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Spring Budget 2017: Business and company tax

ICAEW Tax Faculty provides analysis of the announcements relating to business and company taxes in the Spring Budget 2017.

Trading and property allowances

From 6 April 2017 individuals with small amounts of income from the provision of goods, property or services or the sharing of assets will no longer be required to declare the income they earn nor pay tax on it, provided it does not exceed £1,000. If the income exceeds £1,000 the individual can elect to deduct the allowance from their receipts or, if no election is made, deduct actual expenses in the usual way.

This measure was announced at Budget 2016 and draft legislation was published on 5 December 2016. Following consultation the draft legislation is amended to deny the use of the allowances where income is received by a participator of a close company.

Self-employed NIC

Class 4 NIC, which is payable by the self-employed, will rise from 9% to 10% from April 2018 with a further 1% increase in April 2019 to 11%. This change is expected to generate around £2bn in total by the end of the forecast period in 2021/22.

This is clearly the most controversial announcement in the Budget. While it will be unwelcome news for many small businesses, the increase in the rate is clearly part of a strategy to reduce the disparity between the amount of tax (including NIC) individuals pay depending on the business structure they adopt. 

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The increase in class 4 NIC is somewhat offset by the abolition of class 2 NIC from April 2018, saving businesses approximately £148 per annum (based on 2017/18 figures). In addition to this, from April 2016 self-employed individuals were given the same state pension entitlement as employed individuals, which is estimated to bring a benefit to individuals of £1,800 per year (paragraph 3.5, Red Book).

Taking the changes to NIC together the government anticipates that only businesses with profits above £16,250 will be affected by the change, although the Institute for Fiscal Studies suggests the figure is £15,570. This will be welcome news for new businesses who do not expect to turn a large profit in the first few years of trade and who might have been concerned about how the increase in class 4 NIC would affect them.

This measure will leave class 4 NIC 1% lower than class 1 primary NIC. The narrowing of the difference in rates reflects the fact that the NIC paid by the self-employed now brings almost the same rights to contributory social security benefits as for the employed; the exception is contributory jobseekers’ allowance to which the self-employed are not entitled. 

For businesses with very low profits, below the NIC threshold, the abolition of class 2 NIC brings a problem: in order to maintain their contribution record and have access to contributory benefits including the state pension, they will have to pay the much higher voluntary class 3 NIC (currently £14.10 a week) rather than class 2 (currently £2.80).

 

 

The government published a national insurance and the self-employed factsheet on 8 March 2017 which provides an overview of national insurance, the contributory aspect and illustrative examples of how the changes will affect individuals.

Business rates

The business rate revaluation takes effect in April 2017 in England which will result in large increases in business rates for many businesses. In response to this the government announced three measures to alleviate the pressure for small businesses:

  • Businesses which no longer qualify for small business rate relief will see a cap imposed on the amount by which their rates bill increases. This will be the higher of £600 or the real terms transitional relief cap for small businesses.
  • Local authorities will be given £300m of discretionary relief. The relief will be allocated to individual hard cases according to a formula, details of which have not been released. While the relief may be valuable, it highlights the fact that the existing system creates winners and losers, and is in need of reform.
  • A one year £1,000 discount will be available for pubs with a rateable value of up to £100,000, which is expected to cost the exchequer £25m in 2017/18.

Taken together these three measures will provide relief of approximately £435m to businesses that face significant rises in their rates bill.

The government has listened to requests for more frequent revaluations to take place, at three year intervals. Details will be published at Autumn Budget 2017, ahead of the next revaluation date which is currently 2022.

From 1 April 2017, rural rate relief is doubled to 100% to remove the inconsistency between small business rate relief and rural rate relief and small business rate relief is permanently doubled (ie, the value below which properties get 100% relief will go up from £6,000 to £12,00.

Cash basis of accounting for trading income

From 6 April 2017 the entry threshold for the cash basis will increase from £83,000 (the current VAT threshold) to £150,000. The exit threshold will increase to £300,000 on the same date. The increase was announced on 31 January 2017 as part of HMRC’s response to the MTD consultations and should be of help to unincorporated businesses with relatively straight forward affairs.

Cash basis for unincorporated landlords

The cash basis will be the default method for calculating rental profits and losses for individuals from 6 April 2017, unless the landlord opts out, or the gross annual rents exceed £150,000, in which case the accruals basis must be used.

If the cash basis is going to be used, it must be used for the rental business as a whole, it is not an election on a property by property basis. If a husband and wife each have a rental business, and they own just one property jointly, then they will have to use the same basis for their entire property business as they must use the same basis for their jointly owned property. However, individuals with both a UK and overseas property can decide separately whether to apply the cash or accruals basis.

Capital expenditure within the cash basis

The government will make some minor amendments to the draft legislation published on 31 January 2017 which sets out the treatment of capital items purchased under the cash basis. Changes will be made to specifically exclude some items of capital expenditure from being deductible under the cash basis.

R&D tax relief

The government has undertaken a review of the tax environment for research and development (R&D) in the UK, and findings have confirmed that the R&D tax relief regime is an effective measure supporting innovation in the UK. To further support business and maintain the regime’s competitiveness, administrative changes will be made.

