Blogs/Vlogs

What might the Budget mean for farming businesses?

31 March 2017

The Chancellor delivered what will be his first and final Spring Budget on 8 March 2017.

Some commentators have described the Budget as an attack on the self-employed, and farming businesses could be particularly affected - approximately 85% of them are sole traders or partnerships.

Previously announced changes to personal allowances, and the changes in the tax bands were confirmed. The basic rate and higher rates of Income Tax remain unchanged.

National Insurance

The contentious item in the Budget was the increase in the rate of Class 4 National Insurance Contributions from 9% to 10% with effect from 5 April 2018, and to 11% with effect from 5 April 2019. For someone earning over £45,000 in 2019/20 this would have resulted in additional Class 4 contributions of £735! The Chancellor justified this on the grounds that the introduction of the flat rate pension entitlement for those individuals qualifying for their pension on or after 5 April 2016 extended to the self–employed and the improved benefit needed to be paid for. The basic pension under the old scheme was £119.20 per week and the new pension rises to £155.65 per week.

One week later this proposed increase was cancelled.

Another previously announced policy was that the Class 2 NICs will be abolished with effect from 6 April 2018 giving a saving to the self-employed £148.20. This now means that the self-employed are entitled to the benefit of the higher pension at a reduced cost!

Dividends

While a large percentage of farmers are sole traders or partners, there are those who in the past took advantage of turning their businesses into limited companies. These farmers will be able to take advantage of the lower Corporation Tax rates previously announced; the current rate of 20% will be reduced to 19% for the financial year beginning 1 April 2017, and will reduce to 17% for the financial year beginning on 1 April 2020.

However, most of the proprietors of these businesses would have extracted income from the company by way of a modest salary topped up by dividends. In many cases the dividend would have been tax free in the hands of the receiver, and they would only give rise to additional tax charges if the individual was a higher rate tax payer. The year 2016/17 changed that by introducing a tax on dividends of over £5,000, at a rate of 7.5%, or at 32.5% if the higher rate applied. This Budget reduced the tax free allowance of £5,000 to £2,000 with effect from 6 April 2018 resulting in a minimum extra tax liability of £225.

Making Tax Digital

The Chancellor used the Budget to update the government proposals for ‘Making Tax Digital’ (MTD) under which businesses will be expected to maintain business records digitally, report summaries of those records quarterly and make End of Year adjustments through their digital tax accounts.

The government has now announced a one year deferral of the requirement to Make Tax Digital for unincorporated businesses with turnover below the VAT threshold, so their commencement date will be from the start of accounting periods which begin after 5 April 2019. This gives some farmers a planning opportunity as, if the current year end date of 5 April is changed to 31 March, the MTD requirements will be delayed for another year!

Many rural areas suffer from poor digital infrastructure leaving rural businesses unable to comply with their obligations so the Chancellor promised to commit £200m to accelerate market delivery of fast and reliable full fibre broadband. Also an HMRC consultation paper said: “Those who struggle to engage digitally will be protected and helped.” Further clarification of this statement is expected but no indication of when has been given. We will of course keep you up-to-date as and when this is announced.

Other matters

No new exemptions have been announced and the only exempt businesses will be those with turnovers of less than £10,000.

It was noted that the Chancellor said nothing about Brexit and thus gave no indication of how any successor regime to basic farm payment may be structured or even contemplated.

If you have any questions about the changes announced in the Budget and how they might affect you, please don’t hesitate to contact me or your local UHY agriculture expert.

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