After a series of consultations and fundamental changes to the taxation of LLPs and partnerships since April 2014 and the announcement in September that Class 2 National Insurance Contributions for self-employed individuals will no longer be abolished during this Parliament, this was a quiet Budget for the professional practices sector, with announcements targeted at encouraging investment within UK business.
Several changes to the capital allowances rates have been announced with a notable significant temporary increase in the annual investment allowance (AIA) from £200,000 to £1m to help stimulate business investment. These changes will take effect from 1 January 2019 to 31 December 2020, with a hybrid allowance available where accounting periods straddle these dates. However, the AIA continues to be available only to LLPs and partnerships consisting wholly of individual partners. There is, therefore, the opportunity to consider the timing of any new capital expenditure. Firms may wish to review their budgeted capital expenditure with immediate effect.
From April 2020, the new off-payroll regime (otherwise known as IR35) will be extended to private sector organisations, including LLPs and partnerships, which will see the responsibility for correctly operating PAYE and accounting for NICs moving from the ‘contractor’ to the engaging organisation. This could present an increased risk for professional practices potentially becoming liable for PAYE and employer NICs in respect of payments to contractors engaged through an intermediary company or a personal service company. Such arrangements can commonly be used where professional practices retain the services of retiring partners as consultants.
While many partners may not benefit from the accelerated increase in the personal allowance, they may still see a rise in their ‘net of tax’ income as a consequence of the increase in the higher rate threshold. For partners with taxable income between £100,000 and £125,000, the importance of pension and tax planning will become even more important.
Although there were no changes to the amount of Entrepreneurs’ Relief an individual is able to claim, to encourage longer-term business investment there was a subtle extension in the minimum period throughout which the qualifying conditions for relief must be met, increasing from 12 months to 24 months.
Changes to capital allowances and a significant boost of the Annual Investment Allowance limit
A number of changes to capital allowances have been announced, the most significant being the temporary increase in the Annual Investment Allowance (AIA) to £1m. A new Structure and Buildings Allowance will be introduced, as well as a reduction in the allowance rate for the special rate pool.
The AIA will be increased from £200,000 to £1m for two years from 1 January 2019 to stimulate business investment.
In addition, a new allowance, the Structures and Buildings Allowance (SBA), was announced, which essentially provides for a 2% capital allowance on the cost of any new non-residential structures and buildings. The allowance will apply where all the contracts for the physical construction works are entered into on or after 29 October 2018.
The special rate of writing down allowances for qualifying plant and machinery will reduce from 8% to 6% from April 2019.
The Government will also update the Energy Technology List and the Water Technology List for the qualifying criteria to qualify for First Year Allowances.
"The Government is keen to stimulate capital investment and improve the international competitiveness of the UK's tax system. These changes will provide significantly faster tax relief for qualifying investment and is a welcome change for businesses."
When will it apply?
The AIA will increase from 1 January 2019. The SBA will apply from Budget Day for appropriate contracts. The special rate of writing down allowances for plant and machinery will apply from April 2019.
For businesses entering insolvency, HMRC will be made a preferred creditor for some taxes.
Some taxes collected and held by businesses on behalf of other taxpayers will instead be held in trust by the business to be paid to HMRC rather than be paid over to other creditors.
HMRC is to be made a preferred creditor to prevent taxes paid by employees and customers and held by insolvent businesses from being distributed to other creditors. The taxes to be held in trust will cover VAT, PAYE income tax, employee National Insurance Contributions and Construction Industry Scheme deductions. There is no change to the taxes paid directly by businesses, such as corporation tax and employer National Insurance Contributions. The change will, however, only be enacted in Finance Bill 2019-20.
"This change will adversely affect all unsecured creditors of insolvent businesses; for example ordinary trade suppliers, who will now likely receive less in an insolvency process, as more value is transferred to HMRC as a preferred creditor."
When will it apply?
The change will from 6 April 2020.
Payroll and employee incentives
Changes to the taxation of contractors and Personal Service Companies will increase risk of PAYE and NIC exposure for many companies
From April 2020, medium and large private sector organisations will be responsible for assessing the employment status of any contractors whose services are provided under a contract with a Personal Service Company (PSC) or intermediary, accounting for any Pay As You Earn (PAYE) and employees’ and employers’ National Insurance Contributions (NICs) due.
