2017 – the Last Spring Budget
The Chancellor Philip Hammond gave his first Budget today, the last Spring-scheduled Budget after the Government’s decision in December to combine this with the Autumn Statement into one annual announcement.
The Budget was given against the backdrop of positive economic news with growth substantially upgraded (at least for the current year), record employment, unemployment at an 11 year low, inflation broadly under control and forecast annual public sector deficits significantly downgraded for the remainder of this parliament. Mr Hammond has focused his energy and spending plans on various infrastructure, productivity and skills initiatives, supporting businesses through business rates rises, commitments to social care and embedded GP facilities to give relief to over-stretched hospitals, and the building of new free schools. Throughout his speech he was able to use his statistics to allege that the Conservative Government was the party looking after the working family.
The number and severity of tax initiatives announced are relatively modest. Nevertheless the speech contained more explicit recognition of the allegedly unfair tax differences between operating through different business mediums, and an immediate pledge to increase National Insurance for the self-employed, from April 2018, to start to deal with part of that. Beyond that there remains the real threat of forthcoming further changes to level up the playing field between individuals working as employees (or self-employed) on the one hand, and doing business through a limited liability company on the other.
Class 4 NICs
In an attempt to align the National Insurance Contributions made by the employed and the self-employed, it was announced that the main rate of Class 4 NICs will increase from 9% to 10% with effect from 6 April 2018, and will further increase to 11% from 6 April 2019.
Research and development (R&D) tax review
As announced at Spring Budget 2017, the government will make administrative changes to research and development (R&D) tax credits, following a review of the tax environment for R&D. This will increase the certainty and simplicity around claims, and will take action to improve awareness of R&D tax credits among SMEs.
Elsewhere, Deloitte has claimed the Government has committed an additional investment of £4.7 billion over the next 4 years for R&D funding.
At least for now, and until 2021 it appears, the R&D scheme is safe and we continue to encourage innovative businesses to claim.
Off-payroll working in the public sector: changes to the intermediaries (IR35) legislation
From 6 April 2017 there will be changes to the IR35 legislation relevant to off-payroll individuals working in the public sector which moves the responsibility for determining whether the legislation applies from the individual to the public sector body. If they do so determine, the public body will then be responsible for withholding a deemed PAYE and NI charge, and remitting to HMRC.
As a further consequence of this, the 5% deduction available in calculating deemed employment payments, which is intended to reflect the costs associated with the administration of the legislation, will be removed for those working in the public sector.
Trading and Property Income Allowances
With effect from 6 April 2017, there will be two new Income Tax allowances aimed at micro-entrepreneurs of £1,000 each, one for trading income and one for property income.
Where an individual is in receipt of income below the new allowances, they will not be taxed on this income stream and will no longer need to report the income to H M Revenue & Customs, potentially removing the requirement to file a Self-Assessment tax return for those individuals.
Where an individual is in receipt of income over and above £1,000, they can simply deduct the £1,000 allowance from their income to arrive at their taxable profit, as opposed to having to calculate and deduct their actual expenditure incurred.
Increase to the cash basis threshold for unincorporated businesses
The trading cash basis thresholds for unincorporated businesses will be increased. From 6 April 2017 the general entry threshold for the trading cash basis will be increased to £150,000. (For Universal Credit claimants, the entry threshold will be increased to £300,000.) The exit threshold will be increased to £300,000 for all users of the trading cash basis.
Simplified cash basis for unincorporated businesses
Finance Act 2017 will legislate to provide a simple list of disallowed expenditure in order to simplify the rules for allowable deductions within the cash basis. These changes will have effect from 6 April 2017, trading profits can be calculated using either the new rules or the existing rules.
Simplified cash basis for unincorporated property businesses
With effect from 6 April 2017 most unincorporated property businesses (other than Limited Liability Partnerships, trusts, partnerships with corporate partners or those with receipts of more than £150,000) will be allowed to calculate their taxable profits using a cash basis of accounting. Landlords will continue to be able to opt to use Generally Accepted Accounting Principles (GAAP) to prepare their profits for tax purposes.
Those with both UK and overseas property businesses will be able to choose separately whether to use the cash basis or GAAP for each. Those with a trade as well as a property business both eligible for the cash basis, will be able to decide separately for each of these, and persons other than spouses or civil partners who jointly own a rental property will be able to decide individually.
To align the treatment with those who opt to use GAAP, the initial cost of items used in a dwelling house will also not be an allowable expense under the cash basis. The existing ‘replacement of domestic items relief’ will continue to be available for the replacement of these items when the expenditure is paid. Interest expense will be treated consistently between those using the cash basis and those using GAAP.Offshore Property Developers
Measures were announced in Budget 2016 which took effect from 5 July 2016 to ensure that all profits from dealing in or developing land in the UK are brought into charge to UK tax, regardless of the residence of the person or company carrying on the trade.
