Chancellor Philip Hammond delivered a gag-filled speech at his first Budget, but the small business community may not have found too much to laugh about when reviewing its contents.
Hammond stated the government’s ambition to make Britain the “best place to start and grow a business”, but the self-employed and business directors both face a substantial hike in potential costs.
For the self-employed the abolition of Class 2 in April 2018 will now be accompanied by an increase in Class 4 National Insurance Contributions to 10% in 2018, and in a measure aimed at director shareholders the dividend allowance will also be reduced from £5,000 to £2,000 from 2018.
Potential rays of sunshine for small business came in the form of relief packages for businesses affected by the business rate rises, and a 12-month delay in the Making Tax Digital (MTD) rollout for unincorporated businesses turning over more than £10,000.
Class 4 NIC rise
While it was already established that Class 2 NICs would be abolished, Hammond announced that the rate for Class 4 NICs will increase by 1% to 10% in April 2018, with a further 1% increase to 11% in 2019.
According to the Chancellor this measure will narrow the difference in taxation between the employed and self-employed, and that the choice of status shouldn’t be driven by differences in tax treatment.
“An employee earning £32,000 will incur between him and his employer £6,170 of NIC”, said Hammond. “A self-employed person earning the equivalent amount will pay just £2,300 – significantly less than half as much”.
Mike Cherry, national chairman at the Federation of Small Businesses labelled the changes a “£1bn tax hike on those who set themselves up in business”, and stated that they risked undermining the government’s mission for the UK to be the best place to start and grow a business.
However, commenting on Twitter accountant and former AccountingWEB tax editor Rebecca Benneyworth said that there was “no rational reason for self employed to pay less NIC than employed. State pension changes have removed the difference”.
The measures also hit the headlines as they appeared to contradict a Conservative election manifesto pledge from 2015 to not raise taxes and NICs, although a government spokesman later defended the plans, stating that the pledge referred to NICs without restriction and were restricted to Class 1.
Dividend allowance reduction
The Chancellor also axed one of the core allowances of his predecessor George Osborne, the dividend allowance of £5,000. Despite being in effect for less than a year Hammond announced that this would be cut to £2,000 in April 2018 – a measure due to raise a whopping £2.6bn over five years.
Commenting on the reduction Anita Monteith, tax manager at the ICAEW, said that the government “is already concerned at how much it will cost”, and cited it as a “prime example of the lack of certainty in the tax system – with small businesses in particular being affected.”
Chris Sanger, head of tax at EY stated that the cut to £2,000 means that those who have just more than £50,000 in shares will now be caught up by a tax rise that is ostensibly targeted at owner managers.
“The cut in allowance will mean that a higher rate taxpayer receiving £5,000 of dividend income will now face almost £1,000 in extra tax”, continued Sanger. “This will be a bitter blow for those who are relying on these savings to fund their retirement but who now find themselves as ‘collateral damage’.”
As expected in light of the recent uproar around the recent business rates revaluations, a relief package of £435m was delivered to cushion the business rates blow (and avert a Tory rebellion from MPs in the constituencies worst-affected).
Due to apply from April this year, the rate changes are due to have the greatest impact on businesses in areas with rapidly increasing property values such as the south east.
The Chancellor pledged that no business coming out of small business rate relief will see their bill increase by more than £50 a month next year, and local authorities will have access to a £300m fund to deliver “discretionary relief” to specific cases.
Hammond also offered small beer to the pub industry, with a £1,000 discount in business rate bills in 2017 for all pubs with a rateable value of less than £100,000.
A ‘better way of taxing the digital part of the economy’ was hinted at in the medium term, but the Chancellor gave no details or timeline, dashing the hopes of those hoping for a business rates equivalent for online businesses.
Jim Meakin, RSM’s head of tax, commented that the measures to lighten the load are being received as “something of a sticking plaster” rather than a fundamental immediate reform.
Making Tax Digital delay
In a move almost universally welcomed in the accounting profession, the Chancellor bowed to public demand by announcing a 12-month delay in the original Making Tax Digital (MTD) timeline for unincorporated businesses turning over more than £10,000 to start filing online from April 2018.
HMRC documentation confirmed that a one year deferral from mandating MTD for business was for unincorporated businesses and landlords with turnovers below the VAT threshold.
For more information read Rebecca Cave's facutal summary of the key measures affecting small businesses.
What did you make of the Budget? Are you laughing along with Chuckles Hammond, or is the joke on your business in the form of increased costs?
About Tom Herbert
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