Owner Managed Businesses – The Budget 2020, what you need to know
With a significant majority from last year’s general election, this budget was due to be an indication of the economic future of the UK independent of the European Union.
And it was. But, as with everything else for the foreseeable future, the huge stimulus was largely overshadowed by the threat of the Covid-19 coronavirus and the economic measures needed to ensure social stability. The new Chancellor, Rishi Sunak, made clear he would do ‘whatever it takes’ to support the UK economy.
In practice there was a co-ordinated response to the virus with a package of measures including additional resources for the NHS and support for individuals and small businesses.
In other news there was the announcement of a huge package of spending that simultaneously brought an end to austerity and a rethinking of the Conservatives fiscal rules in one fell swoop.
Indications of a major change in policy came early with the resignation of Sajid Javid only weeks away from his first budget. Comments at the time suggested a Chancellor is often between the aims of the Prime Minister and ‘balancing the books’. The new Chancellor, Rishi Sunak, subsequently hired for the job, will have known the plan from the start and the Keynesian spending was a sharp departure from previous Conservative chancellors.
While the spending will be welcome in many areas, there seemed little detail on how this spending will be paid for, however, there will be significant government borrowing.
We have taken a look at the detail of the budget and have reviewed how this may affect you. If you have any questions, or want to discuss your individual circumstances with an expert do get in touch.
ER, which reduces the tax rate from 20% to 10% on the sale of qualifying businesses and assets, is being restricted with the lifetime limit of ER on gains being reduced from £10m to £1m. This is effective on all exchanges of contracts from 11 March 2020.
This will have specific impact on those looking at shares in their personal trading companies, interests in businesses, business premises or other assets where this is a key relief to help mitigate the tax. There is still a benefit of £100,000 but for those with Capital Gains on a sale over £1m, relief of £900,000 is now unavailable. We can still look to utilise Rollover Relief for those who acquire new business assets. Measures have also been brought in to prevent anyone who tried to artificially trigger Capital Gains before the Budget in order to utilise the relief. However, these should not apply to straightforward sales.
The Chancellor has announced plans to introduce a tax on certain categories of plastic packaging from April 2022.
In a bid to promote the greater use of recycled plastics, the tax will apply to plastic packaging manufactured in, or imported into, the UK containing less than 30% recycled plastic. The tax, which was promised in the Conservatives’ manifesto will charge manufacturers £200 per tonne of packaging, the aim being to combat the surge in plastic waste, boost recycling and improve waste management.
This is an important change that may well affect your business whether a manufacturer, supplier or consumer. Despite this being a potential new expense, it’s a great opportunity to look at the packaging you or your suppliers are currently using, to become more environmentally conscious and in turn limit the bottom line cost of this tax to your business.
Along with the obvious benefits to the environment, being eco-friendly can also make your brand more attractive to consumers and prove a greater selling point of your products versus your competitors, as well as keeping the price point down.
The government has also announced that there will be no increases on road fuel excise duty this year, for the tenth year running. Again, this supports sectors with high expenditure on road fuel for the distribution of product, including hauliers. It will also assist service sector businesses where staff need to travel for work purposes by road.
From a consumer’s perspective, this should keep the fuel prices down on forecourts and enable work/family travel costs to remain affordable.
A laudable move has been the announcement that the VAT treatment of digital books, newspapers, magazines and academic publications will have parity with printed versions of these publications as from 1 December 2020.
This underpins the stated commitment by the government today to support the UK education system. Currently the supply of digitised or e-publications has been subject to the standard rate of VAT (20%), despite the outcome of a recent high profile VAT case in relation to e-newspapers, indicating that there may be an opportunity for businesses to seek past VAT adjustments. This will keep the cost to consumers down and will encourage a ‘greener’ approach to these important publications, saving costs on paper, printing and distribution (postage, etc.).
We predict that many publishers and organisations which issue these categories of hard copy communications currently will be looking to move largely or wholly to electronic or downloadable versions of magazines and newspapers. Moreover, as consumers, we’ll all hope to benefit from accessible books via our laptops, tablets and mobile phones for a lower price than currently.
