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Introduction

The Chancellor’s Autumn Budget 2017 was Mr Hammond’s second Budget of 2017. The key themes revolved around embracing the future, in particular the changes, challenges and opportunities facing the United Kingdom as we prepare for Brexit. The Low Incomes Tax Reform Group (LITRG) has examined all of the Budget announcements, to see how they will affect those on low to modest incomes. Some of the key facts and figures are explored below. In addition, the Chancellor reminded his audience of previously announced measures – this article includes a quick recap of those that affect the 2018/19 tax year.

Increases to the Personal Allowance and Higher Rate Threshold

The Chancellor announced that the personal allowance will increase from £11,500 to £11,850 from 6 April 2018 and the UK higher rate threshold will increase to £46,350 (from £45,000). For many, this is a welcome announcement as it will mean they have more cash in their pockets, however it does little to help those on the lowest incomes.

Those already earning under the current personal allowance of £11,500 will gain nothing from this change. Those earning above £11,500 may benefit, but by how much depends on whether they receive tax credits or other means-tested benefits such as universal credit or housing benefit.

Taxpayers who claim no benefits and tax credit claimants who have income above £11,500 should see the full benefit of the increase in personal allowance – making them £70 a year better off. However, those with incomes above £11,500 who are receiving universal credit will most likely see a reduction in their benefit. This is because universal credit, like other means tested benefits, is based on net income (after tax and National Insurance have been deducted). As the amount of tax they pay is reduced, their universal credit award is also reduced. Instead of gaining £70 a year from the increased personal allowance, they will only gain overall by £25.90 as their universal credit will be reduced by £44.10. In other words, they only gain 37% of the benefit of any increase in the personal allowance.

In order to help those on the very lowest incomes, another option would be to increase work allowances in universal credit and increase the first income threshold in working tax credit. These thresholds are the amounts that claimants can earn before their benefits start to be withdrawn. Increasing them would help those on the lowest incomes who currently see no benefit from any increase in the personal allowance, and provide a valuable work incentive.

Marriage Allowance – claims on behalf of deceased partners

The transferable marriage allowance was introduced in 2015 to enable a lower-earning spouse or civil partner to transfer 10% of their personal allowance to their partner, thereby reducing their tax bill by up to £230 a year in 2017/18. Certain conditions must be met for couples to be eligible to claim, one of which is that they must both be married to, or in a civil partnership with, each other at the time the claim is made. This precludes the making of any claim after one of the partners has died.

With effect from 29 November 2017, the government will now allow claims to the marriage allowance in cases where a partner has died before the claim is made, and such claims to be backdated by up to four years provided all other conditions for the allowance are met. This implements a long-standing recommendation by LITRG and it is warmly welcomed. The backdating provision should enable those who have been refused a claim on these grounds to re-apply.

Universal credit changes

The Chancellor confirmed a £1.5 billion package of changes to universal credit in order to address some of the recent concerns raised about the impact of roll-out on claimants. Although the changes are welcome, LITRG is disappointed that no changes were announced to the rules for self-employed claimants in universal credit. Since 2010, the group has been raising concerns about the design of universal credit for the self-employed. It outlined the main shortcomings of the system and proposed what it believes to be a workable alternative in its recently published report ‘Self-employed claimants of universal credit – lifting the burdens’. Without these changes, LITRG thinks there is a real risk that those thinking about starting out in self-employment will be dissuaded and those already in self-employment may be forced to give up.

Recognising the recent concerns raised both in Parliament and by third sector organisations about universal credit, the government has announced that it will:

• Offer an interest-free advance of up to a month’s worth of universal credit within five days for those who need it and who have an underlying entitlement to universal credit. The recovery period for these advances will be extended from the current six months to twelve months. This will be in place from January 2018.
• From February 2018, the seven-day waiting period will be removed, so that entitlement to universal credit starts on the first day of the application.
• From April 2018, those already on housing benefit will continue to receive their award for the first two weeks of their universal credit claim.
• It will be easier for claimants to have the housing element paid direct to their landlord.

Hidden in the accompanying Budget documents was confirmation that universal credit roll-out will slow down between February 2018 and April 2018 and that roll-out will not be complete until December 2018 (rather than September 2018 as previously announced).

Extending the scope of qualifying care relief to cover self-funded Shared Lives payments

The government has announced that it will amend qualifying care relief (a simplified way for certain paid carers to work out their taxable profits) to include Shared Lives schemes that are self-funded by the person receiving care. They say that the relief is being extended in this way to reflect current developments in the care sector.

LITRG welcomes this announcement. Under the current law on this area in order to be eligible for qualifying care relief, the provision of care must (amongst other things) be by way of a placement under a specified social care scheme. What qualifies as a specified social care scheme is then set out in secondary legislation. In all the specified social care schemes, there is a condition which requires that Y (the carer) receives payment from L (the local authority) for providing X's care (the person being cared for). On this basis, shared lives carers looking after someone who is a self-funder have thus far not been entitled to qualifying care relief.