From 6 April 2020, private sector organisations will potentially become liable for PAYE and employer NICs in respect of payments to contractors engaged through an intermediary company or a PSC. This is an extension of the so-called IR35 rules, so that the obligations to correctly operate PAYE and account for NICs will now fall on the engaging company in most circumstances. The rules will apply to all engagements that are in place on or after 6 April 2020 in medium and large organisations. Small companies will be exempt.
The organisation that makes payments to the contractor or intermediary will be responsible for determining the status of the contractor and assessing whether or not PAYE and NICs will apply even where there is no direct contract between the individual and the company making payments.
No details have yet been provided on where exactly responsibility will lie in more complex cases where there are multiple intermediaries in a chain between the end user of services and a contractor. Nor has there been any confirmation of what the definition of a small company will be for these purposes. A further consultation on the detailed operation of the reform will be published in the coming months.
"It will be welcome news to the organisations affected that the changes have been delayed until 6 April 2020. Given the extent of the preparations required, however, many companies will already be considering their risk exposure and putting appropriate procedures in place. Significantly, the rules will apply to contractor arrangements already in place at 6 April 2020 as well as new arrangements; therefore, these rules will need to be considered when entering into or extending contracting arrangements over the coming year. For example, twelve-month contracts beginning on or after 6 April 2019 will be affected by the new rules.
This measure will have a significant impact for all companies that do not meet the small company exemption. There will be increased administration required when taking on contractors, increased costs for engagers and decreased net income for contractors where the new rules are applicable. Even a single contractor can easily lead to tens of thousands of pounds of possible exposure, so interest and penalties for non-compliance could also be significant.
In advance of the changes, organisations will need to undertake a review of the contractor relationships already in place, to ensure they will be compliant come April 2020. It will also be necessary to design and implement processes both for assessing new contractor engagements and for reviewing existing engagements on an ongoing basis; HMRC will consider these processes when testing for non-compliance."
When will it apply?
The changes will come into effect from 6 April 2020.
PAYE special arrangements for short-term business visitors to the UK: An extension of the PAYE payment deadline and an increase in the UK workdays threshold
The payment deadline for settling employers’ PAYE liabilities in respect of short term business visitors (STBVs) under a special arrangement will be moved back from 22 April to 31 May following the tax year-end. The number of UK workdays permitted for STBVs to be eligible for the special arrangement will be increased from 30 to 60.
The PAYE special arrangement is used by UK employers who host STBVs from overseas employers and whose earnings are not eligible for exemption from UK tax under a double taxation agreement. These STBVs commonly do not qualify for tax exemption because they are from an overseas branch of a UK company, or from a country with which the UK has not entered into a double taxation agreement.
The arrangement enables the employer to make one single PAYE payment for all STBVs, rather than through monthly payroll reporting for each STBV.
The extension of the payment deadline from 22 April to 31 May following the tax year-end will give more time for employers to collate the necessary information required to make the return. The increase in the UK workday limit from 30 to 60 will enable PAYE to be settled for more STBVs under the special arrangement.
"The PAYE payment deadline extension will be welcome news for employers operating PAYE special arrangements, who will have longer to collate the requisite information and to calculate the amounts subject to PAYE.
Also welcome is the relaxation of the eligibility criteria for STBVs by increasing the UK workdays limit to 60, as fewer STBVs will need to be reported through payroll on a monthly basis.
The above changes will increase the appeal of the PAYE special arrangement.
It is, however, disappointing for employers that the recommendations in the consultation to exempt STBVs from overseas branches of a UK company are not being taken forward."
When will it apply?
These changes will apply from 6 April 2020.
Restriction of eligibility for National Insurance Contributions Employment Allowance
Access to the National Insurance (NICs) Employment Allowance will be restricted to employers with an employer NICs liability of below £100,000 in the previous tax year.
Currently, employers of all sizes may reduce their Class 1 NICs liability by £3,000 a year. This claim is available for one employer per group of companies.
From 6 April 2020, this relief will only apply to employers who had a NIC liability below £100,000 in the previous tax year.
