AUTUMN BUDGET AND SPENDING REVIEW 2021

‘Growth up, jobs up, debt down!’ 

Yesterday, the Chancellor delivered his latest budget and spending review. Here are the key highlights for owner managers and entrepreneurs.

TAX RELIEF

From April 2023, R&D tax relief to be extending to include more qualifying expenditure (such as date and cloud costs) but claims will be targeted at UK based businesses and innovation.

The temporary Annual Investment Allowance of £1m will be extended to 31 March 2023.

TAX INCREASES

From April 2022, a new Health and Social Care levy of 1.25% will be paid on earnings by everyone paying Class 1 National Insurance contributions (both employer and employee) and to those paying Class 4 National Insurance contributions (paid by the self-employed).

Importantly, this levy will also apply to earnings of individuals working above the State Pension age from April 2023.

The rates of income tax on dividends will increase by 1.25% for all bands as follows:

Ordinary rate – increase from 7.5% to 8.75%

Upper rate – increase from 32.5% to 33.75%

Additional rate – increase from 38.1% to 39.35%

As previously announced, the tax free allowance will remain unchanged and the bandings for higher rates of tax will also remain unchanged.

Tax free allowance        £12,570

Basic rate 20%              up to £37,500 (so earnings of £50,070)

Higher rate 40%            up to £150,000 (loss of tax free allowance above £100,000)

Additional rate 45%       above £150,000

Bandings for National Insurance contributions will increase in line with the CPI (being 3.1%).

Corporation Tax rates will remain at 19% for 2022/23. But from 1 April 2023, the main rate will increase to 25% for profits above £250,000. For profits above £50,000 but below £250,000, the rate will also be 25% reduced by a marginal relief. Profits up to £50,000 will continue to be charged at 19%.

TAX ADMINISTRATION

Making Tax Digital (MTD) for Income Tax Self-Assessment is now delayed until April 2024.

No changes announced in relation to off-payroll (IR35) rules.

Many of you would have heard about the Loan Charge, but what is it and why might you be affected?

The Loan Charge is a piece of legislation that was introduced in the Finance Act 2017.  It went largely unnoticed at the time, but its far reaching consequences are now being felt by a large number of self-employed contractors.

What brought about the Loan Charge in the first place?

Until about 15 years ago, many contractors were working through their own personal service companies when carrying out contract work.  They were able to be paid gross, allowing them flexibility over the amounts and timings of tax and National Insurance they needed to pay. It all worked like clockwork!

This all changed, however, when the intermediaries legislation, IR35, was introduced, which was meant to deal with counter avoidance by the aforementioned individuals.  This created a problem for those contractors who were used to being paid without deductions at source.

A solution to this appeared in the form of umbrella companies offering to act as the employer for these contractors. It had the added benefit that their income could be structured, avoiding what the contractors saw as the punitive rates of tax and National Insurance under IR35.

In many cases, this involved the use of Employee Benefit Trusts (EBTs). These EBTs were set up by umbrella companies to receive payments from their employees’ contracts. In turn, the contractors received a basic salary from the umbrella company (which often attracted little or no tax or National Insurance) and then a loan from the EBT.  The loans were treated as benefits in kind for the contractors and, accordingly, tax and National Insurance was paid on the beneficial loan interest value of those loans, although this was often a very small amount, relative to the amount of the loan.

Due to the nature of the loan payments, however, they were classed as tax avoidance schemes and, as such, were required to be notified to HMRC under the Disclosure of Tax Avoidance Schemes legislation (DOTAS). This meant that users of the scheme had to disclose this fact on their annual tax returns.

The big problem, though, was that many of these loans were never repayable, and even where there was an intention for the loans to be repaid to the EBT, in reality that never happened. So, in effect, they were just another form of remuneration, disguised as a loan.  As such, HMRC’s view is that these “payments” should have attracted tax and National Insurance deductions at the time.

Embarrassingly for HMRC, by the time it realised what was going on, several years had passed. When it finally woke-up to the issue, tens of thousands (and possibly over 100,000) contractors were using these types of schemes. But without new legislation, there was nothing HMRC could do.

We’re told that, initially, HMRC attempted to approach these scheme providers to collect the tax and National Insurance it claimed was due.  The problem was, though, that most contractors were using schemes based in the Isle of Man, and many of the providers had subsequently shut down. This meant HMRC only had one place to turn to; yep, the users of the schemes!

New Legislation

Roll forward to 2016 and HMRC put pressure on Government to introduce a charge to income (payable by the contractor) for any loans which had not been repaid by 5 April this year.

This change was enacted in the Finance Act 2017¹. Broadly speaking, this determines that any loans made since 1999 and still outstanding, will need to be disclosed as self-employment income for 2018/19, unless the taxpayer has reached a settlement with HMRC.  For most taxpayers, this will give rise to a tax charge at least 20% of the amount owing. For higher rate tax payers, however, this could mean paying a 40% (or even 45%) tax charge.

The Options

There are a number of options available to those contractors caught by the Loan Charge.