This Autumn Budget 2017 measure expands the scope of qualifying care relief to cover payments made by the care recipient through the ‘Shared Lives scheme’ to qualify for the relief. It is worth us pointing out that opting for qualifying care relief is only an alternative to working out one’s trading profit on ordinary self-assessment principles. If not entitled to qualifying care relief, one simply declares the payments one receives for providing care minus expenses wholly and exclusively incurred in looking after the service user. The result will often be the same, i.e. no tax – it is just that one has the administrative burden of completing and submitting the tax return form.

The changes will have effect for the tax year 2017/2018.

National Minimum Wage and National Living Wage

Following the recommendations of the independent Low Pay Commission (LPC), the government has announced it will increase the National Living Wage (NLW) by 4.4% from £7.50 to £7.83 from April 2018. The government will also accept all of the LPC’s recommendations for the other National Minimum Wage (NMW) rates to apply from April 2018. The recommendations include:

• increasing the rate for 21- to 24-year-olds by 4.7% from £7.05 to £7.38 per hour
• increasing the rate for 18- to 20-year-olds by 5.4% from £5.60 to £5.90 per hour
• increasing the rate for 16- to 17-year-olds by 3.7% from £4.05 to £4.20 per hour
• increasing the rate for apprentices by 5.7% from £3.50 to £3.70 per hour.

The government says that, in total, earnings for a full-time worker on the NMW will have increased by over £2,000 a year since the introduction of the NLW in April 2016. However, while this may be true for a full-time worker, it will not be the case for agency workers or zero-hours contract workers who cannot work sufficient hours to achieve this.

The recent recommendation from the Work & Pensions Committee and the Business, Energy & Industrial Strategy Committee that ‘the Government work with the Low Pay Commission to pilot, for workers who work non-contracted hours, a pay premium on the National Minimum Wage and National Living Wage’ is therefore of interest.

LITRG thinks it would be worthwhile for the government to look into this as a follow-up to the report of Matthew Taylor’s review into modern employment practices. From the Autumn Budget, however, it seems that the government is only going to look into ‘employment status’ saying it would “publish a discussion paper as part of the response to Matthew Taylor’s review of employment practices in the modern economy, exploring the case and options for longer-term reform to make the employment status tests for both employment rights and tax clearer. The government recognises that this is an important and complex issue, and so will work with stakeholders to ensure that any potential changes are considered carefully.”

State Pension and Pension Credit

The basic State Pension will rise in April 2018 by 3% – this will be a cash increase of £3.65 per week for the full basic State Pension. There will also be an increase to the Standard Minimum Guarantee in Pension Credit to match the cash rise in the basic State Pension. The full new State Pension will also increase from April 2018, rising by £4.80 per week.

Off-payroll working reform: extension to the private sector

The government has announced it will consult in 2018 on whether to extend the public sector off-payroll reforms into the private sector. The public sector changes mean that if a person is working through their own limited company (ltd) in the public sector then they are no longer in charge of determining if the intermediaries legislation (commonly known as IR35) applies. The ‘IR35’ determination now falls to the public body and if it applies, Pay As You Earn (PAYE) tax and National Insurance contributions (NIC) are withheld at source on any payments to the ltd.

Many low income workers often find themselves offered work in the private sector on the basis that they will structure their work through a ltd. Because IR35 is not enforced consistently (which would ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a ltd) this can help save both them and their engagers tax. However, often the fees that they then have to pay to an intermediary to help them set up and run the ltd company far outweigh any savings that the individual may make.

In addition, sometimes the intermediary is unscrupulous in some way, leaving the workers in debt to HMRC (see this BBC news piece: Lorry drivers stung over accounting firm 'tax dodge'); at other times LITRG is aware that the relationship between the worker and the intermediary can trail off, leaving the worker with messy ltd compliance issues that they do not understand.

On this basis, LITRG cautiously welcomes the announcement of this consultation, as extending the IR35 public sector reforms to the private sector could in time help remove the ltd ‘incentive’.

Employee Expenses

Further to HM Treasury’s call for evidence on the taxation of employee business expenses, the government is to undertake work to improve the guidance on employee expenses, particularly on travel and subsistence and the process for claiming tax relief on non-reimbursed employment expenses. This is expected to involve the participation of external stakeholders, such as LITRG.

On travel and subsistence, the government recently reviewed the rules in this area through a discussion paper in 2015-16, concluding that the introduction of new rules would risk substituting one set of complexities for another, and there was little consensus around the direction reform could take.

However, it seems the government is now open to further discussions about travel and subsistence issues.

The full response to the call for evidence is expected to be published on the GOV.UK website in early December.

Making Tax Digital penalties

Following consultation on various options put forward by HMRC for a new penalty regime for the Making Tax Digital programme, the government has now announced that it will be implementing a points-based penalty system in due course. The detail has yet to be published but broadly the idea is that points will be incurred for the late filing (or non-filing) of a return required under the MTD rules in a similar way to points incurred for driving offences. When a certain number of points have accumulated, a financial penalty could then be charged.

