Budget Review 2020

Entrepreneurs’ Relief

No changes other than a reduction from £10 million to £1 million from 11th March.

It was widely expected to see this tax rate increased. Instead we have a simple reduction in the band. Most clients looking to wind up their personal service company will be very relieved.  It’s your classic “leak really bad news and your bad news will seem like good news” tactic.

Employment Allowance

Up from £3,000 to £4,000.

This allowance offsets the Employer’s National Insurance bill and will be a welcome boost for most  employers. This is broadly equivalent to the Employer’s NI for two staff members on £25,000 each.

Capital Allowances

100% first year capital allowances fall from £1 million to £200,000 from 1 January 2021.

This ‘change’ is due to a temporary increase of the threshold being withdrawn. This won’t affect many of our clients, but  due to the method of computation it can have unusual results if spending more than £17,000 in a single period.

R&D Tax Credits

Up from 12% to 13%.

This relief is a one that was expect to be scaled back given studies have shown it rarely actively encourages new research, but merely subsidies it a little.

Corporation Tax Remains at 19%

This is a reversal from the previous policy of reducing it to 17%.

This seems a basic admission of the fact that cutting the Corporation Tax rate reduces, not increases the overall receipt of Corporation Tax, despite previous statements to the contrary by senior politicians.  Treasury figures shows this raises £6 billion+ and funds a significant portion of the genuine extra spending in this budget. I would not be surprised to see this revert to 20% or 21% in the next few years.

IR35 Reforms

We were expecting to see alongside the Budget an extra report into the IR35 reforms which push the risk of employment taxes arising from the Contractor to the End Client, but at the time of writing it was unpublished, and will update this section when I can.

The only known outcome so far is that the new rules apply to income earned from April, not received per the earlier drafts

As many of our contractor clients have found out, End Clients seem to be sidestepping the intended ability for contractors to challenge a status review. Instead they are terminating existing contracts and offering new terms.   The initial strong approach from many larger organisations seems to be softening slightly but I imagine it will be 6 months or more until we see how much risk larger business are going to take on status reviews.   If we look for example at delivery firms, they seem to have  a very relaxed attitude to similar rules for the self employed for which the End Client has always held the risk.  HMRC seem to have little appetite to pursue such cases.

Only one new change:

Extra 2% SDLT for Non-Resident Landlords

This measure was not in the speech, but applies from 1 April 2021.

This is somewhat unexpected, and seems to raise the landlord’s additional rate of 3% SDLT to 5% for non-residents.

But two important changes from April 2020:

30 Day Payment Deadline for CGT

From April 2020 HMRC want all sales of residential property to be notified and CGT paid within 30 days of sale, for all UK property sales.

This is a very significant change in the operation of the tax system and will require essentially an interim CGT declaration when you dispose of a property.

The main aim is to get tax in quicker, but its means taxpayers will need to file an extra return without having an obvious prompt to do so.  Moreover computation “in year” means an accurate prediction of total incomes for the year in many instances.

The tight turnaround will mean substantial planning, and crucially letting us know BEFORE you sell the property so we have plenty of time to work out the tax bill, and get it filed and paid in time.

A similar system for  non-residents has been hampered by the lack of trigger event that a return is due. Often we don’t find out about a disposal until we complete the relevant tax return some months later.

PPR Relief down, Lettings Relief Abolished

From April 2020:

1. If you let a property that was once your home, the final 18 months (36 months prior to April 2014) of occupation that receives  automatic Principal Private Residence relief  is reduced to 9 months.
2. Lettings relief, currently upto £40,000, is to be abolished, unless you let part of your home to a lodger.

This only affects  landlords letting out former residences; there is no impact if you are a commercial landlord who has never lived in the let property.

This has been largely superseded, please see the new dedicated page

Various measures have been announced to help the economy in the face of expected difficulties over the next few weeks.  Most of these are quite vague at this time, and include:

• More leniency on tax payments with “time to pay”
• SSP refundable for SME’s
• 100% business rates relief retained
• 80% government loan guarantees for SME lending by banks
• £3,000 cash grant for business with small premises.

In the 2008 crash, the “time to pay” arrangements were professionally dealt with by HMRC, balancing genuine issues with the inevitable businesses just trying it on.

