After having two full budgets in 2017, Philip Hammond presented his first budget for 2018 yesterday, outlining his fiscal plans for the year ahead. Despite being mentioned by name only once, Brexit remained the elephant in the room and Hammond has made it abundantly clear through various other channels that he is keeping a war-chest in reserve in the event of a no deal exit of the EU next March. Indeed, he has not been shy in saying that he is prepared to present an earlier budget next year, should he (and the UK economy) deem it necessary.
Nevertheless, this was something of a giveaway budget: Extra funding for the NHS, Defence, Universal Credit, and an appreciable income tax cut for many will have made this a popular budget with the electorate – with rumours of an early general election continuing to circulate. The new Digital Services Tax will also be a popular move – and at 2% of turnover, one could be forgiven for thinking that this would bring in a huge amount of tax revenue. However, the published costings do not appear to bear this out and it is the ongoing reform of the off-payroll working rules (known as IR35) that are set to bring in far greater amounts of tax revenue.
To be able to fund this spending, it is clear that the Chancellor has greatly relaxed his commitment to balancing the books, with UK borrowing set to reduce more slowly than previously set out, and it was as a result of this that he was able to announce the approaching end of austerity. It would only be slightly unfair to comment that a large amount of his budget leeway was allowed following positive readjustments of the Office for Budget Responsibility’s forecasts of government revenue for the next few years.
We have set out below the headline points that you need to be aware of.
Points for individuals
The personal income tax allowance is to increase from £11,850 for the current tax year, up to £12,500 from April 2019 and April 2020 before increasing in line with the Consumer Prices Index (CPI). Equally, the higher rate tax threshold is to increase from £46,350 for the current tax year to £50,000 from April 2019 and April 2020, for England, Wales and Northern Ireland. It remains the responsibility of the Scottish Parliament to set the basic rate income tax limit for Scotland.
Pensions tax relief
The lifetime allowance limit for pension savings will increase from £1,030,000 for 2018/19 up to £1,055,000 for 2019/2020.
Stamp Duty Land Tax (SDLT)
The Government will extend first-time buyers relief in England and Northern Ireland so that all qualifying shared ownership property purchasers can benefit, whether or not the purchaser elects to pay SDLT on the market value of the property. This change will apply to relevant transactions with an effective date on or after 29 October 2018, and will also be backdated to 22 November 2017 so that those eligible who have not previously claimed first-time buyers relief will be able to amend their SDLT return to claim a refund.
Capital Gains Tax: Private residence relief
The final period exemption which allows you to claim relief from Capital Gains Tax whilst not living in the property during the period prior to disposal will be reduced from 18 months to 9 months from 6 April 2019. The government will consult on these changes and there will be no changes to the 36 months final period exemption available to disabled people or those living in a care home.
Capital Gains Tax: Private residence relief
From 6 April 2020, the government will reform lettings relief so that it only applies in circumstances where the owner of the property is in shared occupancy with the tenant.
Capital Gains Tax: Entrepreneurs relief
Entrepreneurs relief provides valuable relief from Capital Gains Tax by charging qualifying disposals of company shares and assets at a beneficial tax rate of 10%, rather than at the full rate of 20%. Two changes to the rules have been introduced that will mean greater thought will be required when undertaking relevant transactions.
- The first change increases the qualifying holding period of assets from one year to two years, with effect from April 2019;
- The second change tightens the rules with immediate effect relating to company shares, meaning that qualifying company share rights must now include share capital, voting and distributable profits and net assets of the company.
National Minimum Wage will rise from £7.83 per hour to £8.21 per hour from April 2019 for workers over 24. Younger workers are also set to receive rises on their minimum income levels.
IR35 refers to the rules covering off-payroll working. This will become an issue for more medium sized businesses from 2020 when they will need to decide whether people working for them should be employees or are legitimate contractors. The distinction is not always clear cut but the penalties and consequences for the those engaging the workers could be significant.
