Budget 2017 - The working world
Most of us are involved in the working world as business owners, entrepreneurs or employees. Unfortunately, tax often intrudes into that life and below we consider some of the changes ahead.
Personal service companies
Where individuals offer their personal services through a company, the engager will generally not be liable for employers’ National Insurance Contributions (NICs) at 13.8% and neither will the individual be liable for employee NICs. However, this may seem too good to be true and there are indeed rules to catch this loss of tax and NICs, known as IR35, where the individual is in reality an employee. The personal service company should, under IR35, broadly account for PAYE and NICs on its income. In practice, taxpayers rarely seem to self-assess that these rules apply to them.
The government reformed the off-payroll working rules for engagements in the public sector in April 2017. Under these special rules the public sector employer, agency, or third party that pays the worker’s intermediary must decide whether the rules apply to a contract. If it does then they must account for the liabilities and do so through the PAYE system.
These rules are designed to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. The government are now going to consult on whether these rules should be extended to the private sector! Developments in this area should be carefully monitored.
The Disguised Remuneration legislation has applied since 2012. Broadly it seeks to deal with “avoidance“ schemes where a company has formed an Employee Benefit Trust (EBT) and then the EBT went on to lend funds to employees who had free use of the money. Such cases have been a matter of much wrangling through the courts, in particular the Rangers case is probably the most high profile and has finally concluded in favour of HMRC. The government is passing legislation to make it crystal clear that such loans are subject to PAYE tax and NICs. In particular any outstanding loans at 6 April 2019 will automatically be subject to PAYE tax and NICs. In practice these rules have wider reach and can catch most payments of remuneration (in money or money’s worth) through third parties. The main focus of the changes are for those that continue to have loans from EBT structures to review the implications for their circumstances.
Where termination payments are made to employees and they had a period of foreign service (i.e. they worked abroad) it was often possible to receive the payment exempt from income tax in full or in part. For employment contracts terminated on or after 6 April 2018 this exemption no longer applies to those employees that are UK tax resident on termination. For someone who has worked abroad for most of their career, the timing of their return to the UK, in the future, is therefore crucial.
The personal allowance will increase from 6 April 2018 to £11,850 and the amount upon which basic rate tax will be paid rises to £46,350. A higher rate taxpayer will typically be better off by £270. Whilst not part of the Budget, it is worth remembering that the dividend allowance of £5,000 is due to be reduced to £2,000 from 6 April 2018. It is sensible to review making use of this allowance fully ahead of the tax year end (5 April 2018).
Tax relief for businesses on capital spend
The Annual Investment Allowance, the amount on which a business or company can deduct capital expenditure against their taxable profits at 100% remains at £200,000 and that is the position for the foreseeable future. For most small to medium sized businesses this is a much used relief and most often covers their annual capital expenditure.
On top of this though there are further 100% First Year Allowances (FYA). One such 100% allowance relates to expenditure on energy saving plant and machinery. There is a specific list as to what items qualify and this is annually updated. It is necessary to check registration of the assets in advance as once expenditure is incurred it is too late to obtain registration. In the case of the energy saving allowance, where the company is loss making it can surrender the losses attributable to the qualifying expenditure in return for a tax credit equal to two thirds of the corporation tax rate. This rebate was due to expire on 31 March 2018 but has now been extended by five years to 31 March 2023.
An additional 100% FYA is available on the acquisition of zero emission goods vehicles. This was due to expire on 31 March 2018 but has been extended for a further three years. This is an uncapped relief.
Research & Development (R&D) costs incurred by companies
Increasing the amount of R&D carried out by companies is a key part of the government’s aim to increase productivity and promote growth. There are two types of R&D relief. One is for SMEs and the other is for large companies (more than 500 employees or turnover over €100million and gross assets over €86million).
SMEs may claim the large company relief if preferred or because they are not eligible for the small company relief (e.g. they receive subsidies). In the case of the large company relief, rather than claiming an enhanced deduction against profits or a tax credit repayment, a credit equal to 11% of the qualifying expenditure can be claimed and used to set against the company’s tax liabilities in the same accounting period. From 1 January 2018 this will increase to 12%.
Changes to the taxation of cars or vans provided to employees or directors
The cash equivalent where a van is made available to an employee for private use will increase from £3,230 to £3,350 for 2018 to 2019. The value of the multiplier for calculating the cash equivalent of the fuel benefit for a car will increase from £22,600 to £23,400 for 2018 to 2019. The flat rate charge for the van fuel benefit will be increased from £610 to £633 for 2018 to 2019. These further increases make the provision of a car to an employee even more tax inefficient. This is even more the case for diesel cars where the taxable benefit is subject to a 3% surcharge which is increasing to 4% from 6 April 2018.
VAT: registration threshold
The VAT registration threshold will remain at £85,000 for two years from April 2018 despite the recommendation from the Office of Tax Simplification to reduce it to £25,000. However, the government will continue to “consult on the design of the threshold”, so additional changes are possible.
If you would like to discuss this further please get in contact with David Hadley or your usual Mercer & Hole contact.
Date: 23rd November, 2017
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