UK Budget 2018: how it will impact SME’s?
In this article, we will review the budget changes announced by the chancellor on 29/10/2018. However, our principal focus will be to examine the direct effects that this will have on SME’s. As a result, we hope this will help you understand the legislation, while also proposing key action points for your business.
Please note that we will not be delving into any personal tax changes such as stamp duty on house purchasers or taxes on wine, but feel free to contact us if you do require more information on any of these areas.
Private companies need to be wary of employing contractors if, in substance, they appear to have the characteristics of employees. Up until now the risks of getting this wrong lay firmly with the contractor. From 04/20, if HMRC discovers that contractors are really employees, the employing company must pay any shortfalls in tax and National Insurance (NI). To put this in perspective, the shortfall could be almost half the total payment originally made to such contractors, whilst penalties on top could more than double the total liability. Note that if you’re a small company, these rules do not apply. Small companies are currently defined as those where at least two out of the following three conditions apply:
- Turnover > £10.2m
- Balance Sheet > £5.1m
- Employees > 50
This was expected and mirrors changes made to IR35 legislation for public sector companies in 2017. For more details, see our previous article on contractor risks or review HMRC’s online guidance – https://www.gov.uk/guidance/check-employment-status-for-tax
ACTION: If you’re not a small company, review the status of all contractors to determine if in fact the such workers are really employees. If in doubt, err on the side of caution to avoid significant potential liabilities.
Minimum wage rates for staff 25 years or older (the National Living Wage) will increase 4.9% to £8.21/hr from 04/19. For younger staff, the following increases will apply to minimum wage rates:
- increasing the rate for 21 to 24 year olds by 4.3% from £7.38 to £7.70 per hour
- increasing the rate for 18 to 20 year olds by 4.2% from £5.90 to £6.15 per hour
- increasing the rate for 16 to 17 year olds by 3.6% from £4.20 to £4.35 per hour
- increasing the rate for apprentices by 5.4% from £3.70 to £3.90 per hour
ACTION: Plan for above inflation increases for staff paid at the lowest rates.
Employers NI Annual Allowance
Employers currently receive an annual £3,000 rebate on employer NI contributions. From 04/20, this will only apply to small companies whose total Employers NI contribution is less than £100,000 pa.
ACTION: If your total wage bill is near or above the £1m pa level, be prepared to lose the £3k NI relief, albeit in 17 months time. Consider paying employees extra pensions or introducing salary sacrifices to avoid breaching the limits.
Extra take-home pay for employees
Changes in the personal allowance and tax thresholds from 04/19, mean that all tax paying employees retain more take home pay ranging from £130 pa (basic rate payers) to £495 pa (higher rate payers).
ACTION: Note the good news for employees when considering pay rises. These changes won’t affect how owners choose to split their rewards between pay and dividends (pay should be up to the £8.4k National Insurance Secondary Threshold – see our blog on “Cost savings through paying yourself in the best way”).
The Annual Investment Allowance (AIA) provides immediate tax relief for capital expenditures in the year of spend (rather than spreading them out over decade or more which is the usual case). The AIA will increase from £200,000 to £1m for two years from January 2019.
Conversely, Enhance Capital Allowances (ECAs) which apply to environmentally friendly equipment and operate in a similar way to the AIA cease to apply from 04/20.
ACTION: You can bring forward up to £150k of tax savings if you defer any large, £1m plus investments into the two-year window starting 01/2019.
Disposing of shares in your company
Entrepreneurs Relief (ER) means you pay 10% capital gains tax on any share disposal rather than the usual 20% (although this may be lower for basic rate taxpayers). This relief was available after owning a company for just 1 year whereas from 04/19, the ownership period must be at least 2 years. A new qualification for ER also now applies – you must also own at least 5% of the total shares.
ACTION: You may have to delay the sale or transfer of your company shares to avoid a doubling of tax on your disposal.
Companies need not charge nor register for VAT if their total turnover remains below £85,000 pa. This limit will now remain until 04/22.
ACTION: Companies to note that staying below this limit becomes more difficult as its not indexed for inflation (but it’s much higher than most other European countries).
The UK plans to introduce a plastics tax on all packaging (whether imported or produced) that does not include at least 30 per cent recycled material. It will be accompanied by reform of the existing system of recycling credits (the Packaging Producer Responsibility System) known to be subject to manipulation. These changes won’t however take place until 04/22 following a consultation period.
ACTION: Plan for changing your packaging to make it more environmentally friendly in the next 3 years.