The Positives: It could have been worse
The Negatives: It very soon will be
The general consensus appears to be that this Budget was uneventful. But some of the manoeuvring does not augur well.
Good Tax Points
Making Tax Digital
Businesses with turnovers below the VAT registration threshold will be able to defer the onslaught – sorry, onset – of MTD by a whole 12 months to commence April 2019. Yay. If you thought quarterly reporting was an end unto itself, then you credit HMRC with too little imagination.
3 measures were announced in relation to Small Business Rates Relief (SBRR):
- Small businesses transitioning from SBRR will see bills capped at no more than the greater of £600 or the real terms transitional relief cap for small businesses each year.
- English local authorities will be provided with funding to support “hard cases” on a discretionary basis
- Public houses with a rateable value of up to £100,000 will get a discount of up to £1,000, for one year from April 2017.
I seem to recall that business rates are intended to be revenue-neutral overall; it is perhaps right, then, to focus on alleviating the rate of increase, rather than the increases themselves – if other businesses are set to benefit from corresponding reductions.
Research & Development Tax Incentives
The government has made a pinkie-promise to improve the administration of R&D. To be fair, I think many of the HMRC officers who deal with claims are amongst the most pro-business a taxpayer is likely to meet.
Stamp Duty Land Tax
Apparently, the government intended to start demanding SDLT on dwellings be paid within 14 days, “some time” around 2017 – 2018. That has now been deferred, beyond April 2018. (2.31 OOTLAR)
Yup, that’s it.
Bad Tax Points
Employee Expenses – Those 3 Little Words…
The government will publish a “call for evidence”, supposedly the better to understand the use of Income Tax relief for employees’ expenses. I have warned before that those 3 words are a ruse, whose real purpose is to cast around for the most meagre of evidence to support the most outrageous of proposals. I mean, it’s not as if HMRC lacked an appreciation of the salient points – or employees to enquire of. “Hmm. Why exactly have we been allowing tax relief for these expenses for the last umpteen decades, I wonder..?” I suppose if you can disallow BTL landlords’ finance costs on the flimsiest of “logic”, then nothing is off the table. (2.4 OOTLAR)
VAT and Construction Services
There are concerns that there are issues with accounting for VAT on supplies of labour in the construction sector. One of the proposals is – I kid you not – to impose a reverse charge. On payments to labourers. Good luck with that. (2.30 OOTLAR)
Clearly, we need stronger penalties for “failures to notify”, because the fact that taxpayers can sometimes avoid the penalty because they don’t owe tax is inconsistent with the rest of the penalty regime.
Oh, and we obviously need a penalty regime for Making Tax Digital: the government might have almost no details yet on how the rules will actually work, but that should not stop it from punishing taxpayers who fail to follow those rules. (2.32, 2.34 OOTLAR)
Money Purchase Annual Allowance Restricted
The Money Purchase Annual Allowance (MPAA) will be restricted from £10,000 to £4,000 per tax year from 6 April 2017. The MPAA is triggered once an individual “flexibly accesses” their money purchase pension savings, and caps the amount that might be re-cycled to accrue further tax relief. (TIIN)
Transfers / Appropriations to Trading Stock
According to the legislation, an appropriation to trading stock triggers an immediate charge to Capital Gains Tax, up to market value – even though nothing has actually been sold yet. Nevertheless, it is possible to elect to postpone the gain so that it is effectively converted into trading profit. (TCGA 1992 s 161A) Up until 8 March 2017, the same would apply to capital losses – the election could work effectively to convert a capital loss into a trading loss. Note the symmetry, or balance, or impartiality, of the election.
For appropriations on or after 8 March 2017, however, the election will be permitted only when the asset is standing at a capital gain. The clear inference to draw is that it is “fair” to choose between
a) Paying CGT now, when you have no money because the asset hasn’t been sold yet, or
b) Paying potentially much more Income Tax (plus NIC) on the gain, later on
- but not when the election could actually save you tax. I must make a note to buy a new dictionary, because the definition of the word “fair” seems to have moved on. (TIIN – applies to Income Tax and Corporation Tax)
The Big Changes - Self-Employed NICs and the Dividend Allowance
The Chancellor seems to have a bit of a thing about “fairness”. See if you can spot the similarity between the following two measures:
Measure #1: Increase in Self-Employed NICs
“People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment…
An employee earning £32,000 will incur between him and his employer £6,170 of National Insurance Contributions. A self-employed person earning the equivalent amount will pay just £2,300 – significantly less than half as much.
Historically, the differences in NICs between those in employment and the self-employed reflected differences in state pensions and contributory welfare benefits. But with the introduction of the new state pension, these differences have been very substantially reduced…
The lower National Insurance paid by the self-employed is forecast to cost our public finances over £5 billion this year alone. That is not fair to the 85% of workers who are employees.
…from April 2018, when the Class 2 NIC is abolished, the main rate of Class 4 NICs for the self-employed will increase by 1% to 10%, with a further 1% increase in April 2019.
The combination of the abolition of Class 2 and the Class 4 increases I have announced today, raises a net £145m a year for our public services by 2021-22, an average of around 60p a week per self-employed person in this country.
This change reduces the unfairness in the NICs system and reflects more accurately the current differences in benefits available from the state.”
