EBA 2018 Budget Commentary
Philip Hammond delivered a fairly wide-ranging Budget yesterday with some good news for business owners. It’s scheduled to be the last Budget before Brexit. No changes to the 19% corporation tax rate were announced but there are welcome increases in the income tax thresholds and in tax relief for companies investing in capital equipment. Here goes with our analysis of the key points. Please do not hesitate to call me if there is anything you see here that you’d like to talk about further.
Income tax thresholds increase
The Personal Allowance (PA) will increase again, substantially, from £11,850 in the current tax year (2018/19) to £12,500 from 6/4/19 (tax year 2019/20). It’s interesting to note that since 2009/10, the PA will have almost doubled from its then level of £6,475.
The basic rate of income tax remains at 20% for most sources of income (7.5% for dividends) and the higher rate at 40% (32.5% for dividends). The additional rate remains at 45% for most income (but 38.1% for dividends).
The income threshold at which higher rate income tax is paid will jump from £46,350 to £50,000. The additional rate threshold remains at £150,000.
The income level at which the PA starts to get withdrawn remains at £100,000 and it will continue to be reduced by 50p for every £1 of additional income – disappearing to zero when income reaches £125,000.
All of the above will remain the same in the following tax year, 2020/21, and then increase in line with inflation in 2021/22.
National insurance thresholds rise
In the current tax year, you can earn up to £8,424 per annum (that’s £702 per month) without having to pay national insurance (NI). Nor does your employer have to pay any NI. Above this level, the employee suffers 12% on the excess and the employer has to pay 13.8%. The employee rate drops from 12% to 2% on anything in excess of £46,350, although the employer continues to pay 13.8%.
In 2019/20 the £8,424 starting level rises to £8,632 (£719.33 per month) and the £46,350 threshold at which employee contributions drop to 2% will rise to £50,000.
The Chancellor clarified that Class 2 NI (payable by sole traders) will not be abolished during the lifetime of this Parliament. He also stated that plans to introduce NI on termination payments in excess of £30,000 will be postponed until April 2020. This was due to happen from April 2019.
Employment Allowance (EA) restricted to ‘smaller’ businesses
The EA offers a reduction of £3,000 per annum in the amount of employer’s NI that a company has to pay. This allowance has now been around for several years. From April 2020, only ‘smaller’ businesses will be eligible for this exemption. By ‘smaller’, the Chancellor means companies with an annual NI liability of less than £100,000. So, for most of us, we’ll continue to benefit from the EA.
Capital gains tax exemption is up
The main rates of capital gains tax (CGT) remain unchanged at 18% (basic rate) and 28% (higher rate). However, the annual exemption will rise from its present level of £11,700 to £12,000 in 2019/20 meaning that an additional £300 of annual gains will be free of CGT.
Qualifying rules for entrepreneur relief (ER) tightened slightly
Business owners selling shares in their trading companies only have to pay a CGT rate of 10% (not the 18% or 28% referred to above). To benefit from this generous rate (known as ER), they have to have owned at least 5% of the share capital in the company for 12 months prior to disposing their shares. They must also have been either a director or employee of the company.
Fortunately, ER will remain available in 2019/20 but, to qualify for it, you will need to have held your shares for 24 months rather than 12. The other qualifying conditions remain the same. The lifetime limit for ER stays at £10m of qualifying gains.
Tax relief for buying goodwill might be on the way back
Until 8/7/15 a limited company could buy the goodwill of another business and then write off (amortise) that goodwill in its profit and loss account over a period of time, claiming tax relief on the amount written off. In July 2015 the laws were changed so that, for example, if your company paid £500,000 for the goodwill of another business, it would only be able to claim tax relief on the £500,000 once that other business was sold again (the £500,000 would be deducted from the sale proceeds and tax would be payable on the net gain).
The Chancellor has now said that tax relief on goodwill acquired will be reinstated from April 2019, although at this stage we are slightly unsure as to how this will work. A consultation document is going to be published in November so we’ll keep you posted on this one. We’re told that the tax relief will be available for the purchase of goodwill of businesses with ‘eligible intellectual property’. We’ll keep you updated on what this means over the coming months. However, if you’re considering purchasing the goodwill of another business, it may be worth putting those plans on hold until the precise mechanics of how the tax relief will be given becomes clear.
VAT thresholds frozen
There’s no change to the rate of VAT and the Chancellor announced that the registration threshold turnover of £85,000) and de-registration threshold (£83,000) will stay the same until April 2022 rather than increase annually. This will have the effect of bringing more small businesses into the VAT net.
Possibly more CGT to pay on selling your home if it has been rented out
If you sell your ‘principal private residence’ and it has only ever been used as your home (not let to anyone during the period you have owned it) then there’s no CGT to pay. If there have been periods during the time you have owned it when you did let it, rather than live in it, then that proportion of the gain in value relating to the let periods is generally subject to CGT. One concession in such circumstances, when calculating the proportion of the gain subject to CGT, is that the final 18 months of your ownership can be treated as if you were living there, even if the property was actually let during that period. From 2020/21 (so not next tax year but the one after) the 18 months exemption will be cut to just 9 months. On top of this, ‘lettings relief’, which offers exemption on gains when the main residence is let out up to a maximum of £40,000) will now be restricted so that it will only apply to periods where the owner jointly occupies the property with the tenant. Again, this will kick in from April 2020.
Directors beware of personal liability for HMRC debts
A director will sometimes give a personal guarantee (PG) for a company liability – that’s pretty common in smaller companies for business loans and asset finance. Other than this, directors/shareholders have not generally been responsible for the debts of their companies. If the company becomes insolvent, creditors (including HMRC) may not get paid.
