Budget 2018: Top 10 contractor announcements
The two important caveats to the loss, due to raise £3bn in 2020-2024, are that it will not take effect until April 2020 and, initially, will only apply to PSCs with large and mid-sized clients.
The relevant Budget 2018 chapter is reproduced below, on top of a briefing note and government consultation response. Other Budget paragraphs affecting PSCs are also reproduced below, with chapter references and expert reactions.
1/Off-payroll Working in the Private Sector: delayed, with an exemption
(Budget report 3.8)
“To help people comply with the existing rules and bring private sector organisations in line with public-sector bodies and agencies, the government will reform the off-payroll working rules (known as IR35) in the private sector.
“This follows consultation and the roll-out of reform in the public sector. Responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker.
“To give people and businesses time to prepare, this change will not be introduced until April 2020. Small organisations will be exempt, minimising administrative burdens for the vast majority of engagers, and HMRC will provide support and guidance to medium and large organisations ahead of implementation.”
2/Entrepreneurs’ Relief: retained but reformed
“To support longer-term business investments, from 6 April 2019 the minimum period throughout which the qualifying conditions for relief must be met will be extended from 12 months to 24 months.
“In addition to the current requirements on share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief. This is to address an identified abuse of the current rules.”
Lucy Brennan, partner in the private wealth group at accountants Saffery Champness, said: “Entrepreneurs’ Relief will now have a two-year time limit before the reduced 10% CGT will apply.
Anyone thinking about selling their business in the next few years should seek advice to ensure that they comply with the new rules.”
“When considering Entrepreneurs’ Relief on the sale of shares in a company there have always been plenty of ways to trip up, with people usually considering they will get the relief as long as they hold over 5% of the shares.
“In looking at anti-avoidance this will need to be reviewed further in the future, as not only will HMRC consider the share of voting rights, but this has now been extended to shares of distributable profits and net asset value.”
Richard Hepburn, operations manager at Gorilla Accounting said: “Despite the change in minimum period, this could be good news for those contractors that have spent time building their business.”
Alex Henderson, partner at PwC, said: “A change to Entrepreneur’s Relief, to more narrowly target this at employee shareholders who’ve got 5% interest in profits and assets…will be significant for those affected.”
Accountants at Blick Rothenberg said: “The doubling of the holding period to 24 months is likely to hit fast growing tech businesses and is not welcome.”
3/VAT: registration threshold frozen
“Alongside the Budget, the government is publishing a response to the call for evidence on the design of the VAT threshold.
“The responses to the call for evidence did not provide a clear option for reform. The VAT threshold will therefore be maintained at the current level of £85,000 for a further 2 years until April 2022. The government will look again at the possibility of introducing a smoothing mechanism once the terms of EU exit are clear.”
Chris Bryce, CEO of IPSE said: “While the news will be welcomed by many millions of our smallest businesses – the self-employed – IPSE wants to see the government actually go a step further and increase the VAT threshold in line with RPI.
“This would resume a historic trend which saw the threshold pegged to RPI from 1980 until it was frozen in 2017. Doing so would give businesses both certainty and the space to grow and thrive – particularly import as the UK’s impending exit from the EU approaches.”
Jon Stride, of tax charity the ATT said: “We welcome the announcement that any change to the VAT threshold has been delayed for two years, especially with the stress many businesses face already because of ongoing uncertainty on Brexit and having to manage the transition to Making Tax Digital for VAT from April 2019.
”Any change to the VAT threshold will require a very detailed consideration of its implications not just for businesses but for all consumers.”
The Federation of Small Businesses said: “The chancellor was correct to resist any moves to lower the threshold at which point businesses begin to pay VAT, which would have extended a significant administrative burden to many more small firms right across the UK.”
4/Personal Allowance & Higher Rate Threshold: both hiked
(Budget Report Page 3)
“The Budget delivers the government’s commitment to increase the Personal Allowance to £12,500 and higher rate threshold to £50,000 in April 2019, a year earlier than planned.” (For more details see 3.7)
Gorilla Accounting reflected: “This is one year earlier than planned and the rates will stay the same for the 2020-21 tax year. This will hopefully be good news for contractors as they can potentially declare more dividends at the lower 7.5% rate of tax.”
The Association of Independent Professionals and the Self-Employed said: “It is very pleasing that the government has followed through on a manifesto pledge to increase the personal allowance. It’s a measure that will particularly help the lowest paid self-employed.”
