Budget 2017, Episode 2
Leading up to yesterday’s Budget there was speculation that Philip Hammond would announce some major shake-ups to certain aspects of the taxation system. This was fuelled by the Budget earlier in the year being relatively uneventful and the political environment having changed substantially in the months since then. However, save for one change, the Chancellor of the Exchequer delivered another unremarkable Budget – at least with regards to taxation. Perhaps this shouldn’t come as a shock, though, as it was inevitably going to be a politically motivated Budget. As such, the big announcements were regarding spending in an attempt to retain or win back sections of the electorate, most notably the youth vote.
There is still enough for us to get our editorial teeth stuck in to, though, including some grave warning signs of changes to come. Below are the announcements that we felt were noteworthy, supplemented with our thoughts and opinions.
- For completions on or after 22 November 2017, those buying their first home won’t pay any Stamp Duty Land Tax (SDLT) on properties up to £300,000. First time buyers paying between £300,000 and £500,000 won’t pay SDLT on the first £300,000, and will pay 5% on the amount up to £500,000. Properties purchased for more than £500,000 will not receive the relief and SDLT will be due at the same rates as those who’ve bought a home before.
This was arguably the biggest announcement of the Budget, and was part of a raft of changes aimed at helping (predominantly young) people escape ‘generation rent’ and step on to the first rung of the property ladder. On properties between £300,000 and £500,000 this represents an SDLT saving of £5,000, which could be the difference between someone being able to afford a home or not.
Our opinion: While this is good news we expect that house prices will increase as a result, thus negating some of the savings that the change offers.
- From April 2018 the personal allowance will increase to £11,850, and the basic rate limit will increase to £34,500, so the amount at which an individual will start paying higher rate tax will rise to £46,350 from its current £45,000.
Our opinion: This was not a surprise announcement as the government had previously committed to increasing the personal allowance, however it is good news that this plan wasn’t reversed in the face of increased spending.
- The indexation allowance for disposals by companies, which allows inflation to be taken in to account in order to reduce the capital gains when selling an asset, will be frozen from 1 January 2018. The indexation allowance will be calculated up to December 2017 for disposals that occur after this date.
Our opinion: This is obviously bad news for companies, but it is arguably a fair change as it aligns the capital grains treatment for companies with that for individuals and non-incorporated businesses.
Venture Capital Schemes
- A new qualifying condition is to be introduced for all three tax-efficient venture capital schemes (the EIS, SEIS and VCTs) in the form of a principles-based test to determine if, at the time of investment, the investee company is a genuine entrepreneurial company. It requires a conclusion to be reached as to whether the company has objectives to grow and develop and whether there is a significant risk of loss of capital.
The purpose of this new condition is to exclude tax-motivated investments, where the tax relief forms the majority of the return for the investor (rather than the gain made on the investment) and with limited risk of loss of capital.
Our opinion: While this extra condition will create more work when applying for any of the schemes, if its introduction means that the current tax benefits are preserved by excluding companies who shouldn’t have been using the schemes to begin with, then we view it as good news. Of course we may change our mind once more details about the ‘principles-based test’ are released, as it has the potential to be purposefully-vague and difficult to satisfy.
- The current VAT registration threshold of £85,000 will not change for two years from 1 April 2018.
- The government will consult on the design of the VAT threshold in response to the Office of Tax Simplification’s recommendations that the high threshold causes distortions (businesses operation below the threshold have a competitive advantage over those above it).
This is not a change, but rather a confirmation that the current status quo will remain unchanged for at least two years. However, the consultation that was announced may result in a change. This is because it is rare that a consultation in to a particular tax is announced and then the suggested change is not implemented in some form. Therefore it is our opinion that the VAT threshold will be reduced in the future, likely to an amount similar to those seen elsewhere in Europe (e.g. ~£15,600 as it is in Germany).
Our opinion: This would of course be bad news, as it would result in thousands of small businesses being drawn in to the VAT system who would either need to increase their prices or sacrifice some of their income. The added red tape and administration demands of becoming VAT registered would also be costly and potentially discourage new entrepreneurs from starting businesses of their own.
- The government will consult in 2018 on how to tackle non-compliance with the intermediaries legislation (IR35) in the private sector. A possible next step would be to extend the recent public sector reforms to the private sector.
Since time immemorial HMRC have waged war on contractors in pursuit of their Utopian vision where all workers are paid via PAYE.
Part 1 of their master-plan was executed earlier this year with the introduction of new rules for the public sector that shifted the responsibility for determining a contractors position regarding IR35 from the contractor to the client. Of course the public bodies did not want to risk getting these decisions wrong, nor did they want to spend time and money reviewing each contractor on a case-by-case basis. As a result, all contractors were added to payrolls and had PAYE and NICs deducted from their fees.
Since these rules were implemented there’d been suspicions that it was only a matter of time before the same would be rolled out to the private sector. The announcement of this consultation confirms these suspicions, and could have just sounded the death knell for contractors operating via personal service companies in the private sector.
Our opinion: Needless to say this would be terrible news that would affect a lot of people, and if reports of the how the new rules have been implemented within the public sector are anything to go by then it will cause chaos for both the contractors and those companies who rely on them.
Expect to hear more about this in next year’s Budget, and possible timeframes for when the new rules will be enacted.
Still have an appetite for reading high-quality Budget related content? Then why not read our blog on the first Budget of 2017 here.