Moving forward, HMRC will now get priority over other creditors in an insolvency situation. they will also be able to make directors jointly and severally liable for their companies’ tax liabilities in some situations. This change has been introduced to address the problem of directors who put companies into liquidation, owing HMRC (and others) and then simply start up a new company and, in some cases, do the same again – a process referred to as ‘phoenixing’.
The provisions to allow HMRC to make directors jointly and severally liable for company tax liabilities in certain situations will have effect from Royal Assent of Finance Bill 2019/20.
National Minimum Wage (NMW) up
In April 2019 the NMW will rise from £7.83 per hour to £8.21 – that’s by almost 4.9%. That’s the ‘main’ rate. Special rates apply to younger workers. For ages 21-24 it will rise from £7.38 to £7.70, for ages 18-20 from £5.90 to £6.15 and for ages 16-17 from £4.20 to £4.35. The apprentice rate increases from £3.70 to £3.90.
Massive increase in tax relief for capital expenditure
At present, a business can spend up to £200,000 (the Annual Investment Allowance or AIA) per annum on capital equipment (including commercial vehicles, plant and machinery and office equipment) and the entire amount spent can be deducted from the company’s profit for the purpose of calculating the tax liability in the year the assets were purchased. For example, your company may have made a profit of £300,000 but then gone and bought £200,000 of capital equipment. The fact that the capital equipment may have been on finance doesn’t matter – the whole £200,000 can be deducted to arrive at a taxable profit figure of just £100,000.
From 1/1/19 the AIA will be temporarily increased from £200,000 to £1m per annum. This would allow a company making up to £1m of annual profit to wipe out its corporation tax liability by investing in capital equipment. The temporary increase only applies for two years, with the AIA reverting back to £200,000 on 1/1/21.
Tax relief for ‘altering’ land confirmed
The Chancellor has clarified that expenditure incurred on altering land so that it is suitable for the installation of plant and machinery will qualify for capital allowances. So, if you had to spend £10,000 on such work, you’d be able to include that expenditure in your AIA (see above). This is with immediate effect (from yesterday).
Tax relief for electric charging points extended
In addition to the AIA, some capital purchases qualify for what’s known as a FYA (First Year Allowance). That means that the entire cost of the asset can be deducted from profits when calculating the tax liability – on top of the AIA. So, if a company had already spent £200,000 on capital purchases and ‘used up’ its AIA, it could also buy an asset qualifying for a FYA and deduct that too.
The current FYA status of new and unused electric vehicle charging points has been increased by four years to March 2023 – it was due to cease in March 2019.
Introduction of additional tax relief for buying brand new commercial premises
A new ‘structures and buildings allowance’ (SBA) will be introduced for expenditure on new constructions and on purchases of properties from developers. The buyer will be able to write off 2% of the qualifying cost per annum and claim tax relief on it. By ‘new’ constructions, we understand that this means any that commence from yesterday (29/10/18). Structures and buildings will include, hotels, care homes, offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses. There will be no balancing allowances or charges on disposal of the asset and future owners will be able to continue to claim the annual two percent allowance based on the original cost for the remainder of the 50 years (2% per annum).
You will still claim normal capital allowances on the cost of any integral fixtures in the property – and then claim the SBA on the balance.
So, let’s assume you bought a new commercial property in January 2020 for £1.5m. Let’s also assume that you engage a capital allowances specialist (please speak to us about this) who uncovers £500k of qualifying fixtures within the building. You’d then be able to claim normal capital allowances on the £500k. As the AIA will be £1m in January 2021, you’d be able to write off the entire £500k against your profits – substantially reducing your tax liability. On the remaining £1m of expenditure, you’d claim the new SBA at 2% per annum – so you could write off a further £20k in 2021 and £20k per annum every year after that.
Some slightly negative news on capital allowances
From April 2019, the rate of tax relief for assets that only qualify for the ‘special rate’ of capital allowances will be reduced from 8% to 6%. ‘Special rate’ assets mainly focus on assets found in buildings such as air-conditioning, lighting, lifts, cold water and solar shading. However, this relief is only useful where the AIA has not been available. With the AIA limit climbing from £200,000 to £1m, most capital expenditure will be relieved for tax purposes in the year it is incurred, lessening the blow of this small reduction.
A welcome reduction in business rates for some retailers
Retail premises with a rateable value of less than £51,000 will see their business rates reduced by 33% from April 2019 for a period of two years. Note that occupiers of premises with a rateable value of £15,000 and below already benefit from exemptions and reliefs and so will feel less of an impact from the new measure. The main beneficiaries will be those businesses trading from retail premises with a rateable value of somewhere between £15,000 and £51,000.
Restriction on R&D tax credits for loss-making companies
SME companies that do not have a corporation tax liability and incur R&D expenditure can currently obtain a repayable tax credit (RTC) equal to 14.5% of the qualifying expenditure. This is an excellent option for start-up companies which have not yet got to the point at which they are profitable. The RTC acts a little like grant funding for them, subsidising their R&D.
For company accounting period beginning on or after 1/4/20, the RTC will be capped at an amount equal to three times the company’s annual PAYE/NI liability. This is reminiscent of a similar cap that existed up to 2012, although less punitive.
This should be a call to action for entrepreneurs to get moving quickly on any planned R&D. For a company with a financial year end of 31 March, for example, the (uncapped) RTC can still be claimed for years ending 31 March 2019 and 31 March 2020.
Some companies use subcontractors to carry out R&D work. If they expect to make a loss (and will therefore be looking to make an RTC claim) they should consider (from April 2020) employing staff in-house to do the R&D work rather than outsourcing it. This will create a larger PAYE/NI liability and, with it, a higher cap for the RTC.
It’s worth pointing out that there have been no other changes to the R&D tax relief regime. It will continue to be of huge benefit to profitable companies that carry out any qualifying activities.