But maybe not so much reflects the better rights afforded employees in relation to, say:
- Mutuality of obligations
- Unfair dismissal
- National Minimum Wage (I shan’t insult anyone’s intelligence by trying to call it a “living” wage)
- Employer pension contributions
Some might argue that it is not fair to conflate NICs with the employee protections listed above: that’s not really what NICs are all about. But is it fair to blame a self-employed taxpayer for the fact that HMRC cannot collect employers’ NICs on his profits? Is it anything other than disingenuous to imply that an employee’s NICs are buying only state benefits, such that he is being short-changed on his pension by the self-employed?
I am pretty sure that it wasn’t employees, employers or even the self-employed, who asked for NICs to be surreptitiously nudged up, year after year, so that they became almost as important as Income Tax. But, here we are, common fund and all.
I am also pretty sure that the Chancellor needs a new calculator because, last I checked,
(£32,000 - £8,164) @ 11% = £2,621.96, DIFF £2,300 = £321.96, or £6 extra per week, not 60p
(I am assuming that £32,000 will be reasonably representative for 2021/22; it is, after all, the example given by the Chancellor earlier in his argument).
Measure #2: Decrease in Dividend “Allowance”
“Alongside the gap between employees and the self-employed there is a parallel unfairness in the treatment of those working through their own companies…
HMRC estimates that existing incorporations cost the public finances over £6bn a year and the OBR forecast an additional annual cost to the Exchequer from those choosing to incorporate of £3.5 billion a year by 2021-22…
This is not fair. And it’s not affordable. Fairness demands that this discrepancy in treatment is addressed, just as I have addressed the discrepancy with the self-employed.
The Dividend Allowance has increased the tax advantage of incorporation. It allows each Director/Shareholder to take £5,000 of dividends out of their company tax free, over and above the personal allowance.
It is also an extremely generous tax break for investors with substantial share portfolios.
I have decided, therefore, to address the unfairness around Director/Shareholders’ tax advantage, and at the same time raise some much needed-revenue to fund the measures I shall announce today, by reducing the tax-free dividend allowance from £5,000 to £2,000 with effect from April 2018.”
Part of me wishes he’d get rid of the Dividend “Allowance” completely, so that I didn’t have to put up with calling a nil-rate band an “allowance” simply because someone thought it sounded better.
Part of me reflects that we’ve only had the Dividend “Allowance” for 2 years, as camouflage for the raid on dividend taxation announced in the 2015 Summer Budget – to fund further cuts in Corporation Tax so that Britain could say it was “open for business”, according to the then Chancellor.
(Oh, and for those who have just started complaining that the above NIC hikes break the Conservatives’ manifesto pledge, that ship sailed on 8 July 2015: even if you can convince me that abolishing dividend tax credits was not a “real” tax rise, 38.1% is bigger than 37.5%).
The changes to dividend taxation were already forecast to cost individuals around £2bn a year; the new restriction is set to cost them almost a further £1bn a year. Much of this will be borne by OMB companies.
What is particularly galling is that the figures quoted above for the projected costs of incorporation, etc., are the same as those referred to in the 2016 Autumn Statement, which are in turn based on figures at 4.1 in the OBR’s Economic and Fiscal Outlook November 2016 – which, as we have already pointed out, is by its own admission years out of date, can only estimate the effect of the dividend tax hike in 2016/17 and whose figures for the continued tax savings from incorporation could be comprehensively demolished by anyone with a working calculator. (Exhibit A; Exhibit B)
It may be that the OBR – with HMRC’s help, mayhap – has managed to confuse itself about the savings that the employer would make in NICs and pinned that on the individual who is weighing up whether or not to incorporate. But that would be to assume that every individual involved was originally a full-time employee (probably called Dave – works in IT support) with whom his soon-to-be-erstwhile employer has agreed to pass on the NI savings to Dave’s new company.
But there’s a problem with that being the population on which to base government policy, and it rhymes with “IR35”. It presumes that, statistically speaking, figurative Dave is more than occasionally confident that saving £1,000 in tax is worth leaving a secure job, setting up on his own and saddling himself with £2,000 in additional costs for running his own company. I just don’t think that Dave is that dumb, figuratively or otherwise.
How Bad is it, Doc?
This is a chart that estimates the new position for 2018/19, showing the difference in net incomes between a shareholder/director and a self-employed taxpayer, for various profit levels. While some modest savings can be made on incorporation, at certain profit ranges, they may well not outstrip the costs of running a company – and certainly not enough to make incorporation worthwhile, only from a tax perspective. Most of all, the chart shows that there is no reliable trend. I have read that businesses want certainty. What they’ve been given is a drunkard’s Etch-a-Sketch musings.
Here is a table of the impact on net yields / marginal tax rates over the next few years, for a given level of business profits. For now, I am assuming that when the Chancellor says he is going to increase the “main rate” of NIC, he actually means the main rate, rather than the main rate and the residual rate for higher earners as well.
I make the point because I rather suspect that, if he reckons he has gotten away with these adjustments without too much fuss, we may well see more “fairness creep” so that higher earners pay more as well. I leave it to the reader to ponder the wisdom of increasing self-employed NICs in the hope of discouraging “Tax-Motivated Incorporation”.