The end is nigh.
During what one could be forgiven for thinking was a pre-election budget, the Chancellor confidently stated that ‘austerity is coming to an end – but discipline will remain’.
He then went on to promise a ‘double deal dividend’ if Brexit negotiations turned out to be successful and he warned that there would be a full-scale Spring Budget in 2019 if not.
This budget Newswire focuses on the tax measures which may affect you.
Main Budget Tax-Related Proposals
- Increases to the Personal Allowance and the Basic Rate Band.
- An extension of Off-Payroll Working (IR35) for the private sector.
- A temporary increase to the Annual Investment Allowance (AIA).
- VAT registration threshold is frozen for a further two years.
- Changes to Entrepreneurs’ Relief (ER) and Private Residence Relief (PRR).
- Measures to tackle the plastic problem.
Budget proposals are often subject to amendment during their passage through Parliament or in the subsequent Spring Statement.
In a welcome, but surprise, move the Chancellor announced he would accelerate his delivery on the government’s manifesto promise of a £12,500 personal allowance (currently £11,850) in April 2019, instead of 2020.
- There’s a reduction to the personal allowance for those with ‘adjusted net income’ over £100,000.
- The reduction is £1 for every £2 of income above £100,000.
- Once adjusted net income exceeds £125,000 (currently £123,700), personal allowance is extinguished.
The marriage allowance
The marriage allowance enables couples, whose income does not exceed the basic rate, to transfer 10% of their personal allowance to their spouse or civil partner.
The marriage allowance reduces the recipient’s tax bill by up to £238 a year in 2018/19.
Rates and bands
Hardly had Hammond dispensed the personal allowance good news before he revealed a significant increase in the basic rate band from its current £34,500 to £37,500, also from next April. Thus, he delivered another manifesto promise a whole year early.
Taking into account the personal allowance and the increase to the basic rate tax ceiling, the threshold at which the 40% band will apply will be £50,000 from the 6 April 2019.
The basic rate and additional rate of tax remain at 20% and 45% respectively, with the additional rate payable on taxable income above £150,000.
- In the 2018/19 Scottish Budget, the Finance Secretary for Scotland introduced five income tax rates ranging between 19% and 46%.
- The Scottish income tax rates and bands for 2019/20 will be announced on 12 December 2018 as part of the Scottish Draft Budget.
- Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK.
- From April 2019, the Welsh Government has the right to vary the rates of income tax payable by Welsh taxpayers. The UK government will reduce by 10 pence each of the three rates of income tax paid by Welsh taxpayers. In turn, the Welsh Government has provisionally set the Welsh rate of income tax at 10 pence which will be added to the reduced UK rates. This means the rates of income tax paid by Welsh taxpayers will continue to be the same as those paid by English and Northern Irish taxpayers. The Welsh Government will need to confirm this proposal prior to their final Budget.
Tax on dividends
The UK Dividend Allowance will remain at £2,000 for 2019/20.
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 still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.
- To determine which tax band dividends fall, dividends are treated as the last type of income to be taxed.
Tax on savings income
The Savings Allowance, introduced for the 2016/17 tax year and applied to savings income, remains unchanged.
- Individuals taxed at up to the basic rate of tax have an allowance of £1,000.
- For higher rate taxpayers the allowance is £500.
- No allowance is due to additional rate taxpayers.
Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000.
The starting rate is lost where taxable non-savings income exceeds £5,000.
In an interesting U-turn, the Chancellor announced that he will not be introducing a shared occupancy test as he previously indicated he would.
The current £7,500 relief is to remain in place.
Gift Aid – donor benefits
Draft legislation has been issued to simplify the donor benefits rules that apply to charities who claim Gift Aid tax relief on donations.
National Living Wage (NLW) and National Minimum Wage (NMW)
The government is adopting the Low Pay Commission (LPC) recommendation to increase the NLW by 4.9% from £7.83 to £8.21 from April 2019.
It is also accepting all other LPC recommendations for next April’s NMW rates:
- 21-24 year-olds up by 4.3% from £7.38 to £7.70 per hour.
- 18-20 year-olds up by 4.2% from £5.90 to £6.15 per hour.