5/Annual Investment Allowance: notched up to £1m
“The government will increase the Annual Investment Allowance to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020, to help stimulate business investment.”
Accounting firm Saffery Champness said: “The increase in AIA will support larger companies, rather than small businesses, but starts to show the increasing support for entrepreneurs and evidence that UK Plc is open for business and investment.”
Tax charity the ATT said: “The AIA has ‘yo-yoed’ around since its introduction in April 2008.[And] businesses repeatedly call for stability in the allowance in order to be able to plan for capital expenditure.”
The ATT’s Michael Steed added: “Given that such a relatively small number of businesses are likely to be able to take advantage of the increase from £200,000 to the £1,000,000 two-year limit, we think that the complicating transitional provisions should only apply to those businesses that are able to benefit from the temporary increase.”
The Institute of Directors said: “This is a measure…[we] have been calling for several years, and it should now bring some much-needed confidence for firms to make plans to boost their productivity.”
6/Work-related training costs: as you were
“Following consultation responses indicating that tax relief is unlikely to be effective in addressing the barriers to learning or incentivising training, the government is maintaining the scope of tax relief currently available to employees and the self-employed for work-related training costs. Instead, the government is launching the National Retraining Scheme and skills pilots to help those in work, including the self-employed, develop the skills they need to thrive.”
[Expert reactions will hopefully follow]
7/R&D: restriction returns
“To help prevent abuse of the payable credit, from 1 April 2020, the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year.”
London accountancy firm Blick Rothenberg said: “Small businesses have been hit with a reduction in R&D credits by restricting these to the PAYE paid by the company.
“This restriction was removed a few years ago, and it was welcomed. It is likely the smallest businesses that are currently in receipt of the tax credit will be the ones hardest hit.”
8/New Enterprise Allowance: extended
“The government will continue the NEA from April 2019 onwards. The NEA provides support and mentoring for benefit claimants who are looking to start or develop their business.”
IPSE’s Chris Bryce said: “The NEA has the potential to be a great springboard into the world of work and has already helped over one hundred thousand people onto the path of viable work, from the white van man to the one-woman band.
“IPSE is glad the NEA has been extended. Encouraging people into self-employment and to run their own businesses is an overwhelmingly positive thing for the economy, as it lowers unemployment and boosts productivity and government coffers in the long term.”
9/Apprenticeship Levy: reformed
“The government will introduce a package of reforms to strengthen the role of employers in the apprenticeship programme, so they can develop the skills they need to succeed.”
Agency body the Recruitment & Employment Confederation said: “The recognition that the Apprenticeship Levy must be more flexible and work better for employers is good news.
“Reducing the contribution levels for SMEs will help, but it’s disappointing that we still lack the flexibility needed to ensure training is available for temporary staff. All workers should have opportunities to progress, irrespective of what type of contract they are on. We want to work with government to ensure that the levy works better for employers and for all workers who want to upskill.”
The IoD’s director-general Stephen Martin said: “Low take up of apprentices by small businesses has been a quandary for the government since the levy was introduced and employers will cheer the decision to reduce the co-investment rate for small firms.”
The institute added: “However, technological and demographic changes will shift the goalposts for employers more than ever in the coming years, and the race to build genuine flexibility into the UK skills framework is far from won.
“Looking ahead, the aim should still be for the levy to do more heavy lifting. A wider training levy, one that acknowledges a much wider need for flexible provision on top of apprenticeships, should remain the goal for ministers as they plan beyond this parliament.”
10/Digital Services Tax: new levy to be consulted on
“From April 2020, the government will introduce a new 2% tax on the revenues of certain digital businesses [whose annual ‘UK’ revenues are above £25m from activities relating to search engines, social media platforms and online marketplaces] to ensure that the amount of tax paid in the UK is reflective of the value they derive from their UK users.”
The IoD said: “New taxes warrant a clear justification and careful implementation.
“The new proposed digital services tax may make political sense, but it has been announced with scant detail on how it will work apart from the revenue threshold, which is lower than even the EU has suggested. The chancellor must proceed with extreme caution here.”
Blick Rothenberg said: “[It’s] another Google tax. To be introduced in April 2020, ahead of any globally agreed OECD tax.
“This is likely to be the start of many other countries introducing their own regimes, which in turn will then hit UK digital businesses providing services overseas. Whilst the chancellor intends to consult on this to make sure it achieves its purpose, it will not be well received by global businesses making sales in the UK.”