The SSP refund is sensible given this cost is normally met by employers.  However there is no current mechanism for reclaims, so this may be easier to announce than implement or administer. It will either mean major rewiring of payroll and HMRC software, or a manual “on the side” system, neither of which will be quick jobs.  It should point out the claim is only £94 per week for a maximum of two weeks, so unless you have a lot of staff off its unlikely to be worth the admin.

The business rates ‘cut’ is somewhat smoke and mirrors in that this just re-announces the current position of 100% rate relief for many smaller premises.  There are some genuine breaks for a few sectors, notably “pubs and clubs”, albeit still only on a temporary basis.

The SME loan guarantees are notoriously poor use of government funds, it just tends to encourage speculative lending by banks but allows “billions of support” style headlines.

The £3,000 cash grant for business eligible for 100% rate relief is an unexpected and  odd one-off policy, seemingly aimed at boosting micros businesses, but only those with business premises. Details are very slim, and it looks to be local authority administered.  I am unsure how this will operate, and quite possibly neither does the Chancellor.

NI Threshold Up

Employees threshold up from £8,632 to £9,516

Employer’s threshold up from £8,632 to £8,788

This is part of  a manifesto promise to push the starting threshold for NI to £12,500, being the same as the personal allowance for income taxes.    I think it makes a lot of sense economically to have one level when all taxes on income start. However we now have a return to a big divergence between when employee’s and employer’s start to pay NI which tends to lead to lots of confusion.

This is a firm U-turn on the former Conservative Party policy of pushing up the personal allowance.  It’s risen sharply from £8,105 in 2013 to £12,500 from 2020, a 54% rise.   NI has increased by only 15% from  £7,488 to £8,632 over the same period.

Longer term the ‘dream’ has always been to abolish the two taxes and have one single tax on income due to to the considerable simplicity this would in theory provide.  No Chancellor has yet had the stomach to do this due to a list of arbitrary winners and losers that would result due to computational differences of both taxes.   I imagine it will however remain a scholar’s dream and accountancy lecturers will still be able to set this as an exam question in 25 years’ time, just as it was set to me 25 years ago.

Most Allowances Frozen

The vast majority of key rates and allowances are frozen.

The rate at which higher rate tax and personal allowance occur have been driven up sharply in the past 3 years, but for the first year since 2010/11 are frozen.   This is known as “fiscal drag”, and through inflation alone the Chancellor aims to stealthily raise more revenue than had inflationary increases been applied.

Pension Annual Allowance

Currently those with earnings over £110,000 (and adjusted earnings over £150,000) have their maximum pension contributions reduced on a complex tapered basis from £40,000 to £10,000.  The threshold is to be increased to £200,000, but the taper falls to just £4,000 from April 2020.

This eases a common pension issue for many earners in excess of £110,000 having reduced pension contributions, but seemingly causes problems for much higher earners by reducing the maximum from £10,000 to £4,000.

Fuel Duties Frozen

For the 10th year in a row, fuel duty is frozen.

This isn’t going to help the move to electric vehicles, and seems rather naive given the big drops in oil prices which will feed through to the pumps in the next few months. Surely the time to push this up is when fuel prices are low?

Reduced VAT on Sanitary Products

VAT reducing from 5% to 0% from 1 January 2021 (subject to Brexit happening).

This was a very important issue amongst some Brexiteers, right up there with Dark Navy passports, and is said to save almost £40 over the average woman’s’ lifetime. The cost to the Chancellor? A snip at £5 million per annum.  Apparently the EU think this is a good idea and may reclassify sanitary products too – who says we have no influence in Europe!

Tax avoidance and evasion

The normal announcements of more tax raised by being tougher on people not paying their taxes got an airing.   To be fair, this bit of the speech is very green as it’s recycled every year.

I mention this only because buried within all of this is the hiring of 1,300 more HMRC staff for debt collection, which looks suspiciously like the outsourced debt collection unit will finally be brought back in house.

Some Key Allowances for 2020/21

• NI Threshold increase to £9,516 (from £8,632) for employees
• Personal CGT allowance up to £12,300 from £12,000

What hasn’t changed?