- 16-17 year-olds up by 3.6% from £4.20 to £4.35 per hour.
- apprentices up by 5.4% from £3.70 to £3.90 per hour.
Corporation tax ratesThe main rate of corporation tax, currently 19%, will remain at this rate for another year. It still looks set to fall to 17% in April 2020.
Class 2 and 4 National Insurance contributions (NICs)
We had already been told that Class 2 NICs will not be abolished during this Parliament. After the embarrassing U-turn in March 2017, we have been told that there will not be any increases to Class 4 NICs rates either.
UK property income of non-UK resident companies
Confirming a pre-Budget announcement, from 6 April 2020, non-UK resident companies that continue with a UK property business, or have other UK property income, will be charged corporation tax. This will be charged rather than income tax, as at present.
Annual Investment Allowance
In a surprise move – which may be considered to be mainly a hollow gesture, due to the fact that few businesses will be in the position to take advantage of the offer – Chancellor Hammond increased the Annual Investment Allowance for two years starting from 1 January 2019. The allowance will change from £200,000 to £1,000,000 in respect of qualifying expenditure.
In common with similar moves in the past, complex calculations may apply to straddling accounting periods.
- Writing down allowances on the special rate pool of plant and machinery – including long-life assets, thermal insulation, integral features, and expenditure on cars with CO2 emissions of more than 110g/km – will reduce to 6% from April 2019. Currently it is set at 8%.
- 100% first year allowance and first year tax credits for products on the Energy Technology List and Water Technology List are set to be abolished from April 2020.
- 100% first year allowance for expenditure incurred on electric charge-point equipment is to be extended to 2023.
- There will be a new capital allowances regime with an annual rate of 2%, on a straight-line basis, for structures and buildings. This will be applicable to new non-residential structures and buildings on eligible construction costs incurred on or after 29 October 2018.
Change to the definition of permanent establishment
From 1 January 2019, the exemption will be denied if they are part of a ‘fragmented business operation’.
Preventing abuse of the R&D tax relief for SMEs
HMRC is said to have identified and prevented £300 million worth of R&D tax relief fraud.
To help prevent abuse of the Research and Development (R&D) SME tax relief by artificial corporate structures, the amount that a loss-making company can receive in R&D tax credits is to be capped at three times its total PAYE and NICs liability from April 2020.
Around 95% of companies currently claiming the payable credit will be unaffected.
HMRC preferential creditor
From April 2020, HMRC will have greater priority to recover taxes paid by employees and customers – namely, PAYE and VAT in the case of the insolvency of a debtor.
Existing rules will remain unchanged for taxes owed by the business.
HMRC will remain below other preferential creditors such as the Redundancy Payment Service.
- Corporate capital losses claims will be restricted to 50% of annual capital gains that can be relieved by brought-forward capital losses. This will apply as of April 2020.
- Changes to the Diverted Profits Tax have been introduced as of 29 October 2018.
- There will be an increase in the small trading tax exemption limits for charities, as of April 2019 it will be £5,000 per annum or, if the turnover is greater than £5,000, 25% of the charity’s total incoming resources. It is subject to an overall upper limit of £50,000, to £8,000 and £80,000 respectively.
- An income tax charge will be introduced on amounts received in a low tax jurisdiction in respect of intangible property. it will apply to the extent that those amounts are referable to the sale of goods or services in the UK, from 6 April 2019, and includes targeted anti-avoidance rules for arrangements entered into on or after 29 October 2018.
Digital Services Tax
In response to growing public disquiet, the Chancellor announced he will introduce a Digital Services Tax (DST), but only if agreement on an international way forward cannot be reached.
Hammond predicted that the new tax would raise £1.5 billion over four years from April 2020.
- DST is to be set at 2% on the revenues of search engines, social media platforms, and online marketplaces, where their revenues are linked to the participation of UK users.
- Businesses will need to generate revenues of at least £500 million globally to fall taxable under the DST.
