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AUTUMN BUDGET 2018 – END OF AUSTERITY?

November 30th, 2018

As is by now customary we attach our take on the Chancellors Autumn Budget and bring you up to date both with current and postulated changes to the tax system within the foreseeable future and within Longhill Accounting itself. 

We start off with a summary of the main changes that came out of this year’s budget. This is not a comprehensive overview and : some various fairly specialist measures and other matters that do not seem to apply to our clients have been omitted. I have also omitted lifestyle changes like duty on alcohol and fuel. Benefits & discussion of changes to these  have also been omitted. 

 

 

OVERALL THEME

 

Essentially the economy is in better shape than expected a year ago. Borrowing is down and employment levels are up, and National debt has expected to have peaked at a level of 85% of GDP in 2016-17. Clearly some sectors of the economy are faring better than others – high street retail is in serious trouble for example – but overall the picture is apparently better than it was.

 

This state plus widespread unhappiness with cuts in the public sector has essentially meant that the Government has to all intents and purposes abandoned its intention of balancing the Budget this parliament and instead this Budget tried to hand out some good news.

 

The elephant in the room remains the Brexit deal or lack of it and the effect that withdrawal from the EU will have on the economy. Theories abound but in truth at this stage no one knows. We will have a better idea next year but if the last economic cycle is anything to go by then all the effects won’t be felt across all of the country immediately. Further discussion is definitely outside the scope of this circular!

 

The ‘end of austerity’ tag may therefore be premature at this stage.

 

Personal tax & National Insurance

 

          The Personal allowance for 2019-20 will rise to £12500 (from £11850 this year).

 

          The Higher Rate threshold for income tax will be increased to £50000 for 2019-20 (from £46350 this year)

 

          National Insurance primary threshold for 2019-20 will be £8632 (up from £8424) in 2018-19; upper earnings limit will rise to £50000 along with the higher rate personal tax threshold.

 

          The abolition of Class 2 National Insurance (trailed over last couple of years) will not take place during this parliament. This was not a Budget measure; this was announced over the course of the summer.

 

          Tax return late submission penalties. Last year we talked about the reform to the current penalty system. There is no update to this; indeed a separate release from HMRC in November has delayed this until 2021.

 

          No changes were announced to the way in which dividends are taxed (so 1st £2000 remains taxable at 0%, and others taxable at 7.5%/32.5%/38.1% depending on whether you are a basic/higher/top rate tax payer.

 

Company tax

 

          The headline rate of Corporation Tax is still due to fall to 17% with effect from 1 April 2020; the current rate remains at 19% for all companies.

          The Budget announced a temporary rise in the Annual Investment Allowance (AIA). This is the maximum amount of capital expense that can be written off against profits for a given period. This will rise to £1m p.a. from the current level of £200,000 for a period of 2 years commencing 1 January 2019.

 

          Employment Allowance (EA). This allowance gives small companies relief from their first £3000 of Employer NIC in a given tax year. From April 2020 this relief will be restricted to companies with an NIC bill of <£100k in the previous tax year; this is presumably to prevent a giveaway to larger employers.

 

          R&D relief. From April 2020 the amount of payable R&D tax credit will be restricted to 3x the company’s total PAYE & NIC for the previous year. Not many of our clients claim R&D credit and I am not entirely sure whether this is likely to have a practical effect on those that do (depends on their individual circumstances)

 

VAT.

 

          The VAT registration threshold has been frozen at £85,000 for 2019-20; this will be the third consecutive year that it has stayed at this level.

          A ‘reverse charge’ VAT levy is to be brought in affecting the building industry. This was announced in the summer rather in the Budget and is due to come into force on 1 October 2019. This will affect the supply of services (i.e. labour) in the construction industry where both contractor and subcontractor are VAT-registered and is designed to combat perceived VAT fraud in the building industry.

 

The list of services affected is the same as those affected by the Construction Industry Scheme.

 

Under these new arrangements, a subcontractor will no longer charge the contractor VAT if the contractor is VAT-registered. The contractor will account for both sales and purchase VAT on its own VAT return (so a nil net position). This prevents the situation arising where the contractor claims back the subcontractor VAT but the subcontractor does not declare it to HMRC (clearly HMRC think that this is happening). If a contractor is not VAT-registered then the subcontractor presumably charges VAT as normal.

 

Both subcontractor and contractors will have to ensure that VAT is charged and declared correctly. We will pick this issue up separately with all clients likely to be affected.

