A budget bringing MTD breathing space
Last week brought us the final spring Budget from Chancellor, Philip Hammond. Potentially saving some show-stopping announcements for later in the year, this Budget was fairly light on revelations to get the accounting and business community excited.
The most welcome piece of news was the one year deferral of MTD for unincorporated businesses, the self-employed and landlords with turnovers below the VAT threshold. A nation of SMEs, it means the majority of UK businesses – and their accountants – have some breathing space to truly get to grips with MTD. It’s the government acknowledging that the migration to digital will bring challenges.
Despite the delay, MTD is on the way and the move to digital record keeping is advisable sooner rather than later, there is nothing to gain by using this extra year’s deferral to ignore the issue, as the deadline panic will set it again before we know it. Keeping digital records in real-time is the more effective way of understand a business’ financial health, and ultimately that can only be good news for you and your clients.
The announcement that grabbed the headlines was changes to National Insurance Contributions for the self-employed. The plan was to increase Class 4 NICs from 9% to 10% from April 2018, and to 11% from April 2019. It would have cost 1.6 million self-employed people an average of £240 a year. At odds with the Conservative Party manifesto, the backlash was immediate and from all sides; within the party, opposition parties, business groups and the media.
Fast forward a week and there was a change of heart. The Chancellor cancelled his plans to raise Class 4 NICs for the self-employed, bowing to a week of pressure. Citing honouring the pledges made in the party manifesto, Philip Hammond said he would instead use the Autumn Budget to "fund in full" the £2 billion lost from NICs.
During the Budget, the Chancellor also made changes to the dividend allowance, which is a move likely to hit small business owners hardest in the pocket. From next April, tax-free dividends will fall from £5,000 to £2,000. A basic rate taxpayer who gets £5,000 in dividends will pay £225 more tax – and those in the higher tax bracket will pay £975 more. It is an increase in tax, or the end of a popular tax break, whichever way you want to look at it.
This is going to hurt business owners and company directors who top-up small salaries with dividends, and pensioners using dividend payments outside of a tax wrapper to increase their pension income. For accountants, it will obviously impact on tax planning and may make businesses think twice about incorporation, as the financial benefit is a little less attractive now.
Those were the main and relevant announcements within the Budget, which also brought us an increase to the VAT threshold and CGT annual exemption. Business rates got a helping hand – although not the reform many had hoped for. Tax avoidance was mentioned; businesses will no longer be able to convert capital losses into trading losses, and a penalty will be introduced for professionals who create schemes defeated by HMRC.
Watch this space, this is a year with two Budgets, so more to come in just a few months as the Chancellor delivers his first Autumn Budget. Delivered after the Prime Minister triggers Article 50, this ‘Brexit Budget’ may well be one with some surprises in store.