Otherwise, HMRC have reminded us in the Budget commentary that there are some major pending changes to be introduced as from 1 January 2021 which will impact any business which sells goods to, or buys goods from, businesses in the EU. As most of you will be aware, HMRC has already issued commentary, guidance and periodic updates on this matter in relation to Brexit. It has been difficult for both the government and thus advisers to pronounce on what will happen if there is no ‘hard Brexit’ as had been predicted last autumn (2019) and negotiations in relation to matters such as VAT are still in the early stages in the main. We’ll be providing more detailed commentary on this as it impacts businesses separately.
Suffice to say, there’s been some concern around the potential cash flow impact of having to account for import VAT on goods purchased from the EU on a ‘real time’ basis i.e. on point of entry to the UK, unless there is a duty/VAT deferment or other delayed tax/duty payment regime or arrangement in place. HMRC have confirmed that, as from 1 January 2021, whilst some of the changes involving indirect taxes connected with EU trade will broadly equate to how they are dealt with now for non-EU trade, postponed accounting for import VAT will be applied to both EU and non-EU purchases of goods.
VAT on all imports of goods from 1 January 2021 will be accounted for on the business’ VAT return, rather than at the point of entry into the UK. This will assist businesses with their cash flow, as the import VAT claimable on the VAT return will cancel out the import VAT payable on that same VAT return in most cases, subject to the usual VAT accounting rules.
HMRC had already announced alignment of the UK with other EU member states as from 1 January 2020 in relation to four international trade related matters concerning the EU. In this Budget they have confirmed the implementation of the Quick Fixes Directive, which covers the zero rating of goods sold to the EU and also the retention of certain EU VAT simplifications such as for call-off stock and triangular supply chains. This legislation will allow the continuation of certain agreed EU VAT related simplifications and, for example, no EU VAT registration would be required under these specific rules, which may otherwise be the case.
There’s been reiteration of the VAT changes to be implemented in relation to the construction scheme reverse charge, which is to be introduced as from 1 October 2020 (HMRC deferred its introduction as from 1 October 2019). This will be a major change for all involved in supply chains in the construction industry. We wrote to clients regarding this last year and will be providing more guidance in due course, so preparations can be made in advance of the implementation date.
As part of the government initiative to support small businesses in particular, and UK businesses as a whole, there has been no move to increase VAT rates or to decrease the annual VAT threshold, in the latter case as was promised a couple of years ago, and which still seems to be the case now. This is very welcome to all consumers and also to smaller businesses currently trading below the current annual VAT registration limit of £85,000.
HMRC are due to implement business support measures so that VAT could be paid to HMRC over a 60-day period, if a business was already in debt. This scheme is to commence in 2021, and further details will be announced.
The long-awaited reduction in VAT rate to the zero rate for women’s sanitary products really needs no further comment other than there has been a long-standing demand for these products to be made more affordable, particularly for young women, and this is therefore very much welcomed by a high proportion of the UK.
It was announced in the Budget that, for employees and the self-employed, the minimum threshold for paying National Insurance Contributions (NICs) will be increased from £8,632 to £9,500 as from 6 April 2020. This is a continuation of the commitment by the government to eventually increase these thresholds to £12,500.
Furthermore, for employers, it’s been announced that from 6 April 2020, the employers’ NICs allowance will increase from £3,000 to £4,000. This means employers will be able to claim against Class 1 NICs paid to HMRC up to a maximum of £4,000 each year. In addition, the government has proposed a ‘NICs holiday’ for employers which will take effect in April 2021 for businesses and other organisations who employ veterans within their first year of civilian employment. This will exempt employers from any NICs liability on the veteran’s salary up to the Upper Earnings Limit which currently stands at £962 per week.
What does this mean for you as a wage earner? You’re now able to earn up to £182.69 free of Class 1 and 4 NICs per week. For those who are employed earning above this weekly amount, this means that the £868 increase in the Class 1 NICs threshold will result in savings of £104. For those who are self-employed, the savings made will be £78 per year of Class 4 contributions.
What does this mean for your business? It’s worth noting that, for employers, this additional weekly wage limit would provide room for a small increase in tax-free wages for those who fall underneath the current limit of £8,632, which in turn could prove beneficial in incentivising lower-paid staff. This coupled with the government’s proposal to increase the employment allowance by £1,000, provides scope for both business and employee savings in the event of an increase in wages. In addition to the above, the proposed veteran ‘NICs holiday’ presents employers with another method to expand their workforce, whilst also making NICs savings along the way.
