Tax

Autumn Budget 2017 – the key implications for personal and business tax

Last week Chancellor Philip Hammond presented the UK’s first Autumn Budget in 21 years.

As budgets go it was not jam packed full of surprises and unlike George Osborne Philip Hammond is not one for pulling the proverbial rabbit out of the hat. Nevertheless, it was not all bad news – especially for anyone about to become a first-time-buyer.

The Chancellor’s report set out a range of key-actions that the government will take including support for a greater level of house building. His view is that the UK economy continues to grow and continues to create more jobs.

Although, by his own admission productivity remains stubbornly weak, well below the UK’s long running average of 2%. Hammond delighted would-be first-time-buyers who will not now have to pay Stamp Duty Land Tax on homes costing up to £300,000.

The key Budget tax proposals

  • An increase to the personal allowance and the basic rate tax band.
  • Greater tax relief for investment in certain Enterprise Investment Companies.
  • Proposals to change Entrepreneurs’ Relief.
  • Improvements to Research and Development tax credit regimes.
  • VAT limits frozen for two years.
  • Support for businesses reeling from the effects of the recent business rates revaluation and the impact of the so called ‘staircase tax’.

There were also previously announced measures including:

  • A slowing of the introduction of Making Tax Digital for Business.
  • The 2018 reduction in the Dividend Allowance.
  • Changes to NICs for the self-employed.
  • Capital allowance changes for cars from April 2018.

As always, what has been announced may be subject to change either in the Spring Statement or the subsequent Finance Act.

Personal Tax

The personal allowance

The personal allowance, currently £11,500, will increase to £11,850 in 2018/19. However, not everyone can benefit from the full personal allowance. The allowance is reduced by 1 for every £2 of adjusted net income’ above £100,000. So, for 2018/19 this will mean there will be no personal allowance available where a person’s adjusted net income exceeds £123,700.

Tax bands and rates

The basic rate of tax is to remain at 20%. However, the band of income taxable at this rate is set to rise from £33,500 (2017/18) to £34,500 (2018/19). The threshold at which the 40% band starts will rise from £45,000 (2017/18) to £46,350 in 2018/19, for those who are entitled to the full personal allowance. The 45% additional tax rate remains payable on taxable income above £150,000.

 Note The basic rate for income (other than savings and dividend income) is different for taxpayers resident in Scotland. The Scottish Government will announce the Scottish income tax rates and bands for 2018/19 in its Draft Budget on 14 December.

Reduction in the Dividend Allowance

Currently the first £5,000 of dividends are charged to tax at 0% (the Dividend Allowance).

Dividends received above the allowance are taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends within the allowance count towards an individual’s basic or higher rate band and so affect the rate of tax paid on dividends that exceed the £5,000 allowance. Dividends are treated as the last type of income to be taxed. The Chancellor has confirmed the Dividend Allowance is to reduce from £5,000 to £2,000 on 6 April 2018.

The reduction in the allowance will particularly impact shareholders in close and family companies who typically pay themselves a low salary and high dividends.

The impact of the reduction will be up to:

  • £225 additional tax for basic rate tax payers,
  • £975 additional tax for higher rate taxpayers, and
  • £1,143 additional tax for additional rate taxpayers.

Note  The government anticipates that even with the reduction in the Dividend Allowance, 80% of ‘general investors’ will pay no tax on their dividend income.

The Marriage Allowance

The Marriage Allowance permits married couples or persons in a civil partnership who do not receive income at above the basic rate to transfer 10% of any unused personal allowance to their spouse or civil partner, reducing their tax bill by up to £230 a year in 2017/18.

In a commonsense-move, Chancellor Hammond said legislation is to be introduced to allow Marriage Allowance claims on behalf of deceased spouses and civil partners, and for the claim to be backdated for up to four years where the entitlement conditions are met.

This measure will come into force on 29 November 2017.

Savings

Originally aimed at low-income working households, Help to Save accounts will be withdrawn in April 2018. Although, savers can choose to continue to save for a further two years.

The £5,000, 0% Starting Rate for Savings band is still intact, as are:

  • The basic rate taxpayers £1,000 saving allowance, and
  • The high rate taxpayers £500 saving allowance

There’s no change in the overall ISA limit which was significantly increased from £15,240 to £20,000 for 2017/18.

There continues to be four types of ISAs:

  • Cash ISAs
  • Stocks and shares ISAs
  • Innovative Finance ISAs (allowing investment into peer to peer loans and crowdfunding debentures) and
  • The Lifetime ISA

Money can be placed into one of each kind of ISA each tax year.

Universal Credit

A state benefit intended to replace some benefits such as housing benefit, tax credits and income support and specifically designed to support those on low income or out of work. An individual’s entitlement to the benefit is made up of several elements to reflect their personal circumstances.

Entitlement is withdrawn at a rate of 63p for every extra £1 earned (the ‘taper rate’) where claimants earn above the work allowances. In response to public concerns over the roll out of Universal Credit, the Chancellor announced that households who qualify for Universal Credit from the day they apply, rather than after seven days.

Housing Benefit will continue to be paid for two weeks after a Universal Credit claim. New claimants will be able to access a month’s worth of support within five days, via an interest-free advance, from January 2018.

