8 November 2018
Now that the dust is settling on the October 29th Budget announcement, we take stock of its economic context and its potential effects on taxpayers and SMEs.
A stroke of luck
Faced with an electorate fed up with austerity, and back-benchers on both sides of the Brexit divide threatening to vote down the deal, the Chancellor needed some giveaways to appease his opponents. Fortunately for him, the Office for Budget Responsibility revised its forecasts and announced that over the financial year the Government will borrow about £10bn less than had been forecast in March (due to a slightly healthier economy than expected and better tax revenues) and that by 2023 public finances will be £20bn better than previously estimated.
We should not get carried away. GDP growth is now expected to be 1.6% this year instead of the forecast 1.3% and the expected annual growth rate for the next five years is only 1.5%; somewhat sluggish compared to other major economies. Increased public spending is largely confined to the NHS, whilst most other government departments will see no increases at all, and even the increase in NHS spending is less than the promised 3.6% real terms rise. We should nevertheless welcome this measure as well as more funds to repair potholes in local roads, £650 million for social care, £1bn for defence, £400m for schools “to buy those little extras” and various tax-breaks that will help businesses to invest in the future.
Mr. Hammond has in fact addressed a wide range of public concerns, while at the same time bringing forward a few tax cuts that will make middle-income taxpayers better off, and lower income households better off to a lesser extent. In doing so, he has deferred the date on which the Government will ‘balance its books’ by at least two years.
Encouragement for businesses
Businesses have generally welcomed the budget. Smaller retailers, restaurants and cafés have been offered help in the battle to save the High Street: those with a rateable value of less than £51,000 will enjoy a one-third cut in business rates for two years (this will benefit 90% of them), and £675 million will be injected into a new High Street Fund.
To encourage capital investment the Annual Investment Allowance has been increased to £1,000,000, and the old industrial buildings allowance has been revived; giving tax relief annually on 2% of the cost of new industrial buildings. The house-building industry is to receive a boost in the form of an additional £500m in the Housing Infrastructure Fund.
SMEs get a further incentive to train employees as their contribution to apprentice training costs will reduce from 10% to 5%.
A few negatives
Changes in Entrepreneurs’ Relief have been introduced to increase the qualifying period of ownership from one to 2 years. (However, on the plus side, where a business is sold shortly after incorporation its period of pre-incorporation ownership will be taken into account).
Research and Development tax credits: it is proposed that where the claimant is loss-making and therefore receives cash instead of tax relief, the refund will be limited to three times the company’s PAYE and NI cost. This could disadvantage small start-ups.
The increase in National Living Wage to £8.21 (up 4.9%) with the declared intention to increase it in future at a faster rate than inflation, although good news for lower paid employees, will make life more difficult for the care and hospitality industries.
Good news for individuals
For the tax year 2019/2020 the personal allowance for an individual will be £12,500 (increased from £11,850) and the basic rate tax limit will be £37,500 (increased from £34,500). The additional higher rate of 45% will continue to apply on income over £150,000. The savings rate will remain at £5,000. This will reduce Income Tax for 30.6 million taxpayers. Those earning over £125,000 will see no benefit but those on £50,000 will pay £860 less tax, although they will pay more NI so the net benefit is only £520.
New tax pitfalls for homeowners
Principal Private Property Relief, which exempts one’s main residence from the scope of Capital Gains Tax, is to be modified. Currently the period of occupation can be extended up to 18 months after the date of moving to a new house, to allow for any difficulties in selling the property. This period will be reduced to 9 months and may result in an unexpected (but probably small) CGT bill for some. In the same vein there are new significant restrictions to CGT lettings relief, which will affect those who let the house that was previously their principal private residence then sell it for a gain. Those planning to let their private residence should seek our advice.
There is a raft of anti-avoidance measures mostly affecting large companies and those located offshore. The headline-grabber is the proposal to levy a 2% charge on the sales of the big tech companies in the UK, although this is deferred for consultation.
This has been a quick round-up of the main points. If you would like more detail please download our budget report here. For more personalised guidance about how the budget may affect you, please speak to us.
As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues. If you would like to speak to one of our local experts, please contact us.