 

IR35 & private sector

 

As those working in the sector will know the supply of time through a personal services company (the company typically supplies the services of the owner to its customers) has long been a target of HMRC who see these companies as a way of avoiding National Insurance.

 

The IR35 rules are designed to apply where the relationship between customer and supplier would be one of employer-employee but for the existence of the limited company and basically taxes receipts from the affected customer as if they were PAYE earnings (this tends to increase the amount of tax & NI paid by the company and its owner). The decision as to whether these rules apply has basically been left to the service company which in the view of HMRC is a bit like a turkey deciding whether Christmas should be celebrated, and in their view basically doesn’t work.

 

For the last 18 months and in the public sector only the decision and responsibility for applying the rules correctly has been moved from service company to ultimate customer; with effect from 5 April 2020 this will also apply in the private sector.

 

          If a customer decides that IR35 rules apply it will deduct personal income and NI from the supplier’s invoice and pay the net amount to the service company. The individual will be given payslips and other payroll related tax information but will not necessarily be entitled to holiday or sick pay.

          Accounting in the service company is too complicated to go into here but basically the accounts ignore turnover treated in this way and the income is treated as the personal income of the director-shareholder. Ultimately this may leave the company with costs that it cannot offset against income.

          The Budget stated that this measure would apply to larger companies only (presumably they mean the service company customers) and that the smallest 1.5m companies would not be affected; we do not yet know how these bands will be defined.

          We expect some initial teething troubles as the measure is rolled out, especially with customers trying to apply the rules to suppliers undertaking work that does not fall within IR35

          We strongly recommend that all personal service companies carry out an IR35 check of their arrangements before the change in the law comes in. This should be useful evidence in the event that the ultimate client unilaterally and incorrectly decides that IR35 applies.

 

MAKING TAX DIGITAL

 

          Nothing was said in the Budget beyond confirming the arrangements that will apply from April 2019, that is to say that VAT-registered businesses whose turnover is also above the VAT threshold will need to submit VAT returns digitally after that date. That to all intents and purposes means using software. We are contacting or have contacted all customers likely to be affected

          No other aspect of MTD is expected to come into force before April 2020. We still do not have clarity on the size of businesses to be affected or whether income or corporation tax will be affected first.

          In reality it seems unlikely that either government or small business is likely to be fully prepared for MTD by 2020 and our belief is currently that either the 2020 date will be pushed back or extra MTD reporting will apply only to larger businesses (e.g. those above the VAT threshold)

 

DIVIDENDS. There was no mention of any cut to the existing 0% tax band applying to dividends beyond that already announced; that is to say from 2018-19 the 0% band will be reduced to £2000. Nor was there any increase in tax on dividends.

 

PENSIONS. No new measures. Lifetime Allowance increases to £1055k from April 2019.

 

TAX-RELATED MEASURES TO COME INTO FORCE FOR 2018-19

 

There are a few tax-related changes announced over the last 12-18 months due to come into force next year. These are as follows:

 

          Capital Gains Tax

 

The changes to the law in this area are marked by the withdrawal of limitation of reliefs on main residence disposals. These all apply for 2020 but start planning for these changes now.

 

          From April 2020 there will be a change to the lettings relief currently available on main residences. As matters stand if you rent your main property out and then later move back into it the first £40000 of any gain incurred during letting is exempt for CGT purposes. Now it appears that this will only apply where owner and tenant are sharing occupation (in which case presumably the owner is living in the property anyway).

 

          Also from April 2020 the deemed occupation period applied to a property which was once a taxpayers main residence will be cut from 18 months to 9; this basically means that if you move out of a property and into a new one to assist the sale process you now have 9 months to sell the old property before having to consider Capital Gains Tax rather than 18.

 

          With effect from 5 April 2020, any CGT payable on the disposal of residential properties will be due 30 days after sale. This will be an ‘on-account’ payment, supported by a special return for each disposal, and the gain will still need to be reported through the taxpayers return for the year. There is no doubt that many small landlords will be caught out by this relatively short window but there seem to be two other problems:

 

o   The deemed date of disposal is the date of contract exchange not the date of completion. So it is entirely possible that CGT will be due before the taxpayer has actually received the disposal proceeds or even knows what the final costs of sale are.

o   While CGT refunds on losses on other residential properties will be processed through the special return system there is no in-year relief for other CGT losses (e.g. on quoted shares). So tax may be due on a property disposal but the refund delayed for 18 months.      

 

We suspect that a number of landlords will move properties into limited companies (that are not so far affected) but this approach may carry problems of its own. Talk to us about your plans.