• Enter into a Settlement Agreement with HMRC

Recognising that for some, this would result in some fairly hefty tax liabilities, HMRC has set about persuading those contractors affected to settle.  In general, settlement means giving HMRC permission to re-assess the tax payable in each of the earlier years in which a contractor was paid a loan. HMRC has attempted to sweeten the deal by offering contractors on low incomes extended periods of time (up to 7 years) to pay the tax arising. In theory, this should result in a lower amount of tax being paid than under the Loan Charge calculation, but this should not be assumed.

There are a number of issues with this option, which many commentators have already raised with HMRC and, more recently, the Treasury Committee².  The first is that, ordinarily, HMRC is only permitted to open an enquiry into earlier tax years in two circumstances.  These are (1) if it believes the taxpayer has been careless in completing his or her returns, or (2) if it believes the taxpayer has deliberately excluded income from his or her tax return.  In the first of these instances, HMRC can go back six years, but in the case of deliberate errors this is extended to 20 years.

However, as many have argued, it’s hard to see how either of these circumstances exists. After all, most of those affected used a qualified accountant to prepare their returns (hardly careless) and full disclosure was made of the fact that they were using these avoidance schemes under DOTAS (so nothing was deliberately withheld).

Interestingly, it would seem that HMRC can only open enquiries into these earlier years in the event the taxpayer agrees to settle.

• Pay the Loan Charge

Arguably, this is the most straightforward option to administer. Provided the details of the outstanding loans are available (which may not be the case), then this option requires contractors simply declaring the loan balance as self-employed income on their 2018/19 tax return. The tax and Class 4 National Insurance arising on the loans would need to be paid by 31 January 2020, along with other tax and National Insurance liabilities.

One of the main problems with this option is that the contractor is still liable for the loans and could be called upon to repay the loan at a future date. It is unclear what would happen if they were repaid after 5 April, but is seems that tax relief will not be given – even if tax had been paid under the Loan Charge in 2018/19. I can foresee this becoming a significant problem for HMRC and Government which they have not anticipated.

It is worth noting that just because a contractor decides to include their disguised remuneration loans in their 2018/19 tax return, it does not mean that HMRC cannot open an enquiry into these loans, since it will be covered by the normal time limits for such an enquiry in respect of the 2018/19 return.

Another problem is that HMRC could still seek payment of inheritance tax, if it determines there has been a distribution from the EBT. In addition, there is also talk of HMRC treating the payments of the scheme providers’ fees as non-tax deductible (meaning that tax would be payable on these amounts as well).

• Repay the Loans

One way to avoid the Loan Charge and any need to settle your liabilities with HMRC, is simply to repay the outstanding loans. If no loans are outstanding at 5 April 2019, then no tax or National Insurance will arise.

It’s important to recognise that any loan repayment prior to 5 April, must meet strict criteria (for example, payment cannot be facilitated by entering into another tax avoidance arrangement) and the taxpayer might be called upon to provide evidence to HMRC of the repayments being made from taxed income or a commercial loan.

• Dispute HMRC’s right to make the Loan Charge

Surprisingly, many experts and politicians are beginning to challenge HMRC on the legitimacy of the Loan Charge legislation in relation to the rights of contractors as taxpayers.

It seems possible that even at this late stage, there may still be some changes to the implementation of the new charges. Whilst I think this is a very interesting development, HMRC seems doggedly determined to stick by its guns. So taking this option would be a high risk strategy.

What should you do?

It is revealing that HMRC seems to be making very little effort in helping contractors with assessing the options available, namely to either settle or pay the Loan Charge.  We believe HMRC are misleading contractors (unintentionally or otherwise) by suggesting that the best option is to settle rather than pay the Loan Charge.  For the majority, this could well be the case, but in the cases we have seen, there would appear to be a significant minority for whom the Loan Charge is actually the preferable option.

In a recent Twitter poll, we asked contractors which option they are planning to take.  The results make interesting reading.

Out of 197 voters, 66 (33%), said they intended to settle with HMRC and 57 (29%) said they planned to pay the Loan Charge.  But 74 (38%) said they were planning to do neither of these options. This would seem to reflect HMRC’s own experiences. At the recent Treasury Select Committee meeting on 30^th January, HMRC indicated that, so far, 9,000 contractors had been offered settlement agreements from an estimated 50,000.

So it would seem the settlement offer from HMRC is not overwhelmingly attractive for those impacted and it will be interesting to see what happens when some contractors, who have settled, realise they have potentially been duped into accepting a worse offer than the tax payable under the Loan Charge.

It is worth mentioning that if your other income for 2018/19 is below the basic rate of tax and you are not receiving any means tested benefits, paying the Loan Charge may be an attractive option – particularly if you are able to claim reliefs for pension contributions. This course of action might also be helpful if you are looking to secure a mortgage based on your taxable income for 2018/19.

But if you’re not concerned about HMRC opening earlier tax years, then settlement may be the best route.  Be advised, however, that time is running out if you want to take advantage of this option (the deadline being 5 April 2019).