- The first £25 million of relevant UK revenues are also not taxable
Intangible fixed assets
The Intangible Fixed Assets regime introduced on 1 April 2002 is now more than fifteen years old. The Chancellor announced that the government will seek to introduce targeted relief for the cost of goodwill in the acquisition of businesses with eligible intellectual property from April 2019.
With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.
Interestingly, in a nod towards Making Tax Digital, Mr Hammond announced a further freezing of the £85,000 registration, now until 2022.
While not a total shock, it is fair to say that it lays to rest, at least for the time being, any scope for the adoption of the Office of Tax Simplification proposals to greatly reduce the registration threshold.
VAT fraud in the construction sector
In a reannouncement of a 2017 commitment, Hammond confirmed that the government will pursue legislation to shift responsibility for paying VAT along the supply chain. This comes with the introduction of a domestic VAT reverse charge for supplies of construction services, with effect from 1 October 2019.
VAT treatment of vouchers
Draft legislation has been issued to introduce a new tax code for the VAT treatment of vouchers, such as gift cards, for which a payment has been made and which will be used to buy something.
The legislation separates vouchers with a single purpose (e.g. a traditional book token) from the more complex gift vouchers, and it sets out how and when VAT should be accounted for in each case. The new legislation is not concerned with the scope of VAT and whether VAT is due. Rather, it is concerned with the question of when VAT is due and, in the case of multi-purpose vouchers, the considerations upon which any VAT is payable.
VAT collection – split payment
The government wants to combat online VAT fraud by harnessing new technology. It is consequently consulting on VAT split payment.
The intention is to utilise payment industry technology to collect VAT on online sales and transfer it directly to HMRC.
In the government’s view, this would significantly reduce the challenge of enforcing online seller compliance and offer a simplification for businesses.
Draft legislation has been issued to change the VAT interest rules so that they will be similar to those that currently exist for income tax and corporation tax.
This will mean:
- Late payment interest will be charged from the date the payment was due until the date payment is received.
- HMRC will pay repayment interest when it has held taxpayer repayments for longer than it should.
- The provisions are expected to take effect for VAT returns from 1 April 2020.
Off-payroll working in the private sector
In what can hardly be described as a surprise move, the public sector changes to IR35, commonly referred to as off-payroll working, introduced in April 2017, are to be extended into the private sector from April 2020.
The thrust of the proposal is that responsibility for operating the off-payroll rules will be transferred from the contractor to the private organisation, agency, or third party engaging the worker.
One crumb of comfort is that the rule will only apply to large and medium-sized employers.
The Employment Allowance provides businesses and charities with up to £3,000 off their employer NICs bill.
From April 2020, the Employment Allowance will be restricted to employers whose employer NICs bill was below £100,000 in the previous tax year.
Most cars are taxed by reference to bands of CO2 emissions, multiplied by the original list price of the vehicle. The maximum charge is capped at 37% of the list price of the car.
The scale of charges for establishing the taxable benefit in respect to an employer-provided car is announced well in advance. This tax year there was generally a 2% increase in the percentage rate applied to each band.
This applies to all diesel cars (unless the car is registered on or after 1 September 2017 and meets the Euro 6d emissions standard), but the maximum is still 37%.
A new development for the current tax year is an increase in the diesel supplement from 3% to 4%.
There is no change to the current position in which the diesel supplement does not apply to hybrid cars.
For 2019/20, rates will increase by a further 3%.
Charging facilities for electric and hybrid cars
A new, backdated, exemption from a taxable employment benefit is being introduced, for those employers providing charging facilities for employee-owned all-electric and plug-in hybrid vehicles at or near the workplace.
When introduced, the exemption will be effective from 6 April 2018.
Employer-provided cars and vans are already exempt from this benefit.
Exemption for travel expenses
Legislation that will be effective from April 2019 will remove the requirement for employers to check receipts when making payments to employees for subsistence when they use benchmark scale rates.
Exemption will apply to standard meal allowances paid in respect of qualifying travel and overseas scale rates. Employers will only be asked to ensure that employees are undertaking qualifying travel.
The legislation puts existing concessionary accommodation and subsistence overseas scale rates on a statutory basis.