The Government has taken this action since some developers of UK property have been making use of offshore structures to reduce the tax payable giving them an unfair advantage over UK developers paying tax on the full amount of their profits.
Subsantial Shareholdings Exemption
Finance Act 2017 will relax rules so that all companies that have substantial shareholdings in trading companies/groups can sell subsidiaries exempt from a capital gain. Currently the vendor company/group has to satisfy a trading test. Also, UK companies owned by qualifying institutional investors will be more likely to be able to benefit from the relief. The changes take effect from 1 April 2017.
Interest deductions for Companies
Groups of companies with a net interest expense of more than £2m per annum will be restricted to deductions of 30% EBITDA from 1 April 2017.
From 1 April 2017 companies making patent box claims, who are part of cost sharing arrangements, will have clearer rules covering treatment of payments into and out of the cost sharing scheme.
From 6 April 2018 the £5,000 dividend allowance, which allows for an individual’s first £5,000 worth of dividends to be tax free, will be reduced to £2,000. This is the first step of a review by the Government into the different tax treatment of employed and self-employed and those who operate through a limited company. The Government has commissioned a report which is due to be published in the summer.
Life Insurance Part Surrenders/Assignments
Holders of life insurance policies who part surrender or part assign their policies can, in certain circumstances, inadvertently trigger taxable gains far in excess of the underlying gain on their investment for which the availability of ‘deficiency relief’ often would not fully compensate.
This measure allows taxpayers who make such a disproportionate gain on a policy to apply to HMRC to have the gain reviewed. If HMRC agree it is disproportionate they will recalculate the gain on a just and reasonable basis.
Foreign pension schemes
Whereas currently part, or all, of certain foreign pension receipts and lump sums paid to a UK resident are exempted from UK tax, from 6 April 2017 100% of the pension arising will be chargeable to UK tax to the same extent as if it had been paid from a registered pension scheme.
With effect from 6 April 2017 the Income Tax and NIC advantages where Benefits In Kind are provided via certain salary sacrifice arrangements will change. The changes will affect car schemes, workplace parking, school fees, white goods, accommodation and mobile phones.
Please note you can delay the impact of these changes for either 1 year or 4 years by starting, varying or renewing schemes before 6 April 2017.
The longer protection is afforded to cars, accommodation or school fees arrangements.
Qualifying Recognised Overseas Pensions (QROPS)
Except in particular circumstances pension transfers made to QROPS requested on or after 6 April 2017 will suffer a 25% tax charge (clawback).
In addition pension payments made from funds that have enjoyed UK tax relief and been transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules.
Reform of Domicile Rules & Inheritance Tax
With effect from 6 April 2017, non-domiciled individuals will be deemed domiciled in the UK for tax purposes where they have been resident in the UK for 15 of the past 20 tax years. For those affected, it is last chance before 6 April to pay a remittance basis charge (of £90,000) for the privilege of keeping this year’s unremitted overseas income off your UK tax return.
Those who become deemed UK-domiciled in April 2017 under the above rule will be able to treat the base cost of their non-UK based assets as the market value of that asset as at 5 April 2017.
In addition, individuals who were born in the UK with a UK domicile of origin, but have since acquired a domicile of choice elsewhere, will be deemed UK domiciled for all tax purposes while they are resident in the UK.
From April 2017, Inheritance Tax will be charged on all UK residential property, regardless of whether it is held indirectly by a non-domiciled individual through an offshore structure.
Making Tax Digital
Unincorporated business (businesses owned privately by one or more people) with annual turnover below the VAT registration threshold of £85,000 now have until April 2019 before they will be required to start using the new digital service. However it still remains that businesses, self-employed people and landlords with annual turnover under £10,000 are exempt from these measures. This gives small privately owned businesses more time to prepare for the measure before using digital records to keep tax records, updating HMRC on a quarterly basis.
Strengthening Avoidance Deterrents (SAD)
HMRC have introduced a new class of deterrent known as an ‘enabler’ (briefly anyone involved in the tax avoidance chain).
Such activity post Royal Assent will cause enablers to be subject to a new penalty regime.
Taxpayers must exercise ‘reasonable care’ when assessing tax avoidance schemes. This will apply to inaccuracies in documents relating to tax periods commencing on or after 6 April 2017.
If you would like to discuss any of these matters or talk to us about your tax affairs in general, please contact our Tax Partners, Steve Crompton or Chris Barrington on the details below:
Partner – Head of Tax
direct dial: 01942 292541
mobile: 07790 840394
direct dial: 01942 292505
mobile: 07730 436070