These changes will affect both ends of the company spectrum. For large businesses, there will be a focus on improving the certainty around how the rules of R&D tax relief apply to claims and for SMEs there will be an increase in the awareness of the availability of R&D tax credits.

Contributions to grassroots sports

Draft legislation has been amended to extend the treatment of a sport governing body to its 100% subsidiaries. This is a result of feedback from stakeholders during the consultation period. Corporation tax relief for companies that make contributions to grassroots sports will be available from 1 April 2017.

Museums and galleries relief

There is good news for exhibitions that have a live performance as part of the exhibition which, following consultation, will now qualify for the museums and galleries tax relief. The relief takes effect from 1 April 2017 and will be available at 25% for touring exhibitions and 20% for non-touring exhibitions. Relief will be available on 80% of qualifying expenditure (in line with other creative sector tax reliefs) and will be capped at £500,000 per exhibition

Enterprise management incentives

The government will seek State Aid approval to extend provision of this tax relief beyond 2018.

Patient Capital Review

The Patient Capital Review was announced in November 2016. The review, led by HM Treasury, aims to identify barriers to access to long-term finance for growing firms. As part of review the government will look at various reliefs available to investors and entrepreneurs to ensure they are fit for purpose, effective and well targeted.

Large business risk review

There is to be a 12-week consultation over the summer to review the current process for risk profiling large businesses in order to promote stronger compliance.

Separately, HMRC has recently started to engage with large businesses to understand how well the Customer Relationship Manager (CRM) model is currently working, and what changes could be made for it to work better for taxpayers and HMRC alike.

Corporate interest restrictions: amendments

The interest restrictions will give effect to an OECD Base Erosion and Profit Shifting (BEPS) minimum standard and will come into effect from 1 April 2017. Draft legislation was published on 5 December and 26 January and there are to be a few further amendments to these provisions which will be included in Finance Bill 2017.

  • The further amendments include:
  • provisions to amend the worldwide debt cap to prevent an unintended restriction in the carry forward provisions for UK groups;
  • the rules which treat interest on debt guaranteed by related parties as related party interest and which can be subject to restriction will not apply to certain performance guarantees and all guarantees granted before 31 March 2017, nor will it apply to intragroup guarantees in the context of the group ratio rule;
  • amendments to the public infrastructure exemption including a relaxation of requirements for comparable non-qualifying companies to have similar levels of financing as those covered by the exemption;
  • the definition of interest will include income and expenses from dealing in financial instruments as part of a banking trade; and
  • rules will be introduced for insurers regarding the calculation of interest on an amortised cost basis to provide a practical alternative to fair value accounting.

The first two amendments will make the rules operate more fairly for many groups but will add to the complexity of the new regime which will take up well over 100 pages of the Finance Bill 2017.

Loss relief reform

There is to be more flexibility in the use of losses carried forward which arise on or after 1 April 2017: these losses can be set against profits from different types of income and profits of other group companies.

The use of losses in existence at April 2017 will not be able to reduce profits arising on or after 1 April 2017 by more than 50% of the profit. This restriction will apply to a company or group’s profit above £5m. Draft legislation to this effect was published on 5 December 2016 and 26 January 2017.

Substantial shareholding exemption reform

The government has confirmed that it will simplify the SSE rules, remove the investing company requirement and provide a more comprehensive exemption for companies owned by qualifying institutional investors.

Patent box: cost-sharing arrangements

The new patent box regime, introduced by Finance Act (FA) 2016, will be amended to ensure that when R&D is undertaken collaboratively by two or more companies under a cost-sharing arrangement companies are neither advantaged, or disadvantaged, by organising their R&D in this way.

Withholding tax on interest and double tax treaty passport scheme

The double taxation treaty passport scheme is an administrative scheme which simplifies the process for accessing reduced withholding tax rates for interest payments by UK borrowers to overseas lenders under the relevant double taxation treaty. The scheme involves the overseas lender applying for a treaty passport. Once granted, this can be used to make further loans to UK borrowers without contacting the overseas tax authority and HMRC in respect of every loan.

This is currently restricted to corporate lenders and UK borrowers but from 6 April 2017 the scheme will apply to all types of overseas lenders and UK borrowers. Revised terms and conditions for the scheme will be published on 6 April 2017.

The government has also announced an exemption from withholding tax for interest on debt traded on a multilateral trading facility, removing a barrier to the development of UK debt markets. A consultation document on the implementation of the exemption will be published on 20 March 2017.

Offshore property developers: land in the UK

The government has announced changes to the ‘Profits from Trading in and Developing Land’ legislation, introduced in FA 2016. The change announced in Budget 2017 removes the exception which grandfathered contracts entered into before 5 July 2016, such that all profits recognised in a company’s accounts on or after 8 March 2017 will be subject to tax, regardless of the date that the contract was entered into.

Non-resident companies liable to corporation tax

A consultation document will be published on 20 March which will examine the case for bringing non-UK resident companies currently chargeable to income tax on their UK taxable income (and to non-resident capital gains tax on certain gains) within the scope of corporation tax.

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