This advance will be repayable over 12 months, rather than the current six.

Business Tax

Making Tax Digital for Business

There are no new announcements, merely a restatement of Mel Stride’s (the Financial Secretary to the Treasury) 13 July written Ministerial Statement:

  • Mandation has been deferred for all except the VAT registered.
  • Then only for those above the £85K compulsory registration threshold.
  • It was confirmed that MTD’s scope will not be widened until April 2020 at the earliest.

Corporation tax rates

Corporation tax rates up to 31 March 2021 are already in place, as follows:

  • 19% for the Financial Years beginning on 1 April 2018 and 1 April 2019
  • 17% for the Financial Year beginning on 1 April 2020.

Note Under devolved powers Ireland could choose to set its own rate in the future.

National Insurance contributions (NICs)

In November 2017, the government decided to defer abolishing Class 2 NICs by one year to April 2019. The deferral allows time to engage with interested parties to discuss their concerns and the impact on self-employed individuals with low profits.

In his spring ’17 Budget, the Chancellor announced that he was going to increase the main rate of Class 4 NICs but within a week he was forced to announce that the increase would not take place and there will be no increases to NICs rates in this Parliament.

There will, however, be a new 0% rate.

Partnership taxation

The government intends to introduce legislation to clarify aspects of partnership taxation such as:

  • Where a beneficiary of a bare trust is entitled absolutely to any income from that bare trust, it will be subject to the same rules for calculating profits and reporting as actual partners.
  • How current rules and reporting requirements operate in circumstances where a partnership has partners that are themselves partnerships.

The proposed legislation will also:

  • Relax the information to be shown on the partnership return for investment partnerships, both for the Common Reporting Standard or Foreign Account Tax Compliance Act, where there are non-UK resident partners, who are not chargeable to tax in the UK.
  • Clarify that the allocation of partnership profits shown on the partnership return is the allocation that applies for tax purposes for the partners.
  • Provide a structured mechanism for the resolution of partners’ disputes over the allocation of taxable profits (or losses) shown on the partnership return.

Improving Research and Development (R&D)

The Chancellor announced a raft of new measures including:

  • An increase in the rate of the R&D expenditure credit for the large company scheme from 11% to 12%, on expenditure that is incurred on or after 1 January 2018.
  • A pilot (three years) for a new Advanced Clearance service for R&D expenditure credit claims.
  • A campaign to increase awareness over the eligibility for R&D tax credits among SMEs.

Mileage rates for non-corporate landlords

In what can only be a positive simplification measure, Hammond announced that the government will give owners of unincorporated property businesses the option to use a fixed rate deduction for every mile travelled by car, motorcycle or goods vehicle for business journeys.

This will be as an alternative to claims for capital allowances and deductions for actual expenses incurred, such as fuel. The changes will have effect from 6 April 2017.

Government consultations

The government is to consult on:

Profit fragmentation – To establish the best way to prevent UK traders or professionals who avoid UK tax by arranging for UK trading income to be transferred to unrelated entities. This includes funds that remain held offshore.

Royalties Withholding Tax – Concerning the rules expanding the circumstances in which a royalty payment to persons not resident in the UK has a liability to income tax.

Intangible Fixed Asset regime – The tax treatment of intellectual property (also known as the Intangible Fixed Asset regime) to establish if there is scope for targeted changes to this regime so that it better supports UK companies investing in intellectual property.

Off-payroll working extension to the private sector – To look at ways to tackle non-compliance with IR35 in the private sector. One possible next step might be to extend the recent public sector reforms to the private sector.

Non-UK resident companies – To explore how to charge non-UK resident companies with UK property income and/or chargeable gains (relating to UK residential property) to corporation tax. This is rather than income tax or capital gains tax, as at present.

Other changes to business tax

The abolition of Disincorporation Relief – At the time of its introduction in 2013 disincorporation relief was given a five-year sunset clause. As a result, the relief is going to be allowed to expire at the end of March 2018. Recommended by the Office of Tax Simplification, the relief is aimed at certain small companies where the shareholders want to disincorporate their businesses. Currently, the relief removes the tax charge arising on the disposal of the company’s assets of land and goodwill if qualifying conditions are met.

Extension of First Year Allowances (FYA) – The 100% FYA available for businesses purchasing zero-emission goods vehicles or gas refueling equipment, due to end on 31 March 2018, has been extended for a further three years.

Extension of First Year Tax Credits (FYTC)  The credit system enables loss-making companies to claim FYTC when they invest in products that feature on the energy and water technology lists. A FYTC claim allows the company to surrender a loss in exchange for a cash credit and is currently set at 19%, but the facility was due to end on 31 March 2018. It is to be extended for five years, but the percentage rate of the claim is to reduce to two-thirds of the corporation tax rate. The changes will be effective from 1 April 2018.

Capital gains indexation allowance  –  The indexation allowance claimed by companies against capital gains arising from the disposal of assets on or after 1 January 2018, will be calculated using the Retail Price Index factor frozen at December 2017, irrespective of the date of disposal of the asset.

In part two we cover employment, capital and other taxes.

Brian Palmer is the tax policy adviser for AAT.

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