Payroll - Changes from 6 April 2019:
- The new living wage – from 1 April 2019 all workers aged 25 and over are legally entitled to at least £8.21 per hour. Check your staff under 25 years old are earning at least the right amount of minimum wage as these rates have also increased.
- Do you have directors/employees earning up to the Secondary Threshold for NIC? The rate increases to £719/month.
- Payslips – This month there are important changes to the Employment Rights Act 1996 affecting payslip information:-
Employers must include the total number of hours worked where the pay varies according to the hours worked, for example under variable hours or zero hour contracts.
Payslips must be given to ‘workers’ and not just employees.
- Changes to your employees’ tax codes – Since July 2017, HMRC have been using the RTI information that they receive to make automatic adjustments to your employees’ tax codes as soon as they are notified of a change in their circumstances.
This may result in your employees asking you about their tax codes if they are changed. Your employees can see information regarding their tax code and how it is calculated instantly by accessing their Personal Tax Code at www.gov.uk/personal-tax-account.
- Employment Allowance – An allowance of up to £3,000 to reduce the employer Class 1 NIC that you pay continues to be available from 6 April 2019. We will deal with the claim for you as part of your normal payroll. If you’re the director and only employee paid above the Secondary NIC threshold, you are not entitled to Employment Allowance.
- New Employees – a Starter Checklist must be completed for each new employee after 6 April 2019. They must also give you their passport number, as this information must be sent to HMRC. Starter Checklists can be downloaded from the HMRC website – or we can email them to you. The forms do not have space to write the passport number – you must remember to ask the employee for this.
- Employees under 21 years old – If you have employees under 21 years old, you will not need to pay employer’s Class 1 NIC on their earnings up to £962/week.
- Penalties and Interest – Don’t forget that HMRC charge a penalty for filing Employer submissions late. Depending on the number of employees you have penalties are between £100 and £400 for late filing. So please make sure that the payroll information is given to us in good time to process it, forward the details to you and for you to let us have your approval so we can file the FPS on or before the date you pay your employees.
Interest on late payment of PAYE and NIC will continue to be charged.
- Pension Contributions – from April 2019, minimum pension contributions for employers and employees will increase to a total of 8% (5% from employee and 3% from employer.
- Forms P11D – if you provide benefits to any director or employee, you will be used to completing forms P11D (or used to us asking you for the information if we complete them for you). We will be writing separately to those employers for whom we prepare forms P11D later in the year.
- Tax Free Childcare– as an employer you don’t need to do anything but any employees who are ‘eligible parents’ might benefit from visiting www.childcarechoices.gov.uk
Autumn Budget - 2017
Income Tax: Rates and allowances
The Government has reaffirmed its commitment to increase the basic personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020. For 2018-19 the personal allowance and the higher rate threshold will increase to £11,850 and £46,350 respectively.
The £5,000 band of savings subject to the 0% starting rate is unchanged for 2018-19 and so is the £20,000 ISA limit although the limit for Junior ISAs and Child Trust Funds will increase to £4,260.
The lifetime allowance for pension savings will increase to £1,030,000 for 2018-19.
Income Tax: Company cars and vans
The van fuel benefit charge increases to £633 and the flat-rate van benefit charge increases to £3,350 for 208-19 and the multiplier for the car fuel benefit charge increases to £23,400,
The 3% diesel supplement which is added to the appropriate percentage for calculating taxable fuel benefits is increased to 4% from 6 April 2018 although the maximum percentage is unchanged at 37%. It is estimated 800,000 company car drivers will be affected by this change.
Cars with NOx emissions not exceeding 80mg/Km will not be subject to any supplement although it is thought that few, if any, cars will meet this new EU standard in 2018 or 2019.
Income Tax: Marriage allowance
The marriage allowance allows taxpayers to transfer up to 10% of their unused personal allowance to their partner giving a potential saving of £230 in 2017-18. Claims will now be allowed where a partner has died before the claim was made and claims will be able to be backdated by up to 4 years. The change comes into force on 29 November 2017.
Income Tax: Off-payroll working
The off-payroll working rules, usually referred to as IR35, applying to engagements in the public sector were radically reformed in April 2017. The Government claims that compliance in the public sector is much improved as a result and would now like to extend the reforms to the private sector. A period of consultation is promised before any reforms are introduced.
Income Tax: Rent-a-room relief
The Government has indicated it wishes to ensure the relief is better targeted at long term lettings.
Income tax: Mileage rates for landlords
In order to reduce the administrative burden on individuals operating property businesses, the option to use approved mileage rates for business travel will be extended to landlords. The new measure will have effect from 6 April 2017.
Income tax: Employee business expenses
Various changes are proposed:
- The scope of tax relief available to employees (and the self-employed) for work-related training costs is to be extended.
- From April 2019, employers will no longer be required to check receipts when reimbursing subsistence claims using benchmark scale rates. In addition, the existing concessionary scale rates for overseas accommodation and subsistence claims will be replaced by statute.
- HMRC will consult to determine how to improve the guidance on employee expenses, particularly travel and subsistence, and on the process for claiming tax relief for non-reimbursed expenses.
Income Tax: Armed forces personnel
Certain allowances paid to armed forces personnel for renting or maintaining property in the UK private sector will be made exempt from income tax and NICs.
Income Tax: Carers
Qualifying care Relief will apply to expenses incurred when providing care to ensure carers only need keep simple records.
Income Tax: Venture capital Trusts and Enterprise Investment Scheme
Various changes will take effect for investments on or after 6 April 2018 designed to encourage investment in knowledge-intensive companies. For example, the EIS investment limit of £1m is increased to £2m provided any investment in excess of £1m is in a knowledge-intensive company.
Legislation is to be introduced in Finance Bill 2017-18, to take effect from Royal Assent, intended to ensure that tax-advantaged VCTs continue to focus on long-term investment in higher risk growth companies.
Capital Gains Tax: Payment date
The introduction of the proposed 30-day window for paying tax on gains from a disposal of residential property is to be deferred until April 2020.
Stamp Duty Land Tax: Higher rate on additional dwellings
A number of changes are to be introduced including cases where an individual buys a property from a spouse or civil partner and the right to disregard certain property interests retained by a former spouse or civil partner following the dissolution of a marriage or partnership.
Stamp Duty Land Tax: First-time buyers
From 22 November 2017, first-time buyers paying £300,000 or less will pay no SDLT and on properties costing between £300,000 and £500,000, SDLT will be charged at 5% on the excess over £300,000. SDLT on properties costing in excess of £500,000 will be charged at the normal rates.
Corporation Tax: Indexation allowance
Indexation allowance will be frozen on 1 January 2018 so there is no relief for inflation gains accruing after that date.
Corporation Tax: Non-residents’ property income and gains
From April 2020, income from UK property received by non-resident companies will be chargeable to corporation tax rather than income tax and their gains from disposals of UK property will be chargeable to corporation tax rather than capital gains tax.
Corporation Tax: Intangibles
A consultation in 2018 will examine whether the Intangible Fixed Asset regime can be changed to better support UK companies investing in intellectual property.
Value Added Tax: Registration threshold
The current level of £85,000 will remain in place for two years from April 2018 while government consults on the design of the threshold.
Value Added Tax: Imports
Businesses currently benefit from postponed accounting for VAT when importing goods from the EU. The Government has said this cash flow advantage will be taken into account when considering changes to be implemented following Brexit.
Value Added Tax: Vouchers
The Government will consult on changes to be introduced intended to ensure that where customers pay with vouchers businesses account for the same amount of VAT as when other means of payment are used.
Annual Tax on Enveloped Dwellings: Rates
ATED charges are increased by 3%, in accordance with rises in CPI, with effect from 1 April 2018. As a result, the entry level charge for properties with a value between £500,001 and £1m rises from £3,500 to £3,600.
A consultation on how to make the taxation of trusts simpler, fairer and more transparent will begin in 2018.
A number of measures or intended measures have been announced:
- The Government will publish a consultation response on the proposed requirement for designers of certain offshore structures to provide HMRC with details of the structures and the clients using them.
- Government will consult in Spring 2018 on proposals to extend the assessing time limit to 12 years for cases of offshore tax non-compliance without first having to establish the non-compliance is deliberate.
- Following a consultation process, changes are proposed to tackle VAT fraud in construction industry labour supply chains. These changes are intended to take effect from 1 October 2019.
- Government is to consult on a measure referred to as conditionality intended to make it more difficult to trade in the hidden economy. Conditionality involves making the issue of some public sector licences conditional upon being registered for tax.
- There are also a number of announcements in connection with online VAT fraud.
A number of measures are announced. Most are targeted at particular abuses or perceived abuses but perhaps two are of more general interest. First is the announcement of a consultation to consider ways of preventing traders and professionals avoiding tax by fragmenting income between unrelated entities. Second is the removal, with effect from 22 November 2017, of the 6-year time limit within which companies must adjust losses arising from depreciatory transactions.
Tax administration and compliance
Changes will take effect on 6 April 2019 enabling the recovery of Self-assessment debts through PAYE codes and a new system of late submission penalties and interest is proposed following consultation. The certificate of Tax deposit scheme will cease on 23 November 2017 although existing certificates will continue to be honoured for a further 6 years.
Digital Tax Accounts and Making Tax Digital
HM Revenue and Customs (HMRC) announced its new Making Tax Digital (MTD) in the March 2015 Budget but since then, there have been many consultations and changes in the implementation dates. The aim is for HMRC to be interacting digitally with all taxpayers.
MTD had been planned to start in April 2018. It will now start in April 2019 and only at that date for businesses with a turnover above the VAT threshold.
The end of the tax return
The original intention for small business owners had been the eradication of the annual tax return by 2020 (but see the heading below ‘when does it start..’) most businesses, self-employed people and landlords will instead be required to keep track of their tax affairs digitally and to update HMRC at least quarterly via their digital tax accounts, or more often if they’d prefer. HMRC has said that this doesn’t mean you’ll have to complete a full tax return four times a year; you’ll simply need to provide more regular updates online.
The introduction of a ‘real time’ tax system means that instead of reporting information on tax returns and paying liabilities long after the end of the tax year, you will be able to see a real-time view of your business tax affairs and liabilities through your digital accounts. This should make it easier to understand how much tax you owe and to budget accordingly.
The Roadmap was issued in 2015 and this is the document outlining HMRC’s vision for reform and original intention for the end of the Tax Return by 2020. This document has now been archived and we must look to the commentary used in the overview paper updated on 13 July 2017 which only states with any degree of certainty that MTD will apply from April 2019 businesses above the VAT threshold and beyond that, we will have to look out for updates.
HMRC has identified its ‘four foundations’ which will result in the transformation of the tax system and enable them to remove the requirement for Tax Returns to be filed. Under MTD, they are called reports and declarations instead of a tax returns or self-assessment as we know it.
- Tax simplified: taxpayers will no longer be required to provide HMRC with the information they already hold or have access to.
- Tax centralised or in one place: Information will be retained in one centralised place and taxpayers will be able to see a full ‘tax picture’ of what taxes they pay and owe online, in their ‘digital account’ with HMRC. They will be entitled to set off overpayments of one tax against liabilities of another.
- Making tax digital for businesses: businesses will be required (or their agents) to update/report to HMRC on a quarterly basis their accounting information prepared digitallyand HMRC will use this to enable accurate interim tax calculations. Businesses will still need to make yearend submission, which in essence is preparing their annual accounts that should reconcile their quarterly returns.
- Making tax digital for individual taxpayers: enabling digital interaction with HMRC at any time and giving individuals a personalised picture of their tax affairs, along with prompts, advice and support.
Who does it apply to?
At this stage, the Making Tax Digital proposals are geared at sole traders and partnerships, as well as individual taxpayers. HMRC is also proposing that Making Tax Digital would only apply after £10,000 annual income or turnover, so a sole trader with one small business that makes sales under £10,000 a year would be exempt from MTD. However, a sole trader with two businesses, each making sales of £6,000 a year, would have to comply with MTD, because his/her total income for the year is £12,000.
If you have income taxed under PAYE and are also self-employed or have rental income, and the total of your self-employment and rental income is under £10,000 then you will no-longer need to complete a tax return. Instead, you will update your digital tax account. HMRC intends that usually any tax due will be collected through your tax code.
Personal Tax Account
Each individual will have a personal tax account. It enables them to register for new services, update their information and see how much tax they need to pay. Access to your personal tax account requires registration on the government gateway and your national insurance number. Access is available now.
Here is a link to the sign in or set up page:https://www.gov.uk/personal-tax-account
Here is a link (You-tube channel) to show you how to access your personal tax account: https://www.youtube.com/watch?v=7HL6Dc3QtsE
When does it start & How would Making Tax Digital work?
MTD was planned to start in April 2018. It will now start in April 2019 and only at that date for businesses with a turnover above the VAT threshold as mentioned above.
Changes to VAT reporting will come into effect from April 2019. From that date, businesses above the VAT threshold have to provide their VAT information to HMRC through Making Tax Digital software.
In their Overview paper which was updated 13 July 2017 HMRC state ‘The government has committed that it will not widen the scope of Making Tax Digital for Business beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest.’
Businesses will send summary data to HMRC about their business each quarter, or more often if the business prefers. The summary data will consist of total income and total expenditure.
Businesses will need to send this information from online accounting – HMRC has confirmed that they will not be providing their own bookkeeping / accounting software and that the use of “digital record keeping software that links to and updates business’s digital accounts with HMRC” will be mandatory, except for taxpayers who are exempt from MTD.
Each business will have a proposed nine months after the year end to file an “End of Year declaration”, submitting final figures. This would be a month less than the current tax return filing deadline, which is just under 10 months after the end of the tax year.
How will tax payments work?
HMRC is not planning to change the current payment dates, but they have asked as part of the consultation if they should review the payment on account regime. Under MTD, businesses may have the right to make “voluntary payments” towards their tax liabilities, which would be aggregated together. HMRC has tentatively suggested it may need to be warned of upcoming voluntary payments.
HMRC has also said: “Under Pay As You Go, the customer will decide how often and what amount they want to pay. Payment will not have to be at any fixed time, or at regular intervals; the customer will retain control and choice, so they feel confident that they have made the right decision for their circumstances, and have the opportunity to amend their choices if circumstances change.
How will penalties work?
HMRC are proposing to abolish the current penalty system for late submissions and instead impose a “points” system similar to driving licence penalty points, with a financial penalty to be imposed only when the points reach a set level. That level is suggested as four points, with the slate cleaned after 24 months after the last points were added. Penalties for inaccurate information would only apply to the End of Year update and VAT quarterly returns.
HMRC issued a consultation and this has now concluded without a clear roadmap as to what these penalties will be, however, it appears that legislation for MTD will be included in the next Finance Bill which is expected to be introduced after the summer recess on 5 September 2017.
