October 2018 Budget insights - Peter Bromiley ACA
7th November 2018
The main story for me is the Chancellor’s continuing attack on small businesses and landlords following on from recent policies like the 2016 dividend tax, the effective killing off of the Flat Rate scheme for service businesses in 2017, and the 2016 extra 3% stamp duty on investment properties. This must be a big disappointment to the traditional, ‘aspirational’ Conservative voters who once used to expect to benefit from budgets by Tory Chancellors.
Although, every taxpayer will benefit from an increase in the Personal Allowance – and many middle-income earners will appreciate being told that earning less than £50,000/year no longer means they are considered a Higher earner for income tax purposes – Philip Hammond has:
- attacked businesses by confirming the extension of the (IR35) off-payroll rules to freelance contractors in the private sector from April 2020 despite the problems with the earlier public sector roll-out in April 2017 and the predictable negative impact on the economy;
- attacked landlords by effectively taking away lettings relief when selling one’s former home, and;
- attacked entrepreneurs by making it twice as hard to qualify for Entrepreneur’s Relief when selling a business (it must have traded for 24 months rather than only 12).
A big reason for such complicated, and anti-business, tax laws is that the Government has backed itself into a corner with the promise - in 2015 - to not increase Income Tax, National Insurance or VAT. It still needs to increase these taxes – but has to do it in a sneaky way that most of the general public fail to notice. Hence,
- Income Tax take is increased on business owners with the dividend tax and the new IR35 legislation;
- VAT take is increased by attacking the flat rate VAT scheme, and by freezing the VAT registration threshold until April 2020 (a decrease in real terms), and;
- National Insurance famously didn’t increase on the self-employed in Hammond’s first budget (when he backtracked on increasing Class 4 NI) – but a side effect of the increase in the Higher rate tax threshold is an equivalent increase in the Upper Earnings Limit for National Insurance (when 12% Employee’s NI reduces to 2%) from £46,350 to £50,000 from April 2019.
Below are a few brief notes on individual aspects of the Budget:
Increased tax and National Insurance thresholds – from April 2019
The Personal Allowance increases to £12,500 from £11,850, and the Higher rate tax threshold increases to £50,000 from £46,350, with effect from April 2019. This was expected to happen – but over two years rather than one. So, it is a nice boost to virtually every taxpayer.
National Minimum Wage – increase from April 2020
The National Minimum Wage, for workers aged 25 or over, over will increase to £8.21/hour from £7.83/hour from 1st April 2019. On a 37.5 hour week, this equates to £16,009.50/year.
New IR35 rules for the private sector – from April 2020
This has been on the cards since 2016 when the original ‘off-payroll rules for the public sector’ were announced (despite the ‘we have no plans to extend the new rules to the private sector’ statement issued to us by HMRC). We now know that the new rules for private sector freelancers will be effective from April 2020 – rather than April 2019. This delay makes sense given the imminence of Brexit and HMRC’s new Making Tax Digital system being launched in April 2019. One hopes that, in the meantime, there is a change of heart (and/or a change of Chancellor).
Annual Investment Allowance - relief increased for larger businesses from January 2019 for two years
The AIA will increase from £200,000 to £1,000,000 from January 2019. This means that businesses will get 100% tax relief in the year of purchase on investment in plant, machinery etc. on the first £1m in a year (as opposed to only £200,000). For the vast majority of our clients, this will make no difference, but it will encourage some bigger businesses to invest – or, at least, to invest earlier.
Entrepreneur’s Relief period – tougher requirement to qualify from April 2019
From 6th April 2019, in order to qualify for Entrepreneur’s Relief on the sale or winding up of a business – and thus pay Capital Gains Tax at only 10% - the business owner must have been in the business (owning at least 5%), and the business must have traded, for 24 months. Previously, the required trading period was only 12 months.
Capital Gains Tax on Private Residence – reliefs restricted from April 2020
a) It used to be the case that if you were selling a property that had been your main home (your Principal Private Residence), the Capital Gain relating to the period in which you lived there, plus the last 18 months of ownership, was exempt from Capital Gains Tax. This allowed time to sell the property after moving out without being penalised. From April 2020, this final period will be reduced to 9 months – so more property owners will have Capital Gains Tax to pay on selling their home.
b) Also, there used to be Lettings Relief available which could reduce the amount of taxable Capital Gain on selling a property (that had once been your main home but had then been rented out) by up to £40,000. This relief has effectively been removed from April 2020 – as it will only apply to periods where the home owner shared the property with a tenant.
VAT registration threshold unchanged at £85,000 until April 2022
The annual turnover threshold, at which point a business must compulsorily register for VAT, generally increases each year. However, there will be no increase now until at least April 2022 – which will mean more businesses being forced to register for VAT than would otherwise have been the case.