ICAEW Tax Faculty provides analysis of the announcements relating to business and company taxes in the Spring Budget 2017.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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
The government will seek State Aid approval to extend provision of this tax relief beyond 2018.
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.
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.
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 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.
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.
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.
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.
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.
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.
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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