So what next?
HMRC have changed the timetable on a number of occasions and it appears that they are now going to adopt a wait and see attitude to see how the pilot scheme and the scheme for VAT registered business works in practice before implementing a scheme for others caught within the MTD net.
The Spring Budget - 2017
Tax rates and allowances
Most rates and allowances for 2017-18 have been previously announced and are not reproduced in this summary but can be found here: 2017-18 rates and allowances
Making Tax Digital (MTD)
The MTD start date for self-employed business and landlords with turnover below the VAT threshold will be delayed by a year to April 2019.
Income Tax: Dividend allowance
The tax free dividend allowance is to be reduced from £5,000 to £2,000 from the 2018-19 tax year. This has been reported by some to be in response to the number of businesses incorporating primarily to convert taxable profits into tax-free dividends.
Income Tax: Increase in cash basis threshold
The threshold for the simplified cash basis of accounting for individuals and unincorporated businesses will rise to £150,000 on 6 April 2017. This was previously announced in a policy paper dated 31 January 2017 but is included again in the Budget announcements. The earlier announcement included details of prohibitions on deductions for specific items of capital expenditure including land, cars and items which are not depreciating assets.
Income Tax: Rent-a-room relief
The Government intends to consult on a reform of rent-a-room relief to ensure it better achieves its original intended purpose to increase the supply of affordable long-term lodgings.
Income Tax: Image rights
HMRC are to publish guidelines for employers who make payments of image rights to their employees. This announcement is included in a Treasury Budget summary in a section on compliance and is presumably in response to criticisms in the Commons Public Accounts Committee’s report of January 2017 which recommended urgent action in the next Finance Bill.
Income Tax and Corporation Tax: UK land disposals
Finance Act 2016 included legislation, which took effect on 5 July 2016, to ensure that profits from dealing in or developing UK land are taxed in the UK irrespective of the residence of the person making the disposal. The exclusion for contracts entered into before 5 July 2016 is to be removed in cases where the profits are recognised in the accounts for a period beginning on or after 8 March 2017 or would be recognised in a notional accounting period beginning on that date.
Income Tax and Corporation Tax: Appropriations to trading stock
An appropriation of a capital asset is treated as taking place at market value resulting in a capital gain or allowable loss but it has been possible to elect to substitute a value which created neither a gain or a loss. In the event of a loss, the election could have the effect of converting a capital loss into a more flexible trading loss. With effect from 8 March 2017 the election may only be made in cases where the appropriation to trading stock creates a chargeable gain
National Insurance: Increase in rate of Class 4 contributions
The previously announced abolition of Class 2 contributions with effect from the 2018-19 tax year will now go hand in hand with an increase in the Class 4 rate from 9% to 10%. Self-employed persons with profits over £16,250 will pay more national insurance as a result. The Class for rate will be increased again to 11% in 2019-20.
National Insurance: Employment allowance
A Treasury Budget summary reveals HMRC have concerns over avoidance schemes involving Employment Allowance and action will be taken if the avoidance continues.
Pensions: Reducing the money purchase annual allowance (MPAA)
As expected following the recent consultation exercise, the MPAA will be reduced from £10,000 to £4,000 with effect from 6 April 2017. The reduction is intended to limit the extent to which individuals can “recycle” their pension schemes and gain a second round of tax relief on pension contributions.
Pensions: Qualifying recognised overseas pension schemes (QROPS)
Transfers to QROPS requested on or after 9 March 2017 will be taxed at 25% unless both the individual and the QROPS are in the same country, both are within the European Economic Area or the QROPS is provided by the individual’s employer. The charges can be imposed or refunded in the following five years according to certain changes in circumstances.
VAT: Registration and deregistration thresholds
From 1 April 2017 the VAT registration threshold will increase from £83,000 to £85,000 and the deregistration threshold from £81,000 to £83,000. By increasing the VAT registration threshold HMRC estimate that it will prevent 4000 small businesses from having to register for VAT by the end of 2017-18.
VAT: Use and enjoyment provisions for business to consumer mobile phone services
The government will remove the VAT use and enjoyment provisions for business to consumer mobile phone services. Currently UK VAT applies to mobile phone use by UK residents when in the UK or EU but not when they are outside the EU. Going forward 20% VAT will also apply to mobile telephone use, including data, where the device is used by a UK resident outside the EU. It is estimated that this will raise £65 million in a full year.
VAT: Fraud in the provision of labour in the construction industry
The government will launch a consultation on 20 March 2017 on a range of policy options to combat supply chain fraud in supplies of labour within the construction sector. Options include a VAT reverse charge mechanism so the recipient accounts for VAT. The government is consulting to ensure any option taken forward is targeted effectively, is simple to operate and minimises impacts on businesses, while tackling the fraud as effectively as possible.
VAT: ‘Split Payment’ model
Some overseas businesses avoid paying UK VAT thus undercutting UK online and high street retailers. Building on the measures introduced in Budget 2016, the government will shortly publish a call for evidence on the case for a new VAT collection mechanism for online sales. This would harness technology to allow VAT to be extracted by the Exchequer from on-line transactions at the point of purchase. This is often referred to as a ‘Split Payment’ model and is the next step for HMRC in tackling the non-payment of VAT by some overseas businesses selling goods online to UK consumers.
VAT: Penalty for participating in fraud
As announced at Autumn Statement the government will legislate in Finance Bill 2017 to introduce a new penalty for participating in VAT fraud. The new penalty will be a fixed rate penalty of 30% for participants in VAT fraud.
Following consultation on the draft legislation some minor changes have been made to improve the clarity of the measure and also to limit the naming of a company officer to instances where the amount of tax due exceeds £25,000. The new penalty will take effect once the Finance Bill receives Royal Assent.
Changes are being introduced which are designed to prevent promoters circumventing the Promoters of Tax Avoidance Schemes legislation
These are some of the proposed changes we already knew about …..
Some proposed changes which were announced by the Chancellor in the 2016 Budget and Autumn Statement and which appeared in our previous summaries are due to be enacted.
Income Tax: Benefits in kind
Draft Finance Bill 2017 clauses having effect from the 2017-18 tax year allow an employee to make a payment in return for a benefit in kind and reduce the taxable value of the benefit as long as the payment is made by 6 July in the following tax year.
There are also draft clauses clarifying existing legislation so that employees will only be taxed on business assets for the period the assets are made available for private use and removing the tax charge on certain legal costs and costs of pension advice borne by employers.
Income Tax: Property and trading income allowance
The draft Finance Bill 2017 introduces two new income tax allowances of £1,000 each for property and trading income. Individuals with income below the level of the allowances will no longer need to declare or pay tax on that income. If income exceeds the relevant allowance then the individual may choose to pay tax on the amount by which income exceeds the allowance. The trading income allowance will also apply to certain income from providing services or assets.
Income Tax and National Insurance: Salary sacrifice schemes
The proposed changes affecting salary sacrifice schemes or “optional remuneration arrangements have been announced and will be included in Finance Bill 2017. The new measures, to take effect from the 2017-18 tax year, are intended to ensure that most benefits provided as part of a salary sacrifice scheme will be treated the same as cash income. Pensions, pension advice, childcare, cycle to work schemes and ultra-low emission cars will be exempt from the new rules. Arrangements in place before April 2017 will be protected from the new rules for up to a year and arrangements involving cars, accommodation and school fees will be protected for up to four years.
Taxation of investments
Draft Finance Bill 2017 clauses will allow taxpayers to apply for a recalculation of “wholly disproportionate” taxable gains arising on some surrenders and assignments of life insurance policies. If successful, the gain will be recalculated on a just and reasonable basis.
Income Tax and Capital Gains Tax: Tax-advantaged venture capital schemes
Draft Finance Bill 2017 clauses include clarification of the pre-arranged exit rules for Enterprise Investment Schemes and Seed Enterprise Investment Schemes. There are also changes to the rules for certain follow-on investments in Venture Capital Trusts with effect from 6 April 2017.
Income Tax and Capital Gains Tax: Employee shareholder status
Draft Finance Bill 2017 clauses confirm that new issues of employee shareholder shares no longer qualify for income tax and capital gains tax reliefs and exemptions
Corporation Tax: Patent Box
Draft Finance Bill 2017 clauses include detailed rules dealing with the tax treatment of costs incurred by two or more companies carrying out research and development under a “cost sharing arrangement”.
Corporation Tax: Contributions to grassroots sport
Draft Finance Bill 2017 clauses include a new tax relief for certain contributions to grassroots sport from 1 April 2017.
Draft Finance Bill 2017 clauses confirm that expenditure incurred on charging points for electric vehicles will qualify for a 100% first-year allowance. The allowance is available until 31 March 2019 for corporation tax purposes and 5 April 2019 for income tax purposes.
Finally, here is a reminder of some recent proposed tax changes which are also included in published Finance Bill 2017 draft clauses ….
Corporation Tax: Losses
There will be greater flexibility for relieving various types of loss which arise on or after 1 April 2017 and which are carried forward to a later accounting period. Such brought forward losses may be relieved against the company’s total income rather than specified classes of income. In addition, losses carried forward to a later accounting period will, in certain circumstances, be capable of being surrendered as group relief.
Corporation Tax: Substantial shareholding exemption
The condition that the investing company is a trading company or member of a trading group is to be withdrawn, as is the condition that the company being sold is a trading company or the holding company of a trading group, unless the disposal is to a connected person. Currently, a substantial shareholding must have been held for minimum period of twelve months starting not more than two years prior to the disposal. The two year period is to be extended to six years. These changes apply to disposals on or after 1 April 2017.
Inheritance tax: Deemed UK domicile
Non-domiciles who are long-term UK residents or who previously had a UK domicile and are resident in the UK will, from 6 April 2017, be treated as UK domiciled for income tax and capital gains tax purposes.
