Philip Hammond, the new Chancellor of the Exchequer, announced his first Autumn Statement to Parliament on Wednesday 23rd November 2016.
Small businesses, who make a huge contribution to the economy, are already facing ever increasing responsibilities and pressures, including workplace pension schemes, dividend taxation changes and the national living wage.
Whilst some tax breaks for small business owners would have been welcome to encourage growth, we can at least be thankful that the Chancellor did not announce any new changes for them to grapple with. Instead he confirmed his adoption of the business tax road map set out by the previous Chancellor, George Osborne. This includes cutting the rate of corporation tax to 17% by 2020 and reducing the burden of business rates by £6.7 billion over the next 5 years.
The key changes announced in Autumn Statement 2016 were:
- Increase to the National Living Wage to £7.50 per hour
- Fuel duty freeze
- Withdrawal of the tax breaks of many items under Salary Sacrifice Schemes
- A change to the Flat Rate Scheme meaning it may no longer be beneficial for many small service businesses
In this summary, we describe the focal points of Autumn Statement 2016 for small business owners and remind you of some changes that have already been announced, but are coming in during 2017.
VAT Flat Rate Scheme
The Flat Rate Scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT. Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase.
To combat businesses registering to benefit from applying VAT on their services and paying a lower figure, the government will introduce a new 16.5% rate from 1st April 2017 for businesses with limited costs, such as many labour-only businesses. The previous highest rate for any business was 14.5%.
The limited cost trader is defined as a trader who incurs less than 2% of their turnover on goods in an accounting period providing it exceeds £1,000. This excludes capital expenditure, food and drink and vehicle costs unless they carry out transport services such as a taxi business.
This must be considered by April 2017 as it will apply from that date if the business fits the criteria. Otherwise they stay with the percentage applicable to their trade sector.
For more information about this measure, please click here.
As already announced, from April 2017 the rate of corporation tax will fall to 19%. Despite lots of speculation of further cuts, it has today been confirmed that the proposed cut to 17% from 2020 will proceed as planned.
Letting agent fees to tenants
The government will ban letting agents from charging fees to tenants, to give renters greater clarity and control over what they will pay. There will be a consultation before any legislation is introduced. Although this measure does not directly affect landlords, it is feared that letting agents may increase landlords’ fees to compensate.
Increase to the National Living Wage
The National Living Wage will increase from £7.20 to £7.50 per hour from April 2017. For each member of staff working full time, this increase could cost an employer on average of over £500 per year. Workers aged 25 or over and not in the first year of an apprenticeship, are legally entitled to the National Living Wage.
National Minimum Wage rates
The National Minimum Wage rates (which were last increased in October 2016) from April 2017 will increase accordingly:
- Aged 21 to 24 - an increase from £6.95 to £7.05 per hour
- Aged 18 to 20 - an increase from £5.55 to £5.60 per hour
- Aged 16 to 17 - an increase from £4.00 to £4.05 per hour
- Apprentices – an increase from £3.40 to £3.50 per hour
The fuel duty rate will remain frozen for the seventh successive year. This is great news for mobile traders that rely on their cars and vans to run their businesses.
An Autumn Budget and the Spring Statement
Following the Spring 2017 Budget and Finance Bill, Budgets will be delivered in the Autumn, with the first one taking place in Autumn 2017.
The Office for Budget Responsibility will produce a Spring forecast from Spring 2018 and the government will make a Spring Statement responding to that forecast. The Statement will review wider economic and fiscal challenges and launch consultations. This will improve both external and Parliamentary scrutiny of proposed tax measures.
Making Tax Digital
It was announced that in January 2017, the government will publish its response to the Making Tax Digital consultations and provisions to implement the previously announced changes.
Making Tax Digital is the banner given to HMRC’s radical plans for digitising the way businesses and taxpayers communicate and exchange data with HMRC by 2020. For more information about Making Tax Digital, please click here.
As previously announced, the Personal allowance will rise again from £11,000 to £11,500 from April 2017 and the basic rate band will also increase from £32,000 to £33,500. The combination of these changes means that the higher rate of tax will not apply until your income reaches £45,000 (up from £43,000). This will result in a maximum reduction in income tax of £500.
The plan is still in place to increase the personal allowance to £12,500 and the higher rate tax of 40% to apply on income when it exceeds £50,000 by the end of the current parliament.
The starting point for paying contributions will be aligned from April 2017 at £157 per week (£8,164) for both employee and employer contributions.
The Upper Earnings level/ Profit limits is aligned to the higher rate threshold for income tax. This increases the employee charged at 12% by nearly £188 for an employee earning above £45,000.
As previously announced, Class 2 contributions will be abolished from April 2018. Future self-employed contributory benefit entitlement will be accessed through Class 4 NICs. All self-employed women will continue to be able to access the standard rate of Maternity Allowance. Self-employed people with profits below the Small Profits Limit will be able to access Contributory Employment and Support Allowance through voluntary Class 3 contributions. These are currently £14.10 per week compared to £2.80 per week for Class 2. There will be provision to support self-employed individuals with low profits during the transition.
The tax and employer National Insurance advantages of salary sacrifice schemes will be removed from April 2017, except for arrangements relating to pensions (including advice), childcare, Cycle to Work Schemes and ultra-low emission cars. This will mean that employees swapping salary for benefits will pay the same tax as the vast majority of individuals who buy them out of their net wages. Arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.
The Money Purchase annual allowance will be reduced from £10,000 pa to £4,000 pa from 6th April 2017. This is the limit for taxpayers over 55 who have already started drawing on their pension funds. This is to restrict individuals from recycling their pension funds and benefitting from the 25% tax free lump sum whilst gaining full tax relief when making the contribution. The normal annual allowance limit remains at £40,000 pa.
Capital allowances: first-year allowance for electric charge-points
A 100% first-year allowance will be available for expenditure incurred on electric charge-point equipment. The allowance will come to an end on 31st March 2019 for Corporation Tax purposes and 5th April 2019 for Income Tax purposes.
Benefits in Kind
Valuation of benefits in kind
The government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017
Employee business expenses
The government will publish a call for evidence at Budget 2017 on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer
Insurance Premium Tax (IPT)
The standard rate of IPT will rise to 12% from 1st June 2017. This will make insurance more expensive for individuals and businesses.
Starting rate for savings
The band of savings income that is subject to the 0% starting rate will remain at its current level of £5,000 for 2017-18.
Universal Credit taper rate
Tax credit claimants are gradually moving from the existing tax credit regime to Universal Credit. By 2022, the government hopes Universal Credit will be fully rolled out. For those that are already in receipt of Universal Credit, the taper rate that applies will be reduced from 65% to 63% from April 2017. This will let individuals keep more of what they earn and strengthen the incentive to work.
Off-payroll working rules
The government had already announced plans to reform off-payroll working rules in the public sector from April 2017, by moving responsibility for operating and paying the correct tax to the body paying the worker’s company. The government hopes this will combat the high levels of non-compliance.
In response to feedback during the consultation, the 5% tax-free allowance will be removed for those working in the public sector; reflecting the fact that workers no longer bear the administrative burden of deciding whether the rules apply. This will mean that those working in a similar way to employees in the public sector will pay the same taxes as employees.
The government aims to extend their powers for data-gathering to identify those operating in the hidden economy. They will also consider the case for making access to licences or services for businesses conditional on them being registered for tax. They will also target those who repeatedly and deliberately participate in the hidden economy. This will encourage new businesses to register early, especially when they move towards Making Tax Digital.
Research & Development
The government will review the tax relief available on Research & Development with a view to making the UK an even more competitive place to do Research & Development. To date, very little detail has been released on this measure though.
The government will double rural rate relief to 100% from 1st April 2017, which will bring it in line with small business rate relief. Rural rate relief may be available if your business is in a rural area with a population below 3,000 and your business is:
- the only village shop or post office, with a rateable value of up to £8,500
- the only public house or petrol station, with a rateable value of up to £12,500
The government will award £1.8 billion to Local Enterprise Partnerships (LEPs) across England through a third round of Growth Deals.
£556 million of this will go to the North of England, £392 million to LEPs in the midlands, £151 million to the east of England, £492 million to London and the south east, and £191 million to the south west.
This funding of local infrastructure will improve transport connections, unlock house building, boost skills, and enhance digital connectivity.
The government will work with local partners and the Scottish Government towards a city deal for Stirling. The government has confirmed funding for city deals in Aberdeen and Inverness, is making progress towards a deal with Edinburgh, and will consider proposals for a deal with the Tay cities once they are brought forward, meaning all Scottish cities have the opportunity to agree a city deal.
The government is also continuing to work with the Scottish Government to implement the Scottish Government’s fiscal framework and new powers set out in the Scotland Act 2016.
The government is making good progress in discussions with local partners and the Welsh Government on a city deal for the Swansea Bay City Region. It will also consider options for a growth deal in north Wales and looks forward to receiving proposals from local partners. The government is also continuing to support the implementation of the £1.2 billion city deal for the Cardiff Capital Region, which was agreed in March.
The government continues to work closely with the Northern Ireland Executive towards the introduction of a Northern Ireland rate of Corporation Tax, subject to the Northern Ireland Executive demonstrating it has placed its finances on a sustainable footing.
The government will amend the Northern Ireland corporation tax regime in Finance Bill 2017 to give all small and medium sized enterprises (SMEs) trading in Northern Ireland the potential to benefit.