This week Chancellor Philip Hammond issued his first Autumn Statement to Parliament, in which he set out the government’s fiscal policy objectives, including a £23 billion investment in infrastructure over the next five years to combat a lack of unaffordable housing, the UK’s low productivity and revised-down growth forecasts.
Flagship policies such as this are likely to have an indirect effect on SMEs in the UK, but the changes to taxation and regulation announced later in Philip Hammond’s speech are likely to have a more direct effect on the UK’s SME community.
Professional advisers’ guidance will be in high demand and here, Christopher Darwin of Leeds based Accountancy firm Thomas Coombs goes into detail about how the Autumn Statement is likely to affect small businesses.
Letting agency fees
“One of the most important announcements Philip Hammond made in the Autumn Statement is that letting agents will no longer be allowed to charge fees to tenants. The probable effect of this is that landlords will have to meet these charges and will then pass these costs on to the tenant in rent. It’s about promoting choice and market competitiveness – while tenants can’t shop around if a property is being looked after by a particular lettings agency, landlords can.”
“The government’s commitment to lowering corporation tax from 20% to 17% in 2020 is encouraging, as a good proportion of small businesses are set up as limited companies, and stability is always welcome. In April, there was an increase in personal tax on dividends and this drop in corporation tax will help to partly offset the effect of that for business owners. We already have one of the lowest corporation tax rates in the developed world, so it’s an important incentive for foreign businesses looking to set up here.”
“There have been changes to tax on salary sacrifice, where an employee exchanges part of his or her cash salary for certain benefits. These benefits have traditionally been taxed less than the cash salary would have been. This won’t apply to things like pensions or childcare, but the concern here is that if you sacrifice your salary you will still be taxed on the cash you sacrifice, irrespective of how tax advantaged the benefit would have been.
“Employers want to make their employees pay packets as tax-efficient as possible, but they could then end up with a situation in which two employees have the same package but they are taxed in different ways. The regulations are also being tightened so that fewer and fewer employee benefits are tax-free.
“The Chancellor said that National Insurance will be aligned between the employer and the employee, so the threshold for paying National Insurance will be the same for both. This is done for reasons of tax simplification.”
“In the Autumn Statement, the Chancellor of the Exchequer highlighted ‘the growing cost to the Exchequer of incorporation’. He went on to say that ‘the government will consider how we can ensure that the taxation of different ways of working is fair between different individuals, and sustains the tax-base as the economy undergoes rapid change.’ It looks like we will see a review of the tax rules for companies and maybe higher taxation for those who choose to operate as a limited company.
“We have already seen more taxes being imposed on the owners of companies such as the new dividend tax, restrictions on capital gains tax, entrepreneurs’ relief and income tax on disposal of shares through liquidation involving ‘phoenixing’.
“Whilst there can be legitimate justification to stop abuse of the tax system, there is a high risk that changes may catch the innocent businessperson. Also, additional tax charges can act as a disincentive to the use of limited companies even though they make good commercial sense as the vehicle of choice for most SMEs.”
“The government, amongst other bodies, is looking to close in on aggressive tax avoidance schemes. Last month, seven leading accountancy bodies in the UK have established new ethical guidelines for their members which prohibit them from recommending aggressive tax planning. Although the professional bodies aren’t recommending tax planning, Philip Hammond still thinks it’s necessary to penalise accountants if they do.
“There is also a suggestion from the government that taking reasonable care to do things properly will no longer preserve businesses from penalties. This will not only affect people using avoidance schemes but also, potentially, people who genuinely think that they have the correct processes in place.
“There are also more specific rules to counter areas where HMRC think the rules are being exploited. For example, take the VAT flat rate scheme. Companies receive VAT on their sales and pay VAT on their costs. Once a quarter, they add up all of the VAT they have received, subtract the VAT they have paid out and pay the difference to HMRC. The VAT flat rate scheme makes assumptions about that ratio for simplicity. In the freelance sector, whose VAT costs tend to be extremely low, the Chancellor has announced that they will have to use a special rate. This is significant because a freelancer who makes, for example, £100,000 per year, used to keep £3,800 of their VAT per year. Following the changes in the Autumn Statement, they will now keep only £200. There is a question whether this is a proportionate response.”
Insurance premium tax
“The Autumn Statement included an increase in insurance premium tax, from 10% to 12%. Insurance premium applies to the payment consumers and businesses make to insurers. With respect to car insurance, Philip Hammond also announced that, due to a crackdown on fraudulent claims within the industry, the average motorist would save £40 per year on their premium. For the vast majority of drivers, this will outweigh the increase in insurance premium tax.”
IR35 and working for the public sector
“IR35 prohibits freelancers from forming a limited company so that they pay less tax on payments from their client, when their relationship in all other aspects is one of employer and employee.
“For freelancers who work for public sector clients, the government is going to continue with the idea that it is the client or agency that decides whether this particular tax applies to the freelancer, not the freelancer themselves. From April 2017, for those working in the public sector, the government will make it the decision of their agency or client to decide whether this legislation applies to them.
“There is also a suggestion of extending IR35 to the self-employed. This is a significant step, partly because it’s another extension of HMRC’s crackdown on perceived tax avoidance, and partly because it’s going to be extremely complicated to try to implement. The IR35 approach is to look at the underlying commercial substance: this is all very well in simple cases, but as the regime is extended it will catch more complex businesses, and become much harder to administer. It may be better to look at why there are differences between the employed, the self-employed, and small companies in the first place.”