Employment status: Working for the public sector through intermediaries
From 6 April 2017 public authorities will have responsibility for determining whether the workers they engage fall within the intermediaries legislation (IR35). If the public authority decides the rules apply it will be required to deduct income tax and national insurance from the payments it makes to the worker or the worker’s intermediary. The new rules will also apply where work is completed before 6 April 2017 but payment is made on or after that date.
The Autumn Statement - 2016
Philip Hammond delivered his 2016 Autumn Statement on 23 November and announced it will be the last of its kind. There will be a Spring Budget in 2017 followed by a second Budget later in the year followed by annual winter Budgets. One of the reasons for this change is to allow Finance Bills to be introduced with sufficient time for Parliament to scrutinise any proposed tax changes and to reach Royal Assent during the following spring and before the start of the new tax year. In addition, the Spring Budget will be replaced by a Spring Statement, starting in 2018, and there will be greater consultation on draft legislation.
The following summary is based upon material made available on the gov.uk website following the Chancellor’s statement.
Income tax: Rates and allowances
As expected, the personal allowance is increased to £11,500 and the basic rate band to £45,000 in 2017-18. The Government has confirmed its commitment to increase the allowance to £12,500 and increase the basic rate band to £50,000 by the end of the current parliament.
Income Tax: Benefits in kind
As announced in the 2016 Budget, legislation to be introduced in Finance Bill 2017 and having effect from April 2017 will allow an employee to make a payment in return for a benefit in kind and reduce the taxable value of the benefit as long as the payment is made by 6 July in the following tax year.
From April 2017, an employee who is required to give evidence in court will no longer be subject to tax on legal support provided by the employer.
In addition, Finance Bill 2017 will include provisions intended to clarify existing legislation so that employees will only be taxed on business assets for the period the assets are made available for private use.
The Government intends to carry out a review of how benefits in kind are valued and will publish a consultation document on employer-provided living accommodation.
Income Tax: Pay As You Earn Settlement Agreements
The Government has confirmed its intention to simplify the process for applying for and agreeing PSAs. Legislation will be included in Finance Bill 2017 to take effect from the 2018-19 tax year.
Income Tax: Partnerships
The Government is to introduce legislation intended to ensure profit allocations to partners are fairly calculated for tax purposes. Draft legislation will be published for consultation.
Income Tax: Junior ISAs and Child Trust Fund limits
The proposed increase in the annual subscription limit to £4,128 will take effect from 6 April 2017.
Income Tax: Property and trading income allowance
As announced in the 2016 Budget, two new income tax allowances of £1,000 each for property and trading income. Individuals with income below the level of the allowances will no longer need to declare or pay tax on that income. The trading income allowance will also apply to certain income from providing services or assets.
Income Tax: Employee expenses
The Government intends to carry out a review of income tax relief for employees’ business expenses, including those which are not reimbursed by the employer.
National insurance: Thresholds
The employee and employer thresholds will be aligned from April 2017 so that both employee and employer will start paying National Insurance contributions on weekly earnings above £157.
National Insurance: Termination payments
As announced in the 2016 Budget, from April 2018 termination payments in excess of £30,000 which are subject to tax will also be subject to employer NICs.
Income Tax and National Insurance: Salary sacrifice schemes
As widely predicted, measures will be introduced, taking effect from April 2017, to ensure that benefits provided as part of a salary sacrifice scheme will be treated the same as cash income. Pensions, pension advice, childcare, cycle to work schemes and ultra-low emission cars will be exempt from the new rules. Any arrangements in place before April 2017 will be protected from the new rules for up to a year and arrangements involving cars, accommodation and school fees will be protected for up to four years.
Taxation of investments
As announced in the 2016 Budget, Finance Bill 2017 will include legislation to amend the disproportionate tax charges arising on some surrenders and assignments of life insurance policies from 6 April 2017 and, with effect from Royal Assent, legislation relating to the list of assets which life insurance policyholders can invest in without triggering certain anti-avoidance provisions.
As previously announced, the ISA limit will increase from £15,240 to £20,000 in April 2017.
Income Tax and Capital Gains Tax: Employee shareholder status
The Government has concerns that some companies are not using employee shareholding status as intended. Income tax reliefs on the receipt or buy-back of shares issued to an employee under an employee shareholder agreement will be withdrawn as will the capital gains tax exemption relating to shares received for entering such an agreement. An individual who before 23 November 2016 has taken independent advice on entering an agreement has, depending upon exactly when the advice was received, until 1 December or 2 December 2016 to enter an agreement and still receive the income tax and capital gains tax advantages.
Income Tax and Capital Gains Tax: Tax-advantaged venture capital schemes
Various measures will be included in Finance Bill 2017. The Enterprise Investment Scheme and Seed Enterprise Investment Scheme rules on share conversion rights for shares issued on or after 5 December 2016 will be clarified. The rules for certain follow-on investments in Venture Capital Trusts will be changed from 6 April 2017 to align them with Enterprise Investment Scheme rules.
Corporation Tax: Rates
The Government has confirmed its commitment to cut the corporation tax rate to 17% by 2020.
