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The Chancellor of the Exchequer used the Autumn Budget in the UK to unveil some significant tax changes.
However, for small businesses and many self-employed, the best news was that the government has listened to the vast number of representations, including those of CooperFaure, and have committed to maintain the VAT compulsory registration threshold at £85,000 for two years from April 2018 while a wider consultation is undertaking on the design and level of the threshold.
Among the key proposals in the Budget are:
There was welcome news on the doubling the annual allowance from 6th April 2018 for people investing in knowledge-intensive companies through the Enterprise Investment Scheme (EIS) to £2m and the annual investment those companies can receive through EIS and the Venture Capital Trust schemes to £10m.
However, there is a commitment on introducing a new test to reduce the scope for investment in low-risk businesses through these schemes together with the Seed Enterprise Investment Scheme.
This will be a principles-based test to determine if, at the time of the investment, a company is a genuine entrepreneurial company.
For the tax reliefs to apply on investments from 6th April 2018, the requirement will be both that a company has objectives to grow and develop and that there is significant risk of loss of capital. In other words, where the amount of the loss could be greater than the net return to the investor.
The HMRC will cease to provide Advance Assurances on proposed investments that would appear to meet the new conditions from the date of the publication of draft guidance which is yet to be confirmed.
For contractors, there may be troubled time ahead. Despite the HMRC’s constant reassurance that this would not be the case, the Budget Report states, “The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. Early indications are that public-sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, 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 has committed to a full consultation in 2018 on this.
Over the weekend, we will be publishing a detailed review of the Budget together with our 2017-18 UK Tax Guide.
In the meantime, if you would like to discuss how the Budget or the new measures that come into effect from April 2018 will affect you, please email us at tax@cooperfaure.co.uk.
The 2017 UK Budget will be delivered to parliament by the Chancellor of the Exchequer on Wednesday this week and, in advance of this, the press has been awash with speculation of what may be included.
Whilst much of this is driven by special interest groups, a good measure is ‘kite-flying’ by the government to gauge the public reaction to mooted proposals. It is clear that the public finances are in a perilous state. Rather than overtly increasing tax levels, there seems to be more appetite to reduce tax thresholds or reliefs to bridge the gap, with entrepreneurs and investors potentially paying the price.
As ever, CooperFaure will be streaming a live Twitter feed whilst the Budget is being delivered followed by a digest newsletter on Wednesday evening and a detailed review on Thursday morning.
In particular, we will be watching and reporting as to whether any of the following three measures are introduced:
A Reduction to the VAT Registration Threshold
The current annual turnover threshold where a business has to register for VAT is £85,000. The Office for Tax Simplification undertook a review earlier in the year which outlined that this level was one of the highest in the world and a potential deterrent to business growth. It suggested that by reducing the threshold to the European Union average of £26,000 it would add around 2bn to the current annual VAT raise of £120bn.
However, no account seems to have been taken on the practical impact on the small business or the self-employed person that would be corralled into VAT for the first time.
For those whose customers are individuals and, therefore, unable to reclaim the VAT, it would mean either a 20% price increase or the business absorbing the VAT into their current prices. Not to mention that VAT is a complicated system that, in many cases, would create an additional cost for the professional support to ensure that the VAT return submissions are correct.
The likely reality is that cutting the VAT threshold would actually result in many small businesses ceasing to trade.
A Change to the Enterprise Investment Scheme Rules
Another review this year, this time carried out by HMRC, was into Patient Capital, the mechanisms that allow individual investors to claim tax relief on their investments into UK incorporated businesses.
Under particular scrutiny was the Enterprise Investment Scheme that allows the individual investor to claim 30% of their investment in a qualifying company as an Income Tax relief. The view taken was that the scheme was focused more on the tax incentives for the wealthy rather than the investment.
As a result, three options have been floated:
Although HMRC figures show that £1.9bn was invested under Enterprise Investment Schemes in the 2016-17 tax year, no account seems to have been taken on the impact on both early stage and developing businesses if the rules are changed which are potentially catastrophic.
These schemes are a vital lifeblood and, if investors are not incentivised to take a risk with their money, as there are no clear alternative sources of funding many businesses will stall or fail.
Changes to the Taxation of Dividends
In the spring Budget earlier in the year, the Chancellor announced that the annual tax-free Dividend Allowance would be cut from £5,000 to £2,000 with effect from the 2018-19 tax year.
The snap General Election resulted in this measure being dropped from the trimmed Finance Act.
However, the expectation is that, at the very least, this will be re-introduced with further speculation that the Dividend Allowance may be abolished completely or the tax rates on Dividends increased.
At the moment the tax rate on Dividends for a basic rate tax-payer is 7.5% compared to 20.0% Income Tax. For a higher rate tax-payer, the rates are 32.5% and 40.0% respectively and, for an additional rate tax-payer, 38.1% and 45.0%.
Closing the gap between the tax level on dividends and on other income is seen as an easy win for the Treasury.
However, remunerating business owners and investors through dividends based on the success of the business is a key financial strategy that encourages growth by reducing the burden on operating costs.
At a time of great economic uncertainty, it is counter-intuitive to make the landscape less attractive either to establish a business or to encourage a business to thrive and prosper. All three of these measures are fraught with risks that appear not to have been factored into the stark mathematical calculations.
As has been seen countless times, the effect of tax changes can diverge spectacularly from the anticipated result. For example, when the Off-Payroll Working Through An Intermediary, commonly known as IR35, was introduced in April 2000, the expectation was that there would be an additional Income Tax and National Insurance raise of £300m a year. In reality, a Freedom of Information response exposed that only £9.2m had been raised in total between the 2002-03 and 2007-08 tax years.
As was seen with proposed change to the National Insurance rates for the self-employed in the last Budget, a backlash of public opinion can cause a hasty reversal of policy. If any or all of these measures are introduced in the Budget, we encourage everyone to make their voice heard.