"While this will increase costs for larger employers, the amount of relief being withdrawn is unlikely to be significant for most affected employers."
When will it apply?
This change will apply from 6 April 2020.
VAT and indirect taxes
VAT registration and deregistration thresholds to remain the same
The VAT registration and deregistration thresholds will remain the same for a further two years until April 2022.
The current taxable turnover registration threshold at £85,000 is the highest in the EU, where the average is far lower. The Office of Tax Simplification report published in 2017 recognised the distortions the threshold can cause and recommended a Government review. In the absence of clear guidance from a call for evidence, the registration threshold and the deregistration threshold (£83,000) will remain the same until 31 March 2022, which extends the two year period previously announced in last year’s autumn Budget.
"Although a high threshold can benefit smaller businesses who do not need to register for VAT, it is seen as creating a ‘cliff-edge’ and a bunching effect of businesses choosing to remain below the threshold, which limits their growth. Any reduction to the threshold will need to be implemented carefully, to ensure that it does not simply shift the cliff-edge effect to a lower level. Maintaining the threshold at the same level for four years is only seen as a temporary measure until the Government revisits the matter and provides a longer term solution."
When will it apply?
There will be no change until April 2022.
Increases to personal allowance and higher rate threshold
The personal allowance and higher rate threshold will increase from 6 April 2019, bringing them to the levels promised in the 2015 Conservative manifesto.
The Government has brought forward its commitment to raise the income tax personal allowance and the 40% income tax threshold from 2020/21 to 2019/20. Consequently, the personal allowance for 2019/20 will increase to £12,500 (up from £11,850 in the current tax year) and the basic rate limit will rise from £34,000 to £37,500.
These thresholds will remain at the same levels for 2020/21. For future years, the personal allowance and higher rate threshold will increase in line with consumer price index (CPI).
"The early introduction of these increases will be welcomed by many taxpayers.
The Government’s analysis states that the changes will result in 32 million individuals’ tax bills being reduced in 2019/20 compared to 2015/16, and that the effect of the increase to the personal allowance will result in a typical basic rate taxpayer paying £1,205 less tax in 2018/19 than in 2010/11.
Not all taxpayers, however, will benefit from the increase to the personal allowance. Those on low incomes will not fully benefit from the increase, where their income is less than the personal allowance, or where the increase in after tax pay results in a reduction in their means tested benefits.
In addition, those with incomes above £100,000 will continue to see their personal allowances restricted for every £2 of income above this threshold. As the £100,000 limit has not changed despite increases in inflation, it is likely more people will fall into this category."
When will it apply?
This measure will apply from 6 April 2019.
Restriction to availability of Entrepreneurs' Relief through a change to minimum qualifying period
The minimum period throughout which certain qualifying conditions must be met for an individual to be able to claim Entrepreneurs' Relief (ER) is to be extended from 12 to 24 months. Measures will be included to protect entrepreneurs whose businesses have already ceased by preserving the one year qualifying period for such businesses where cessation was before 29 October 2018.
ER is only available on the disposal of shares in a company where the company is the entrepreneur’s personal company. The personal company conditions previously had to be met for a period of 12 months prior to the sale of the business. A business also currently has to be owned for at least 12 months before sale. These qualifying periods will now be extended to 24 months.
ER can also be claimed where a business has ceased to trade, provided that the qualifying conditions were met during the period prior to cessation and that the disposal takes place within 3 years of the company ceasing to trade. A specific protection will be included to apply the 12-month holding to businesses that ceased (or personal companies that ceased trading) prior to 29 October 2018, to avoid retrospectively penalising entrepreneurs who are in the process of winding up a company.
"This is a further tightening of the ER rules, which will limit the availability of the relief for some entrepreneurs.
Although the protection for those whose businesses have already ceased is welcome, this does not extend to those currently negotiating the sale of their business. Where such businesses have new shareholders, it will be necessary to complete these transactions before 6 April 2019 to ensure those shareholders don't lose entitlement to this valuable relief.
We would recommend that all entrepreneurs review their position to consider the availability of ER in the event of a short-term sale and whether or not any planning steps need to be taken now in anticipation of a sale in the medium to long-term."
When will it apply?
This change will apply to disposals made on or after 6 April 2019.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.