Corporation Tax: Patent Box
Legislation to be included in Finance Bill and taking effect for accounting periods commencing on or after 1 April 2017 will ensure that two or more companies carrying out research and development under a “cost sharing arrangement” are neither penalised by nor are able to benefit from their arrangement.
Corporation Tax: Contributions to grassroots sport
As announced in the 2015 Autumn Statement, Finance Bill 2017 will include tax relief for certain contributions to grassroots sport from 1 April 2017.
Research and Development
In a separate related announcement, the Government has undertaken to review the R&D tax system of reliefs in an effort to make the UK an even more competitive place to carry out R&D.
In the interests of promoting the wider uptake of electric vehicles, expenditure incurred on electric charge point equipment on or after 23 November 2016 will qualify for a 100% first-year allowance. The allowance will expire on 31 March 2019 for corporation tax purposes and 5 April 2019 for income tax purposes.
VAT: Changes to the VAT Flat Rate Scheme
HMRC are making a stand against “limited cost” businesses they see as unfairly benefitting from the flat rate scheme. From 1 April 2017 flat rate scheme businesses must determine whether they meet the definition of a limited cost trader. Limited cost traders are defined as those whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive turnover in a prescribed accounting period or greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).Such traders will be required to apply a flat rate scheme percentage of 16.5%.
To make matters worse, excluded from the definition of goods are capital expenditure, food or drink for consumption by the flat rate business or its employees, vehicles, vehicle parts and fuel (except where the business is one that carries out transport services). These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.
Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation has also been published to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. Draft secondary legislation will be published on 5 December 2016 and businesses will have 8 weeks to comment.
This will affect most personal services companies, consultants, locum doctors and engineers using the flat scheme who will be forced to apply a higher flat rate scheme percentage or leave the scheme completely. Any businesses that trade below the threshold but have registered for VAT voluntarily to use the flat rate scheme because they have minimal costs could also be affected. Presumably businesses will need to apply the test on an annual basis by looking at their previous year’s purchases, although the press release does not make that clear. This may mean that small businesses on the scheme will need to keep something close to full VAT records which is precisely what the scheme is intended to avoid!
VAT: Tackling exploitation of the VAT relief on adapted cars for wheelchair users
The Government will clarify the application of the VAT zero-rating for adapted motor vehicles to stop the abuse of this legislation, while continuing to provide help for disabled wheelchair users.
VAT: Updating the VAT Avoidance Disclosure Regime
As announced at Budget 2016 and following consultation, legislation will be introduced in Finance Bill 2017 to make scheme promoters primarily responsible for disclosing schemes to HMRC and the scope of the regime will be extended to include all indirect taxes. This will have effect from 1 September 2017.
VAT: Penalty for participating in fraud
As announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 to introduce a new penalty for participating in VAT fraud. It will be applied to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud. The new penalty will be a fixed rate penalty of 30% for participants in VAT fraud. This will be implemented following Royal Assent of the Finance Bill 2017.
VAT: Retail Export Scheme
HMRC will provide funding with a view to digitising fully the Retail Export Scheme to reduce the administrative burden to travellers.
Insurance Premium Tax
The rate of Insurance Premium Tax will rise from 10% to 12% on 1 June 2017.
Annual Tax on Enveloped Dwellings: Rates
The annual charges will rise in line with inflation for 2017-18.
The crackdown on tax avoidance continues with new penalties which may apply to advisers who assist taxpayers in the use of failed avoidance schemes. Measures will also be introduced to limit a tax avoider’s defence against penalties in certain cases. Anti-avoidance legislation intended to counter disguised remuneration schemes will be extended to include similar schemes used by the self-employed and tax relief for an employer’s contributions to disguised remuneration schemes will be denied unless tax and national insurance is paid within a specified period.
Inheritance Tax on the Family Home
Changes to Inheritance Tax (IHT) rules were recently announced in George Osborne’s Summer Budget. Whilst the main Nil Rate Band for IHT is frozen at £325,000 until the end of 2020/21, a new Additional Nil Rate Band (ANRB) is introduced with effect from 2017/18. The value of the ANRB will be equivalent to the value of the taxpayer’s home (less any mortgage), subject to a maximum ceiling. The maximum figure in 2017/18 will be £100,000, rising gradually to £175,000 in 2020/21. The following are a list of key points relevant to this relief:-
- The relief is available when a residence is passed on death to a direct descendent (child, grandchild, etc).
- Any unused ANRB is transferable to a surviving spouse or civil partner.
- The relief is only available for transfers on death, not lifetime transfers.
- If a taxpayer has more than one residence, their personal representatives must nominate which property will qualify.
The ANRB will also be available where part of it might be lost as a result of having downsized, or ceasing to own a property after 8 July 2015. The precise technical details of how this will work are still to be ironed out.
All the above sounds reasonably attractive but members need to be aware that there is a tapered withdrawal of the ANRB on a £1 for every £2 basis, where the value of the Estate exceeds £2 million. It appears from the information that has been published to date, that the £2 million figure is calculated before the deduction of any IHT reliefs. If this includes Business Property Relief it may mean that people with reasonably valuable businesses will find that the value of those businesses, although not subject to IHT themselves, may prevent them being able to claim the new ANRB.