The Chancellor emphasised investing in business and promoting investment in Research and Development (R&D). In this respect, he announced an increase in the Research and Development Expenditure Credit (RDEC) rate from 12% to 13% with effect from 1 April 2020.
However, RDEC only applies to larger businesses or those carrying out sub-contracted R&D. It was therefore, perhaps, disappointing that there was no further enhancement to the SME R&D scheme under which most of our clients make claims. That said, the SME scheme is much more favourable than RDEC, offering an enhancement of 130% on all qualifying expenditure on genuine R&D. What this means in practice is that for every £1 of qualifying expenditure incurred on genuine R&D by an SME company, that company can claim tax relief of £2.30.
Whilst not covered in the Budget, it’s worth noting that HMRC are beginning to look much more closely at R&D claims, with particular scrutiny being given as to whether the activities do actually constitute genuine R&D. Recent commentary from one of the leading tax barristers working in the field has confirmed this, noting they are paying close attention to claims being made by some of the less scrupulous specialist R&D houses.
The Budget saw a welcome increase in the rate of the Structures and Buildings Allowance (SBA) from 2% to 3%, effective from April 2020. The SBA allows businesses to claim tax relief on qualifying expenditure on non-residential structures and buildings.
The government will also continue to use the capital allowance regime as a way to incentivise businesses to buy and use environmentally friendly vehicles. The upper threshold for the main writing down allowance will be reduced to 50g/km whilst the 100% first year allowance for business cars will be extended, with the threshold reduced to 0g/km.
Worthy of note by its omission from the Budget was the Annual Investment Allowance (AIA). The AIA gives 100% tax relief to businesses on expenditure on qualifying plant and machinery. The AIA was temporarily increased to £1m back in 2018. No extension to this date was included in the Budget and so the AIA will revert to £200k on 1 January 2021. Businesses looking to incur capital expenditure should be aware of the transitional arrangements in place and capital expenditure should be carefully timed in order to maximise the AIA available.
Extracting profits in a tax and NIC efficient way is a very important aspect of planning for a corporate owner manager.
The typical owner manager will follow a low salary/dividend top up strategy. Changes to the thresholds for employee NIC may lead to a slight realignment of the level of salary taken, but the budget itself should not cause owner managers to steer away from this broader strategy.
Pension contributions remain an extremely tax efficient way of profit extraction and also help secure wealth away from the trade itself. Despite much commentary around a tightening of the tax relief on pension contributions – something which seems to have preceded all budgets in recent times – the Chancellor chose to leave this well alone.
Indeed high earning owner managers who have, in recent years, found their ability to make pension contributions efficiently restricted by the tapered annual allowance, may now find themselves able to contribute again. This follows the Chancellor’s decision to increase the income limits applied in calculating the tapered annual charge. From 6 April, only those whose threshold income exceeds £200k and whose adjusted income exceeds £240k will see their annual allowance restricted.
On Monday 17 March, the government announced that it would defer the introduction of the new off payroll working rules (IR35) to the private sector until April 2021.
The new rules, which have been in place in the public sector since 2018, were due to come into force in the private sector with effect 6 April 2020.
The new rules have the effect of shifting the burden of responsibility for operating IR35 away from the sub contractor’s personal service company (PSC) and onto the end user. This shift was due to be introduced in order to deal with a perceived lack of compliance in this area.
After significant lobbying in recent weeks, the intensity of which has increased dramatically in the last couple of days as the potential impact to business of coronavirus became clearer, the government agreed to postpone the introduction of the new legislation. However, in his statement to the House of Commons, Chief Secretary to the Treasury, Stephen Barclay, was keen to point out that this was a deferral, not a cancellation.
This will be welcome news to many, but it remains to be seen if this is too little, too late. In this respect we are aware of some end users who had already taken blanket decisions to cease contracting with Personal Service Companies (PSCs), effectively telling the sub contractors that they would have to go on the books as employees if they wanted to continue working.
But for many, this is a respite, and will buy them some time to prepare for 2021, whilst they focus on other pressing issues.
Finally, it’s worth noting that IR35 is still very much relevant but, for now, the burden of complying will remain with the PSC.
If you have any questions, or want to discuss your individual circumstances with an Old Mill financial expert, please do get in touch.