The 2018 Budget
Sarah Hamilton - November 1st, 2018
The Budget on 29 October 2018 was perhaps surprising more for what was not said rather than that which was. Despite much advance speculation, Philip Hammond made no mention of squeezing the tax reliefs on pension contributions, nor were there any changes to Inheritance Tax. Perhaps Mr Hammond is keeping these potential sources of increased tax revenues up his sleeve for the next Budget which, if there is a no deal Brexit, might be in Spring 2019.
There were welcome measures to encourage business investment in plant and machinery through a temporary 2 year increase with effect from 1/1/19 in the Annual Investment Allowance to £1 million (up from £200,000). Furthermore Mr Hammond introduced a permanent tax relief for new non-residential structures which will be eligible for a 2% per annum capital allowance, transferable on change of owner, so the original cost can be claimed over 50 years. This is available where the contract for the build is entered into after 29/10/18 – bitterly galling for those with building projects already underway.
One area of Capital Allowances which is being reduced is that concerning the rate applicable to assets qualifying at the “special rate” which currently are written down at 8% per annum – this being reduced to 6% from April 2019.
There had been fears that Entrepreneurs Relief would be scrapped. Under this relief business owners pay a lower Capital Gains Tax of 10% when they sell their business. Mr Hammond said that Entrepreneurs (which includes many of our clients) are “at the heart of our dynamic economy” and rejected the calls to withdraw the relief. However, the rules have been tightened – the minimum ownership period prior to sale has doubled from one to two years and the Entrepreneurs must own shares entitling them to 5% of distributable profits and net assets of the business. Whilst this change should not disadvantage the majority of Entrepreneurs it is as always important to check the conditions are met before entering into a contract.
Freelancers working for medium and large businesses who cannot prove they are genuinely self-employed will face higher taxes. The Treasury has long been trying to stop such forms of disguised employment, but the fiendishly complex off-payroll rules and “IR 35” legislation have not been able to be widely enforced. However, from April 2020 the onus will be on bigger companies (as is already the case in the Public sector) themselves to determine whether contractors are genuine freelancers – and if the answer is no, then the companies are responsible for deducting the correct tax for the deemed employment. We can discuss with you how you may be affected by these rules.
Capital Gains Tax (CGT) on private residences is under consultation. It seems likely that the letting relief, which reduces CGT on property which has also at some point been the vendors main residence will only apply where the owner is sharing occupancy, while the final period exemption will be halved from 18 months to 9 months. This could disadvantage divorcing couples who take some time to sort out selling the marital home, and others who are caught by the slowing down in the property market. Perhaps reflecting this there is an extension to the time limit for claiming back additional rate stamp duty land tax (SDLT) paid when a second property is purchased; in future providing the original property is sold within 3 years the 3% additional SDLT can be clawed back. Also related to property, the proposed Shared Occupancy Test for rent-a-room relief has been deferred/cancelled.
Businesses with rateable values of less than £51,000 are to receive a one third discount off their rates bill for two years, with the aim being to boost ailing high street retailers. However as this operates on top of the existing small business relief scheme (which exempts businesses with a rateable value of below £12,000) this may not be as widely beneficial as it seems at first sight.
A new measure which many will be pleased to see is the introduction of a Digital Services Tax which will attempt to recover tax from the big global digital business. This is set to be introduced from April 2020 and will be a 2% tax applied on the revenues of specific digital business models.
The Chancellor has rejected calls to look at the current level at which a business must register for VAT and that limit will remain at £85,000 until April 2022.
Finally, as has been much heralded, the tax free personal allowance is extended to £12,500 for 2019/20 and the basic rate tax band will become £37,500 which means that 40% tax is payable on total income of £50,000 plus (one year earlier than originally planned). Please note that these levels will not increase again until April 2021. As is currently the case, the personal allowance is withdrawn on a tapered basis for those with income in excess of £100,000, and 45% tax bites on income over £150,000. Making less headlines is the fact that the NI Upper Earnings Limit will rise in line with the Basic Rate band and therefore employees with pay in excess of £50,000 will pay 12% NI on more of their earnings before the rate reduces to 2%.
Many are asking if this is the Budget that signifies the end of austerity, as has been claimed? The calculations are difficult due to the Brexit uncertainties, but rest assured that at Richard Sexton & Co we will remain vigilant and thoughtful as to how changing tax legislation impacts on each of our clients to ensure we can discuss challenges and opportunities as they arise.
The full budget document can be found at www.gov.uk Section 4 “Tax” sets out all of the points raised above, alongside the Governments reasoning for many of the policies being adopted.