• Personal allowance frozen at £12,500
• Higher rate threshold frozen at £50,000
• Corporation Tax stays at 19%
• VAT threshold frozen at £85,000 to at least April 2021
• Mileage stays at 45p for business use of private car under 10,000 miles, and 25p for additional miles
• Insurance Premium Tax – stays at 12% (after rapid rises)
• IHT threshold remains at £325,000
• £100,000 threshold for loss of Personal Allowance remains (frozen since 2010)

Edit, 27/3.  In view of how Rishi Sunak has performed in the past 2 weeks, I think I ought to apologise for the following written on 11/3.  He seems to have gone from comedy space filler to respected heavyweight in the space of a fortnight.

It’s our first budget for Chancellor In Name Only (Chino) Sajid Javid , sorry super sub Rishi Sunak (Chino II) rushed in at the 11th hour following our dear leader  Dominic Boris Johnson’s very reasonable insistence that Javid sacked all his staff and employed those loyal to No.10.   Time will of course tell if Rishi is still there in the Autumn once the actual impact of the Coronavirus are known and factored into the forecasts which are all “pre-crisis”.

As background, Chino II is your typical Conservative high ranker.  Public School (Winchester) followed by PPE at Oxford and onwards to Goldman Sachs and then a Hedge Fund with his billionaire father-in-law.

As for our outgoing Chancellor, Spreadsheet Phil, he didn’t really do very much other than steady the ship and oversee some of the bewildering number of changes George Osborne implemented in his final years.  I am struggling to think of anything of consequence he actually implemented which was not already well advanced by the treasury.

So what are the challenges facing Sunak ?   He has got a largely flatlining economy (referred optimistically as ‘growing’), lots of uncertainty around Brexit given the key issues on trading remain unresolved and a one off issue from COVID-19.   Tax receipts are under a lot of stress and under the terms of the Conservative Party manifesto he can’t really put up any of the main rates of taxes other than capital gains.  This tends to mean indirect taxes and fiscal drag will be  widely in play this parliament, that is to say freezing all allowances and letting inflation grind up the tax take in real terms.  I am sure our government would not ignore the manifesto, just as Boris’s promises to raise the higher rate threshold to £80,000 was implemented today quietly dropped once installed as Conservative leader.

So how does he respond to all of this?

Well he gave the impression of spend spend spend.  But on closer inspection reannounce, reannounce, reannounce would be closer.  He reannounced pretty much every single spending pledge going back years to get his headline spending numbers. There was apparently some £30 billion of new spend too, but it was fairly obscured, and he seemed to be adding potential maximums to loans and anything else on top to make it sound big.  I don’t doubt the actual spend will be much lower once the detail is bottomed out.

In terms of style were some excruciating passages in the speech, with the buzzwords “level up”  and “get it done” repeated ad nauseam in a pantomime manner.  He got so carried away with it, he even claimed “Brexit was done” which may have raised a few eyebrows in the EU negotiating team.

In response was a rather lacklustre Corbyn playing to a demoralised Labour party.  He pointed out that there was nothing in here at all for key social issues of chronic underfunding of social & health care and outlined a shocking case study of a dead Universal Credit claimant, but it seems few in the House were that interested and many left the chamber mid speech, even on his side of the benches.

So we seem to have in essence not a lot actually happening today.  Some sensible albeit small scale measures to stop small business most at risk from Coronavirus going bust, and a lot of talking up of the economy.  No major surprises or deep structural changes, other than an offhand comment about “reviewing the fiscal framework” which might be code for “making up some new rules we can meet” but we will see what happens.

It was oddly not so different to how a first Labour budget might have played out, who have been long suggesting fiscal stimulus not austerity as the answer to economic woes.

I normally publish the following tables to give typical extraction strategies undertaken by small Limited Companies. These give the maximum director’s bonus and dividend combinations for company directors to each key “stop” point, of (a) staying basic rate; (b) preserving child benefit; and (c) loss of personal allowance at £100,000 gross income.

This is getting more complex as time goes on, so please treat this as a “loose guide” as your circumstances may of course be different.

Directors Wishing to Stay Basic Rate

Decrease in tax: £nil

Directors Wishing To Retain Full Child Benefit

Decrease in tax: £nil

Directors Wishing To Preserve Personal Allowances

Decrease in tax: £nil

Alternative Way of Looking at Extractions for Your Limited Company

Your gross income (dividend+salary+other income) should be:

£50,000 if you want to stay basic rate

£50,000 if you want to keep all your child benefit

£100,000 if you want to preserve all your personal allowance

£150,000 if you want to avoid the additional (45%) rate of tax

You can then use the following rules of thumb for how much tax to keep back: