Budget: Small business round up
The prayers of the tax profession were largely answered with the Spring 2017 Budget. We asked for a boring Budget and “Spreadsheet Phil” delivered one.
The key announcements for small businesses were:
- MTD deferment for businesses with turnover under VAT threshold to April 2019
- VAT thresholds increase to £85,000 (£83,000 deregistration) from 1 April 2017
- Dividend allowance cut from £5,000 to £2,000 from 6 April 2018
- Class 4 NIC increases from 9% to 10% from 6 April 2018, and to 11% from April 2019
- CGT: Annual exemption increases from £11,100 to £11,300 on 6 April 2017
The Budget was otherwise very thin on tax measures, which is a good thing, as the tax system needs some time to settle down after all the changes which have been made and proposed in the last seven years.
Making Tax Digital
The biggest change for businesses, which has yet to coming into effect, is reporting under Making Tax Digital for Business (MTDfB). We were relieved to hear that there will be a one year deferral of MTD obligations for smaller unincorporated businesses and landlords until April 2019.
The timetable for commencing quarterly reporting under MTDfB will be determined by the accounting period that starts on or after these dates:
- From 6 April 2018 – businesses with turnover exceeding the VAT registration threshold, to report income and expenses subject to income tax and class 4 NIC
- From 6 April 2019 – businesses with turnover exceeding £10,000, to report income and expenses subject to income tax and class 4 NIC
- From 1 April 2019 – all VAT registered businesses, to report income and expenses subject to VAT
- From 1 April 2020 – all businesses which pay corporation tax, to report income and expenses subject to corporation tax
The reference to businesses includes property businesses. The absolute exemption from MTDfB remains at business turnover or gross rental income of no more than £10,000.
This schedule still represents a very tight timetable for software developers to meet. Any significant partnership or sole trader with turnover of £85,000 or more will be required to make quarterly reports under MTDfB from April 2018. However, on 31 January 2017 it was announced that partnerships with turnover in excess of £10m would also enjoy a deferral of MTDfB until 2020, but that concession is not mentioned in Spring Budget papers.
The compulsory VAT registration threshold increases by £2,000 to £85,000 on 1 April 2017. The VAT deregistration threshold also increases from £81,000 to £83,000, which will help businesses who want to deregister from VAT due to the changes to the VAT flat rate scheme.
The dividend allowance applies a zero rate of tax on the first £5,000 of dividends received by each individual UK-resident taxpayer. This allowance will be cut to £2,000 from 6 April 2018, in an attempt to reduce tax-inspired incorporations. This will cost most owner-directors £225 in extra tax per year.
Trustees and estates of deceased persons are not entitled to the dividend allowance.
In the 2016 Budget it was announced that Class 2 and Class 4 NIC would be merged from 6 April 2018, and we expected that the rates of Class 4 NIC would increase at that time. That expectation has been confirmed, as the main rate of Class 4 NIC will increase from 9% to 10% from 6 April 2018, and will increase again to 11% from 6 April 2019. It remains to be seen whether alignment of Class 4 NIC with employee’s Class 1 NIC, will be made at 12%, from 6 April 2020.
The Budget papers imply that the additional rate of Class 4 NIC, currently set at 2%, will not also increase from 6 April 2018.
As self-employed individuals won’t pay Class 2 NIC of £148.20 per year, and Class 4 NIC is only payable on profits over the lower profits limit (£8,164 for 2017/18), individuals with self-employed profits of less than £16,250 should pay less NIC from April 2018.
The annual exemption rises to £11,300 on 6 April 2017. This is a surprise as this exemption has been frozen at £11,100 since 6 April 2015.
The government is looking at tricky area of partnership tax, and will release a consultation paper later this year.
Rent a room relief is also under the spotlight, and may well be reformed from April 2018.
We should also expect to see further consultations on employee benefits and expenses, and in particular employer-provided accommodation.
All these joys will be revealed in the next Budget Statement, which is due to be presented to the House of Commons in the Autumn of 2017.