 

NEW TAX-RELATED MEASURES IN FORCE FOR 2018-19

 

          Withdrawal of mortgage relief

 

From 2016-17 relief for mortgage interest on residential rental properties started  to be withdrawn. We have started to see the effect of this in 2017-18 tax returns.

 

The mechanics of computation are fairly hideous but essentially mortgage interest will be treated as a relief against tax payable rather than as a deduction against rental profits.

 

Although the change of computation will be phased in over three years the idea is that eventually relief on mortgage interest is restricted to basic rate tax.

 

Higher rate tax payers are obviously affected but some taxpayers currently only paying basic rate may also be affected as the reclassification of mortgage interest may result in taxable income breaching the higher rate tax threshold.

 

We have also seen some issues with automatic (and sometimes incorrect) allocation of personal allowance by HMRC impacting on the availability of the tax relief.

 

Note that the definition ‘mortgage interest’ includes interest on all loans used to buy residential rental property and fees incurred in obtaining finance.

 

Commercial properties are not affected.

 

For 2017-18 25% of mortgage interest paid was subject to the new rules, 75% to the old rules. For 2018-19 the proportions move to 50-50 and for 2019-20 to 75-25. The new rules will be completely in force by 2020-21.

 

          IHT break on family home

 

          An IHT break for the family home came into effect from 5 April 2018.

 

          In effect if a main residence (and presumably the definition will be the same as for Capital Gains Tax) is passed on to a direct descendent then the donor will receive an extra nil rate band to assist them to do so. This will start at £100,000 per person in 2017/18 and rise to £175,000 by 2020/21. So a married couple might receive an extra £350k between them and, taking their current combined nil rate IHT bands into account, will be able to pass on a house worth up to £1m without suffering any Inheritance Tax.

 

OTHER TOPICAL ISSUES

 

Marriage Allowance

 

Marriage Allowance came into force three years ago. This allows one spouse to transfer 10% of their personal allowance to the other in some circumstances if their income is less than the level of the personal allowance (£11500 for 2017/18). We try to anticipate this wherever possible and to make the appropriate claim but in circumstances where we are not acting for both spouses we may not always appreciate that a claim is due.

 

Please let us know if you believe this applies to you and a claim has not been made.

 

Auto-enrolment pension contributions

 

Auto-enrolment (compulsory pension company pensions) has been rolled out across the business sector over the last two years and some of you may be paying employee contributions under auto-enrolment.

 

It has come to our attention that some – not all – auto-enrolment schemes are post-tax schemes rather than pre-tax, in other words your pension contributions are calculated on the basis of your salary after tax not – as in normally the case with employee tax – before.

 

In these cases, the pension provider will claim basic rate tax on your behalf. However in the event that you are a higher rate taxpayer we will need to claim higher rate tax relief through your tax return. There does not seem to be an easy way to do this. You will:

 

a)      Need to check the paperwork you originally received from the pension company, and;

b)      Probably have to add up the deductions made on your individual payslips to work out the figure to be disclosed.

 

If you think that you may be affected by this issue please let us know. We noted this issue in our last circular but it bears repeating.

 

PAYE corrections and comparisons to Self-assessment returns.

 

We have noticed this year that HMRC have been quicker at calculating and notifying taxpayers of PAYE anomalies arising in 2017-18, and a number of clients have received PAYE refunds before we have calculated their overall income tax.

 

This is all very well but it seems that the Self-assessment and PAYE arms of HMRC are not joined up (what a surprise) and the PAYE arm is calculating a nominal tax bill without taking note of untaxed income like self-employment or dividends. So some of these refunds have been handed back as soon as the tax computation has been completed and filed.

 

Please remember that the basic rule is that all your income needs to be declared on your Self-Assessment tax return, whether or not tax was deducted at source.

 

IT SECURITY

 

As ever please be wary of unsolicited communications from organisations purporting to be HMRC or ‘official’ in some way, either pretending you have a tax refund or trying to frighten you with threats of penalties / legal action. The general rules are that:

 

          HMRC will generally communicate with you by letter, not by unsolicited email, text or phone call.

          HMRC will not generally advise you of tax refunds (they will wait for you to claim them).

          If in any doubt please check with us before taking any action. As we are your tax agents we are copied in on legitimate correspondence and will generally have a view on what you should do.

 

The content of this article is for general information only. It should not be relied on and action which could affect your business or personal circumstances should not be taken without appropriate professional advice.