HMRC are also to consult further on the possibility of standardising penalties and interest for late paid tax and tax repayments across all taxes with a view to ensuring the system is fair, simple and effective across different taxes.

Self assessment debts

From 6 April 2019, HMRC will be allowed to collect tax due under self assessment through adjustments to PAYE tax codes, which they say will enable them to collect self assessment tax debts ‘in closer to real-time’. This could affect taxpayers who are employed or in receipt of an occupational or personal pension but who have to complete an annual self assessment tax return.

Following the introduction of HMRC’s ‘dynamic coding’ initiative this summer, tax codes are now amended in response to changes to an individual’s circumstances as soon as they become known, so that HMRC can ensure most taxpayers have paid the correct amount of tax by the end of the tax year, rather than having a tax bill after the tax year end. This is resulting in frequent changes to tax codes and significant variations in take-home pay for many, which is in turn causing some distress and confusion. Therefore, LITRG would not want to see self assessment debts collected through PAYE tax codes until the use of Personal Tax Accounts (PTA) is easy and commonplace, as the main mechanism for challenging changes to a tax code is via the PTA.

Mileage Rates – extension to landlords

Landlords will now be able to calculate their tax allowable motoring expenses using the mileage allowance rates set by HMRC, based on the number of business miles they travel in connection with their property businesses, rather than doing a more complicated calculation to apportion the car running costs between business and non-business use. This puts landlords in the same position as the self-employed and will be a welcome simplification for many.

VAT registration threshold

The VAT registration threshold will remain at £85,000 for the next two tax years, from April 2018. This provides some certainty for small businesses.

Following the Office of Tax Simplification’s report Value Added Tax: Routes to Simplification, the government will consult on the design of the threshold, to see whether this could be improved.

Rent-a-room relief – new call for evidence

The government intends to publish a call for evidence to establish how rent-a-room relief is used currently. This is with a view to ensuring the relief is better targeted at longer-term lettings.

Armed Forces personnel accommodation

An income tax and NIC exemption will be introduced for certain allowances paid to Armed Forces personnel for renting or maintaining accommodation in the UK private market. This will support the Ministry of Defence’s aim to provide a more flexible, attractive and better value-for-money approach to accommodation.

ISA 2018/19

The ISA annual investment limit will remain unchanged at £20,000 for 2018/19. The limit for Junior ISAs and Child Trust Funds will increase to £4,260 a year.

Capital Gains Tax

The capital gains tax annual exempt amount will increase from £11,300 for individuals and personal representatives and £5,650 for most trustees of a settlement, to £11,700 and £5,850 respectively with effect from April 2018.

Student loans

It is welcome news that the Student Loans Company (SLC) and HMRC will change their processes by April 2019 so that loan repayment records are updated more frequently and hopefully this should stop the problem of loan overpayments. Until this has been achieved it is recommended that if you only have two years of repayments left then you should switch to paying the SLC directly as this should also stop the problem of overpaying your student loan.

Insolvency and phoenixism risks

The government has announced it will explore further means for tackling the small minority of taxpayers who deliberately abuse the insolvency regime in trying to avoid or evade their tax liabilities, including through the use of phoenixism.

LITRG welcomes this announcement. The insolvency regime is potentially one of the reasons behind the somewhat cavalier behaviour in evidence from certain employment intermediaries.

A discussion document will be published in 2018.

Recap of previously announced changes that affect 2017/18

Changes to National Insurance contributions for the self-employed

The Budget confirmed the previous announcement that, to ensure there is enough time to work with Parliament and stakeholders on the detail of reforms to simplify the NIC system, the government will delay implementing a series of NIC policies by one year. These are the abolition of Class 2 NIC, reforms to the NIC treatment of termination payments, and changes to the NIC treatment of sporting testimonials. These are delayed to 6 April 2019.

There will be no increase in the main rate of Class 4 NIC. This will remain at 9%.

Making Tax Digital

As announced in July and legislated for in the Finance (No. 2) Act 2017, no business will be mandated to use MTD until April 2019. Only those with turnover above the VAT threshold will be mandated at that point, and then only for VAT obligations. The scope of MTD will not be widened before the system has been shown to work well, and not before April 2020 at the earliest.

Conclusion

LITRG welcomes a number of the announcements in the Budget, in particular the changes to Universal Credit, the extension of Marriage Allowance to allow claims on behalf of deceased partners and the extension of the scope of qualifying care relief to cover self-funded Shared Lives payments. However, there have been a number of missed opportunities, for example the government could have taken steps to address flaws in the current Universal Credit system in relation to the self-employed. In addition, the headline-grabbing increases to the Personal Allowance do not assist those on low incomes to the extent claimed. So, although the Chancellor has made some changes and dealt with some challenges, he has certainly not seized all of the opportunities available to him.

Useful links

Self-employed claimants of universal credit – lifting the burdens
Committees publish Bill to end exploitation in the gig economy
BBC News piece: Lorry drivers stung over accounting firm 'tax dodge'
Taxation of employee expenses call for evidence
Travel and subsistence framework: discussion paper