Self-funded work-related training
After consulting on extending the scope of tax relief for employees and the self-employed for work-related training costs, the government has decided not to introduce any changes to the existing rules. The National Retraining Scheme is being launched to help those in work, including the self-employed, to develop further skills.
No changes to the current Capital Gains Tax (CGT) rates were announced
The CGT annual exemption, currently £11,700, will increase to £12,000 from April 2019.
For disposals on or after 29 October 2018, two new tests are to be added to the definition of a ‘personal company’. These will require the claimant to have a 5% interest in both the distributable profits and the net assets of the company.
The new tests must be met, in addition to the existing tests. The existing tests already require a 5% interest in the ordinary share capital and 5% of voting rights.
ER – minimum qualifying period
From 6 April 2019, legislation will be introduced to extend the minimum ER qualifying period from one year to two years.
The measure will have immediate effect, except where a business ceased before 29 October 2018.
ER – dilution of holdings below 5%
Following consultation, draft legislation has been published to provide a potential entitlement to ER where an individual’s holding in a company is reduced below the normal 5% qualifying level.
The relief will apply where the reduction below 5% occurs as a result of the company raising funds for commercial purposes by means of an issue of new shares, wholly for cash consideration.
Shareholders will be able to make an election treating them as if they had disposed of their shares and immediately reacquired them at market value just before dilution.
To avoid an immediate CGT bill on this deemed disposal, a further election can be made to defer the gain until the shares are sold.
ER can then be claimed on the deferred gain in the year the shares are sold, under the rules in force at that time.
The new rules will apply for share issues which occur on or after 6 April 2019.
Gains for non-residents on UK property
Draft legislation has been issued to charge all non-UK resident persons, whether liable to CGT or corporation tax, on gains arising on disposals of interests in any type of UK land (whether residential or non-residential).
Certain revisions are likely to be made, following a further technical consultation, when the full legislation is introduced. However, the key points are covered here:
- All non-UK resident persons will also be taxable on indirect disposals of UK land.
- The indirect disposal rules will apply when a person has made a disposal of an entity that derives 75% or more of its gross asset value from UK land. There will be an exemption for investors in such entities who hold a less than 25% interest.
- All non-UK resident companies will be charged to corporation tax rather than CGT on their gains.
- There will be options to calculate the gain or loss on a disposal by using the original acquisition cost of the asset or by using the value of the asset at the commencement of the rules in April 2019.
- The CGT charge relating to the Annual Tax on Enveloped Dwellings will be abolished. The legislation will broadly have effect for disposals from 6 April 2019.
The main effect of the new legislation will be to extend the scope of UK taxation of gains to include gains on disposals of interests in non-residential UK property.
Payment on account and 30-day returns
As previously announced, draft legislation has been issued to change the reporting of chargeable gains and their associated CGT liability arising from the disposal of property.
From April 2020, UK residents will be required to make a return and a payment on account of CGT within thirty days of their completion of a residential property disposal. This applies not only in the UK, but on a worldwide basis.
The requirements will not apply in cases where the gain on the disposal is not chargeable to CGT – for example, where the gains are covered by private residence relief.
CGT private residence relief
The Chancellor announced his intention to make two changes to Private Residence Relief:
- The final period exemption will be reduced from 18 months to 9 months.
- Lettings Relief will be reformed so that it only applies in circumstances where the owner of the property is in ‘shared-occupancy’ with a tenant.
The government will consult on the details of both changes, as well as on other technical aspects.
The proposed changes are intended to be effective from April 2020.
There will be no changes to the current 36 months that are available to disabled persons or those in a care home.
Inheritance tax (IHT)
The nil rate band, at £325,000, is set to remain frozen until April 2021, the same level at which it has been since April 2009.
IHT residence nil rate band
On the 6 April 2017 a new nil rate band, called the ‘residence nil rate band’ (RNRB) was introduced, meaning that the family home can be passed more easily to direct descendants on death.
The RNRB is being phased in:
- For deaths in 2018/19 it is £125,000.
- Rising to £150,000 in 2019/20.
- Finally reaching £175,000 in 2020/21.
Thereafter it will rise in line with the Consumer Price Index.