The equitable taxation of trusts continues to vex the Treasury. A consultation is underway that looks to make the taxation of trusts ‘ simpler, fairer and more transparent’. More detail will be published in due course.
Points for businesses
The Annual Investment Allowance will be increased to £1 million for all qualifying expenditure on plant and machinery and integral features made on or after 1 January 2019. This increase is set to last for two years, to help stimulate business investments. From April 2019, the capital allowances rate for the special rate pool will be reduced from 8% to 6% to bring it in line with the average accounts depreciation. A new capital allowance (Structures and Buildings Allowance) will be introduced for new non-residential structures and buildings. Qualifying construction works will be eligible for capital allowances at 2% where contracts are entered into on or after 29 October 2018.
Digital Services Tax
From April 2020, a new tax on the revenues of certain digital businesses will be introduced, at a rate of 2%. This tax will apply to revenues generated from search engines, social media platforms and online marketplaces. However, it will only apply to groups that generate global revenues from these sources in excess of £500 million per annum. The tax is only intended to be in place until an alternative reform is introduced as part of the G20 and OECD discussions.
Reform of Corporate Loss Relief Rules
From 1 April 2020, the income loss relief restrictions for large businesses will also apply to capital losses. Companies with brought forward capital losses in excess of £5 million will be restricted on the proportion of annual capital gains that can be relieved by these losses to 50%. The government also announced its intention to amend the loss relief rules introduced in April 2017 to ensure this legislation is not abused.
Intangible Fixed Asset Regime
Relief for the cost of goodwill will be introduced from April 2019 in the acquisition of businesses with eligible intellectual property. This is a part reversal of the restriction of relief for goodwill on acquisitions that was introduced in 2015. In addition, the de-grouping charge rules will be amended so that a charge will not arise where the de-grouping comes as a result of a share disposal that qualifies for the Substantial Shareholding Exemption.
From April 2019, business rates for retail properties with a rateable value below £51,000 are being reduced by one-third for two years. Other business rates reliefs and discounts are being introduced for public lavatories and local newspapers.
R&D tax credit claims for SMEs
A further cap will be introduced in respect of the R&D tax credit that can be received as a result of surrendering losses arising from the making of R&D claims. From 1 April 2020, the amount of credit that can be received will be restricted to three times the company’s total PAYE and NIC liability each year.
As announced at the Autumn 2017 Budget, legislation will be introduced in the Finance Bill 2018-19 that aims to prevent UK businesses from avoiding UK tax by arranging for their UK taxable profits to accrue in entities resident in territories with significantly lower tax rates than the UK. In those circumstances, UK taxable profits will be increased to the actual, commercial level. This applies to both corporates and sole traders/partnerships and will apply from April 2019. The government has also pledged additional legislation in respect of international tax enforcement and offshore tax strategies.
Businesses in Insolvency
From April 2020, when a business enters insolvency, HMRC will become a preferred creditor for taxes collected and held by businesses on behalf of other taxpayers (eg. VAT, PAYE and employee NICs). Following Royal Assent of the Finance Bill 2019-20, directors involved in tax avoidance, evasion or phoenixism will be jointly and severally liable for company tax liabilities where there is a risk that the company may deliberately enter into insolvency.
The threshold at which a business is required to register and start charging VAT is to remain unchanged at £85,000 until April 2022. With inflation currently nudging along at around 2.5%, this measure will bring more businesses within the scope of VAT over the next few years.
VAT groups can be a useful administrative saving for companies within a group with common ownership. New rules will be introduced to allow certain ‘non-corporate entities’ (yet to be defined) to be introduced to VAT groups. It is expected that this will include UK branches of overseas companies.
It should never be assumed that charities are exempt from tax on their trading income. Historically, a charity with up to £50,000 of trading income (not profit) would be exempt from paying tax on this income and, in a welcome move, this limit has now been increased to £80,000.
Employers allowance for NIC
The £3,000 credit against an employer’s annual NIC bill will now be limited to employers with a total NIC bill of less than £100,000.