This is a welcome addition to IHT reliefs, but as always the devil is in the detail and for many clients the relief may not be as generous as it first appears.
VAT Reverse Charge on Google Fees
A brief reminder that clients who pay for internet advertising on Google should operate the VAT reverse charge on Google’s fees. Google’s services are provided from the Republic of Ireland and are therefore an “import” of services. The UK VAT attributable to these fees should be accounted for as output VAT and, if the client is entitled to full recovery of input VAT, reclaimed in Box 4 on the VAT return. Of course the reverse charge should also be applied to other services that are provided by non UK suppliers.
Mortgage interest – the end of relief for higher rate taxpayers?
One shock announcement made by the Chancellor during his Summer Budget 2015 speech was the measure designed to restrict mortgage interest relief for higher rate tax payer landlords of buy to let properties.
The current regime
Applying the current regime, landlords of buy to let properties are able to obtain tax relief on mortgage interest at their personal rate of tax. This means that currently a top rate tax payer receives £45 tax relief for every £100 of mortgage interest paid in respect of their rental properties. However, the corresponding relief for a basic rate taxpayer is only £20
What is changing?
Mortgage interest relief in respect of buy to let properties will be restricted to 20% for all individuals, regardless of the personal rate of tax of the landlord. The measure will be phased in over 4 tax years, beginning in April 2017:
Applicable rates of relief Tax year
Top rate taxpayers
Higher rate taxpayers
Basic rate taxpayers
The effect of the changes is not immediate. Taxpayers will see no real change to their affairs until after 6 April 2017. Even after this date, the restrictions, as shown in the table above, will be phased in, meaning that higher and top rate taxpayers will still receive some relief for mortgage interest paid, at their personal rates of tax until 5 April 2020.
Time to plan
Despite the fact that the changes are not immediate, it would be worthwhile for landlords of buy to let properties to review their affairs now. In many ways, it may become more tax efficient for landlords to use limited companies for property ownership in future, especially as the corporate rate of tax looks set to fall again in 2017 to 19% and to 18% by 2020.
Worked example – a higher rate tax payer
In this example, a higher rate taxpayer receives £15,000 a year in gross rental income. He pays £5,000 interest on his mortgages and has other rental expenses worth £2,500. His total rental profit before tax is £7,500. Tax payable under the current regime would be £3,000, leaving him with £4,500 take home profit.
If he owned the properties personally in 2020 when the full changes come into force he would owe £4,600 in tax on the same rental profits, reducing the amount he actually receives to £2,900.
If, by this stage he holds the properties in a company he would pay just £1,350 tax on the rental profit, due to the corporation tax rate reducing to just 18% at this time.
This leaves the company with post-tax profit of £6,150. If this was paid to the landlord as a dividend the additional tax due would be £373 giving a total tax charge of £1,723. The landlord’s take home profit would be £5,777, equating to £2,877 more income than he would receive via personal ownership and £1,177 more than he would have received personally, before the rule changes.
For landlords who want to grow their portfolio it would be even more tax efficient to hold the properties in a company and not distribute dividends to reinvest the profits. This way they can build up a more significant portfolio.
Family Investment Company
Taken a step further, clients could undertake Family Investment Company (FIC) planning whereby the property portfolio is built up within the company, but share ownership could be altered order to improve income tax, and inheritance tax (IHT) efficiency.
Once established, ownership of the FIC is fragmented across the family by way of gifts of the shares held.
The gift of shares would be considered to be a Potentially Exempt Transfer (PET) from an IHT perspective, so the 7 year rule becomes applicable from the date of transfer.
We understand that clients can be wary about making outright gifts to family members. However, in using the FIC, different family members would have different rights over the shares, so it wouldn’t be the same as making an outright gift. The original donor of the gift would still have some control over the company and its assets, but capital value will have started to be moved away from the estate of the donor.
There are some potential downsides of owning and managing a property portfolio via corporate structure:
- If properties within the portfolio are sold, corporation tax would be payable on the profits. Although this would generally be at a lower rate than it would when paying capital gains tax (CGT) personally, income tax would be payable on any subsequent extraction of the profits.
- In order to fully access funds, the company would have to be liquidated. This would lead to a CGT charge at a maximum rate of 28%.
- Where a property is purchased with a value in excess of £500,000, 15% stamp duty land tax (SDLT) would be payable.
- Obtaining mortgages can be more difficult when using a corporate structure.
Where properties are already in personal ownership, it would not be a straightforward exercise to simply move them into a corporate structure. Where clients are considering this, they ought to seek CGT and SDLT advice of the implications of transferring an existing portfolio into a corporate structure.
Although corporate tax rates are currently very low, there is no guarantee that they will remain at this level over the coming years. We can be confident that they will remain to be low until at least the end of the current parliament, but there is no way of knowing what will happen beyond 2020.