An analysis of how the Spring Budget’s tax changes are significant for SMEs.
This article was first published in Tax Journal Issue 1345, 9 March 2017.
Whilst there is nothing in the Budget to send SMEs into frenzies of delight, there is nothing to cause paroxysms of despair either.
The package of changes to business rates will be especially welcomed by beleaguered high street traders and pubs in particular. These include support for small businesses losing small business rate relief to limit increases in their business rates to £600 each year; providing English local authorities with funding to support £300m of discretionary relief; and introducing a £1,000 business rate discount for pubs with a rateable value of up to £100,000.
Levelling the playing field still figures prominently. The reduction in the dividend allowance from £5,000 to £2,000 from April 2018 reduces the tax advantages of trading through a corporate vehicle, although the increase in the rate of class 4 NICs for the self-employed from 9% to 10% in April 2018 and to 11% in April 2019 goes the other way and increases the tax advantages. Also, as proposed previously, the rules on quasi-employees operating through limited companies or similar intermediaries (that is, the infamous ‘IR35’ rules) are to be tightened up. In the public sector, responsibility for operating the rules, and paying the correct tax, will move from the workers’ company to the body paying the workers’ company, with effect from 6 April 2017.
Still on the ‘level playing field’ theme, as proposed previously the tax and employer national insurance advantages of salary sacrifice schemes will be removed from April 2017, except for arrangements relating to pensions (including advice), childcare, cycle to work and ultra-low emission cars. This will mean that employees swapping salary for benefits will pay the same tax as individuals who buy them out of their post-tax income.
The crackdown on avoidance and deferral continues apace. First, a new anti-avoidance measure applies from 8 March 2017 to stop conversion of capital losses into income. This applies where an investment such as land is appropriated into trading stock. From 8 March 2017, where the appropriation gives rise to a capital loss, it will no longer be possible to elect to roll this loss into the carrying value of stock. Second, hot on the heels of the changes to the profits from trading in and developing land in the UK introduced in FA 2016, amendments are made to bring all profits recognised in the accounts on or after 8 March 2017 into the charge to UK corporation tax or income tax, regardless of the date the contract was entered into.
Still on the land tax theme, there has been a welcome delay in the implementation of the proposed reduction in the filing and payment window for SDLT. The reduction in the filing and payment window from 30 days to 14 days will now be delayed until April 2018.
Meanwhile, HMRC has confirmed that the previously announced changes to corporation tax loss relief, to the substantial shareholding exemption and to the tax deductibility of corporate interest expense will be implemented, very much as previously proposed, with effect from 1 April 2017.
With regard to the substantial shareholding exemption, with effect from 1 April 2017 the rules will be simplified to remove the investing company requirement; to remove the requirement that the investee company is a trading company immediately after the sale (where the sale is to an unconnected party); and to provide a more comprehensive exemption where the company is owned by qualifying institutional investors.
With regard to the loss relief reform, companies will have more flexibility in the way they can use losses arising on or after 1 April 2017. When they are carried forward, these losses will be usable against profits from different types of income and profits from other group companies but there will be a restriction on the use of losses carried forward by companies so that they can’t reduce their profits arising on or after 1 April 2017 by more than 50% if the company’s or group’s profits exceed £5m.
With regard to the tax deductibility of corporate interest expense, the new rules to be introduced from 1 April 2017 will affect few SMEs (and none whose business is purely domestic), given the threshold of £2m of interest expense. Where they apply, the rules will limit deductions where a group has net interest expenses exceeding 30% of UK taxable earnings.
HMRC has also confirmed its intention to treat all payments in lieu of notice as taxable. Furthermore, NICs will be payable on any termination payments in excess of the £30,000 exemption, which thankfully otherwise remains (aside from the abolition of foreign service relief).
In recent years, we have welcomed additional incentives introduced for film and television productions, orchestras and theatrical productions (although excluding shows involving wild animals or those designed to stimulate the audience, or possibly both). These reliefs are now to be extended to museums and galleries that develop new exhibitions. And for those who instead prefer sports, HMRC is to extend the circumstances in which companies can claim tax relief on contributions to grass roots sports. Going forward, relief will be available for donations to wholly owned subsidiaries of sports’ governing bodies.
Finally, HMRC has invested heavily in its much criticised ‘making tax digital’ initiative. Whereas many doubts remain as to whether it and the taxpayer are ready for such changes, HMRC has at least deferred the introduction of the scheme until April 2019 for businesses below the VAT registration threshold.
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Roundup of BKL’s Spring Budget 2017 coverage