- There are a number of conditions that must be met in order to obtain the RNRB, which may involve redrafting an existing will.
- The RNRB may also be available when a person downsizes or ceases to own a home on or after 8 July 2015 – where assets of an equivalent value, up to that of the RNRB, are passed on death to direct descendants.
- Amendments are to be introduced to the RNRB relating to downsizing provisions and the definition of ‘inherited’ for RNRB purposes.
- The amendments are to clarify the downsizing rules and are to provide certainty over when a person is treated as ‘inheriting’ property. They will have effect for deaths on or after 29 October 2018.
Stamp Duty Land Tax (SDLT)
First time buyers’ relief
The relief for first time buyers is to be extended to purchasers of qualifying shared ownership properties who do not elect to pay SDLT on the market value of the whole property when they purchase their first share.
Relief will be applied to the first share purchased, where the market value of the shared ownership property is £500,000 or less.
The relief is to apply retrospectively from 22 November 2017 and means that a refund of tax will be payable for those who have paid SDLT after 22 November 2017 in circumstances which now qualify for first time buyers’ relief.
Higher rates for additional dwellings (HRAD)
A minor amendment will extend the time allowed to claim back HRAD, where an individual sells their old home within three years of buying their new one.
The measure also clarifies the meaning of `major interest` in land for the general purpose of HRAD.
Consultation on SDLT charge for non-residents
The government will publish a consultation, in January 2019, concerning a SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland.
Extension of offshore time limits
Draft legislation, intended to increase to twelve years the assessment time limits for offshore income and gains and the recovery of inheritance tax, has been issued.
Where an assessment involves a loss of tax brought about deliberately, the assessment time limit remains twenty years from of the end of the year of assessment.
The legislation does not apply to corporation tax, or where HMRC has received information from another tax authority under automatic exchange of information.
The potential extension of time limits will apply from the 2013/14 tax year, where the loss of tax is brought about by careless behaviour, and from the 2015/16 tax year in other cases.
The amendments will have effect once Finance Bill 2018-19 receives Royal Assent.
- The current assessment time limits are ordinarily four years (six years in the case of carelessness by the taxpayer).
- The legislation cannot be used to go back earlier than 2013/14.
- If there has been careless behaviour, HMRC can make an assessment for up to twelve years from 2013/14 in respect of offshore matters, but HMRC cannot raise an assessment for 2012/13 or earlier (unless there is deliberate error by the taxpayer).
Penalties for late submission of tax returns
A new points-based penalty regime for late return submission is to be introduced.
Depending on the frequency of the filing obligation, a defined number of penalty points will accrue. Once a triggering threshold has been reached, a fixed penalty will be charged.
Further late submissions will attract a fixed penalty, until the taxpayer meets all submission obligations by the relevant deadline for a set period of time.
Once this happens, and a taxpayer has provided any outstanding submissions for the preceding 24 months, the points total will reset to zero.
Points will generally have a lifetime of 24 months after which they expire, so if a taxpayer accrues points but does not reach the threshold, the points will expire after 24 months.
Taxpayers will have a separate points total per submission obligation.
Penalties for late payment of tax
Draft legislation has been issued to harmonise the late payment penalty regimes for income tax, corporation tax, and VAT.
The penalties will consist of two penalty charges, one charge based upon payments and agreements to pay in the first thirty days after the payment due date, and another charge based upon how long the debt remains outstanding after the thirty days.
As part of the government’s response to tackling plastic waste, the following announcements were made:
- Single-use plastics will be addressed in the Resources and Waste Strategy, later in the year, for situations in which recycling rates are too low and producers use too little recycled plastic.
- The issue of excess and harmful packaging will be addressed with a tax on the production and importation of plastic packaging which does not contain at least 30% recycled plastic.
- This tax will be implemented in April 2022.
- The Resources and Waste Strategy will also consider ways to reduce the environmental impact of disposable cups.
- Although the government does not believe that a levy would be effective at this time, it will return to the issue if insufficient progress has been made by those businesses already taking steps to address the matter.
Whenever the Chancellor announces the results of his Budget, there’s always an awful lot to digest. Don’t suffer in silence. Call us; we are here to help