2018 Autumn Budget – key changes

Phillip Hammond started the week by delivering his 2018 Autumn Budget. Unlike his predecessor the current Chancellor is generally regarded as a safe pair of hands and true to form there were no controversial changes introduced.

2018 Autumn Budget

2018 Autumn Budget: IR35

The changes to “off payroll working” in the public sector, placed the onus for determining the IR35 status of an engagement firmly with the public sector. Though to say this has been problematic is an understatement as over 18 months later there is still widespread confusion about the application of IR35 in practice. For example there has been anecdotal evidence of one public sector organisation that is prepared to pay individuals 'off payroll' as sole traders though not if they contract through a personal service company. 

Possibly the worst kept secret since the ending of Marvel's 'Infinity War' this year was the fact that the Government were proposing to introduce the above changes to the private sector.

As a starting point, the Government introduced a consultative document for these proposals. However consultation is something of an oxymoron as latterly the Government seem determined to forge ahead regardless of public opinion (did someone mention Br*x*t?). However there is sufficient evidence  (albeit anecdotal) to suggest that contractors leaving the public sector negatively impacted on many public sector projects.

There was Governmental concern that if the public sector rules were introduced to the private sector,it might have a detrimental effect on the economy just as the impact of Brexit is beginning to take effect.

In the 2018 Autumn Budget, the Government decided to grant a stay of execution for the private sector until April 2020 when these new rules will be applied to “large and medium businesses”.  An estimated 1.5 million of the smallest businesses will therefore be unaffected by these changes.

The Government have indicated that the proposed reforms won't be retrospective and that HM Revenue will concentrate their energies on ensuring businesses comply with the reforms going forward.

So this decision is good news for small businesses though not for medium and large businesses. It will be interesting to see what the legislative definition is  for ‘medium and large businesses’. Another point to mention is it's not yet clear whether these changes will relate purely to the end client, or also agencies in the contractual chain.

2018 Autumn Budget: Research and Development Tax Credits

Loss-making Small and Medium Sized Enterprises that undertake qualifying R&D can surrender their loss to HM Revenue for a tax credit. The value of the cash repayment is restricted to the lower of 230% of the qualifying R&D expenditure or the total loss in the year. This can represent a valuable and much needed cash injection for a business in their early developmental stages.

The Government is proposing a restriction to the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year. This would be capped at three times the company’s total PAYE and NICs bill for that year. If introduced these changes would take effect from 1 April 2020.

This proposal initially appears to be aimed at small start-up companies who don’t have any employees, have directors on minimal salary though incur legitimate R&D costs through sub-contractors. Under the proposed changes these companies would be unable to claim the R&D tax credit and a valuable injection of funds from the relief would be lost.

Given the positive moves in last year's Budget it's disappointing to hear about these proposals which represent in our view a retrograde step for the technology sector.

2018 Autumn Budget: Changes to Entrepreneurs' Relief

Entrepreneurs’ relief (‘ER’) reduces the amount of capital gains tax paid on disposals of businesses and shares in personal companies to 10%. Broadly speaking this applies where certain conditions are  met within a 12 month period ending with the date of disposal or cessation of the business followed by a disposal within three years.

The new rules propose that for disposals made on or after 6 April 2019, individuals will need to meet the qualifying conditions for ER for a minimum period of two years rather than one. Essentially this means that:

  • Where you dispose of an asset used at the time your business ceases, your business must have been operating for two years;
  • Where shares are sold, the qualifying conditions in relation to companies must have been met for two years ending at the time of disposal
  • Where you have disposed of an asset used in your business (an associated disposal), that asset must have been used in your business for two years
  • The qualifying conditions in relation to trust business assets must have been met for two years

There a transitional rules where the your business ceased before 29 October 2018, so that the one-year period will continue to apply to claims on disposals of assets within three years after cessation.

In relation to the definition of a personal company, two new tests have been added from 29 October 2018 which require you to have a 5% interest in both distributable profits and the net assets of your company.

These changes announced in the 2018 Autumn Budget are clearly designed to dissuade short term speculative ventures and restrict the relief to genuine claimants who have a true material stake in the business held over a longer period of time. 

Additionally from 6 April 2019, amendments will ensure that the period immediately before a transfer of a business to a company to which incorporation relief applies will be treated as a part of the qualifying period for entrepreneurs’ purposes.

These changes are welcome especially for those businesses that receive offers for sale shortly after incorporation.

2018 Autumn Budget: Other changes

Other notable changes introduced in the 2018 Autumn are as follows:

  • For the tax year 2019/2020 the personal allowance for an individual will be £12,500 and the basic rate tax limit at £37,500. The additional higher rate of 45% will continue to apply on income over £150,000.  The saving rate will remain at £5,000.
  • As of 6 April 2019, the capital gains annual exemptions will increase in line with inflation to £12,000 for individuals and personal representatives and £6,000 for trustees of a settlement respectively. This means Individuals making disposals after 6 April 2019 will be able to use these increased amounts
  • The Government stubbornly refuses to increase the VAT registration threshold and this will remain fixed at £85,000 until 2022. There were fears though that the threshold would be reduced rather than remain static. However given the implementation of Making VAT Digital in March next year such a move would have caused an unnecessary administrative burden on HM Revenue's creaking IT infrastructure

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