Following the Chancellor’s Budget announcements on Wednesday, our experts have brought together some highlights as a summary of the key points that may affect you and your business.
- Personal allowance – increased to £11,850 in April 2018 from £11,500 (England, Wales and NI only)
- The response to this in the forthcoming Scottish Budget in December will be interesting. The Scottish Government is currently consulting on changes to income tax rates and bands, which are devolved to Holyrood. Experience from last year suggests that the increase in the personal allowance may be mirrored, but the increase in the level at which higher rate tax is paid is less likely to be matched. However, it may be that the Scottish Government does something more fundamental in this area – this is highly unlikely to be a tax cut, particularly for higher earners! Based on current tax rules Scottish tax payers earning a £60k salary will pay at least £600 more tax p.a. than their counterparts in the rest of the UK. This will also throw focus on to the difference between income which is taxed at devolved rates, and dividends which continue to be taxed at UK rates (along with capital gains). A significant change may lead to taxpayers wanting to consider their structure, and in some cases residence.
- Taxing gains on UK immovable property
- The government announced that from April 2019 tax will be charged on gains made by non-residents on disposals of all types of UK real estate, extending existing rules that apply only to residential property. The measure will expand the tax base of both the corporation tax and capital gains tax regimes. Indirect disposal rules will apply in certain cases involving the sale of a ‘property rich’ entity. Properties will be rebased from April 2019 so that only gains accruing thereafter should be taxed under the new rules. This measure is intended to more closely align the tax treatment on non-resident owners of UK real estate with that of UK residents, and reduce the incentive to hold UK property through offshore structures, often in low tax or no tax jurisdictions. Although the core features of the provisions are stated to be fixed, a consultation was launched on Budget Day and comments are sought by 16 February 2018. Non-resident investors should consider the potential impact for them of this fundamental change.
- Investment and growth
- The government is concerned that companies should not be discouraged from seeking external investment because that would lead to the dilution of individual shareholders below the 5% threshold for entrepreneurs’ relief purposes. They will consult on a new mechanism to allow individuals to retain the benefit of the relief on gains accrued up to the point of the new investment.
- R&D tax credits – being allocated a further £2.3 billion for investment in R&D and increasing the main R&D tax credit to 12%
- This is a welcome increase in the credit which large companies can claim on qualifying expenditure from the current level of 11%. Unfortunately, there does not seem to be a similar increase in the (admittedly more generous) provisions for SMEs. The increase is effective for expenditure incurred on or after 1 January 2018, and so care will need to be taken by companies with a year end other than 31 December around this. R&D can be claimed by companies which innovate, and is not limited to the more cutting edge hi-tech companies which the name perhaps suggests. Companies which think they may benefit from the relief should speak to their Campbell Dallas contact.
- Enterprise Investment Scheme (EIS) allowance doubled to £2m
- This increase is only relevant where the amount above the current limit of £1m for individuals is invested in “knowledge intensive companies”. This is a category of company created by previous changes to the EIS rules, and given certain preferential treatment at that time. These companies will also now benefit from being able to receive an increased amount of EIS investment per annum of £10m. There is also some relaxation in how “old” the company can be and still qualify for EIS status. In order to be a knowledge intensive company there will be a number of tests, including some around the amount of costs incurred on R&D/innovation and the number of employees with higher education qualifications engaged in R&D. The intention here is to enable these businesses to access more funds to grow from external investors. The difficulty with such businesses for the UK economy is that they are often acquired by larger tech companies (often from the US) with deep pockets before they grow into large businesses in the UK. How effective this measure is in dealing with the problem remains to be seen.
- Corporation tax – remains at 19%
- The main rate remains at 19% despite wide rumours of a cut to 15%.
- Corporation tax – indexation allowance
- For company held properties; indexation allowance is being frozen up to 1 January 2018. This measure is most likely to hit long term property investors who currently benefit from inflation based increases to the base cost of their investments on the ultimate disposal of their land and buildings.
- North Sea oil and gas industry – corporation tax changes to encourage fresh investment
- Where oilfields are transferred to new owners post 1 November 2018, the new owners will now be able to claim tax relief for costs of shutting down the oilfield, decommissioning and clean-up costs. This should make it more attractive to invest in older oilfields where there is still some remaining energy production capacity by passing the corporation tax history from the old to the new owners.
- Income tax is being applied to royalties on UK sales paid to low tax jurisdictions from 2019
- This is a measure targeted at multinationals who deliver digital content, and hold their intangibles in low tax regimes. Withholding tax will be applied to the royalties paid on use of those intangibles insofar as they relate to UK sales. The Government realises that this is something of a patch, and that further international cooperation and pressure is required in order to remedy the perceived avoidance by such companies. They have set out a position paper to this effect, and state they will be looking to work with other jurisdictions to achieve this.
- Employer tax – IR35
- Off-payroll working rules for the public sector were reformed in April 2017. According to the Government, early indications suggest they believe public sector tax compliance is improving as a result and therefore a possible next step would be to extend the reforms to the private sector. Such measures are intended to counteract individuals who effectively work as employees even if they choose to structure their work through a company by taxing them as employees. A consultation will now take place in 2018. Extending the public sector rules to all companies is likely to increase the pressure on SMEs from a legal, operational and compliance perspective.
- VAT threshold for small businesses frozen for two years at £85,000
- This could be a warning of a reduction of the threshold in two years’ time. 83% of those polled by VAT Partner Veronica Donnelly agreed this was an indication of exactly that.
- Making Tax Digital (MTD) regime
- There were no major announcements or changes to the proposed MTD regime which makes electronic record keeping mandatory for VAT from April 2019. A reduction in the VAT threshold at some point in late 2019 timed to coincide with widening the scope of MTD to smaller business seems highly likely.
If you would like to discuss any of these matters please contact your usual Campbell Dallas advisor or call us on 0141 886 6644.
View a copy of our Budget summary here.
The information in this article should not be regarded as financial advice. This is based on our understanding in November 2017. Laws and tax rules may change in the future.