Repaying the loan does seem to be the least attractive option, since the amounts to be repaid will be considerably higher than the amount of tax which is payable. But if an alternative distribution from the EBT could be agreed with the scheme provider, this could make it attractive. To be clear though, replacing one tax avoidance scheme with another will fall foul of the Loan Charge legislation, so any distribution would need to be taxable as income.

It would be understandable if you find none of the above options particularly attractive, and you might be tempted to fight HMRC and hope the problem goes away.  There’s no doubt of the political pressure building on HMRC, but I would not hold my breath in anticipation of any change soon.

Whatever you decide to do, make sure you weigh up the above options carefully because choosing the wrong option could end up being a costly mistake.

If you are a self-employed contractor who feels caught about the best way forward with the Loan Charge, please contact us as soon as possible on 020 7965 7338. We will do all we can to help you find the most appropriate resolution given your specific circumstances.

NOTES

¹The relevant section of the Finance Act 2017 can be found by following this link:

https://www.legislation.gov.uk/ukpga/2017/32/schedule/11/enacted?view=plain

²If you want to hear the proceedings from the Treasury Select Committee held on 30 January where the Loan Charge was discussed, please follow this link:

https://www.parliamentlive.tv/Event/Index/fe9b708b-7752-4d0f-9bd3-fc44608eaae8

It’s a question we are all eager to get an answer too!

If our politicians don’t agree on a clear way forward – and it’s nearly three years since the Brexit referendum – what hope for the rest of us!  I’m certainly not here to wave a magic wand,  but I can share with you what various Government departments have concocted to date which, hopefully, should provide some useful guidance as to what may lie ahead for contractors or small business owners.

As I write this, there is a great deal of uncertainty as to whether there will be a no-deal Brexit.  Parliament has indicated that it will not tolerate such an event, but there seems to be little appetite for Theresa May’s withdrawal agreement, unless alternative arrangements can be found to the so-called Irish backstop.

The Government clearly believes that the risk of a no-deal Brexit is considerable and, indeed, it remains part of the Government’s negotiation policy to keep this option on the table. So, in an effort to quell the concerns of the public and industry, it has produced a series of guidance notes covering everything from travelling to Europe in the event of a no-deal, to EU funded programmes.

In the interests of clarity, if Theresa May does manage to get the backing of Parliament for her deal (whatever form that might take), there will almost certainly be a two year (or longer) transition period, during which it is hoped some form of trade deal with the EU will be agreed.

If that happens, then there will be little if any impact, in the immediate future, on anyone living or working in the UK and you can stop reading any more of this article. If only it were that simple!

However, if a no-deal becomes the default option, there are quite a few things that need to be considered, as the Government guides explain. Regrettably, they all have the potential to impact our everyday lives in some way, but I have highlighted the ones that are most likely to affect small businesses and the self-employed – each with their own degree of nuisance factor!

Trading in Goods

The Trade Secretary, Liam Fox, has recently indicated that he is considering a period of zero tariffs of goods imported into the UK, in the event of a no-deal Brexit.  However, as it currently stands, any goods imported into the UK from the EU after 29 March 2019 (the official date of the UK’s departure from the EU) will be subject to tariffs, as set down by World Trade Organisation (WTO) rules, which state that the same rate of duty must be charged equally to all WTO members. These rates are referred to as ‘most favoured nation’ (MFN) rates. Similarly, goods exported to the EU from the UK will also be subject to the EU’s MFN tariffs (the rates of which may change).

When importing goods after a no-deal Brexit, you will need to refer to the UK Trade Tariff in order to apply the appropriate commodity code to the goods you import. You will then be required to pay the appropriate import duty on the goods you have imported, usually to an import agent, before the goods can be released to you. Broadly speaking, the same rules and procedures will be applied to EU goods as is currently the case for goods imported from countries outside the EU.

Before any goods can be imported to the UK from the EU after a no-deal Brexit, you will need to register for a UK Economic Operator Registration and Identification (EORI) number.  If you don’t already have an EORI number, we recommend that you apply for one as soon as possible. You should also check if you need an import licence which applies to specific types of goods.

If you are VAT registered, you should be able to reclaim the VAT paid to the import agent – provided you have a certificate of VAT paid (called a C79).

Exporting goods to the EU works in a similar way to importing from the EU.  You will still need an EORI number and you will almost certainly need to appoint a customs broker. You may also require  an export licence for specific types of goods.

Trading in Services

Currently, it is fairly easy for UK nationals to provide their services to clients in the EU.  Non-regulated professionals can work freely in the UK and EU and there are various reciprocal arrangements for regulated professionals (such as accountants and lawyers) for EU and UK nationals working in the UK and EU respectively.  But after a no-deal Brexit, these arrangements will no longer exist.

If you are a non-regulated professional from the UK, who wants to provide services in the EU, you will need to check if you require a work permit or visa to continue working in that EU country after 29 March 2019.

It is slightly more complicated if you are a regulated UK professional operating in the EU, as it will also be necessary to check the regulations for non-EU citizens, in the country you are working.

Regarding EU nationals already operating in the UK, there is not expected to be any change, but for EU nationals looking to provide their services in the UK for the first time after a no-deal Brexit, there are likely to be new requirements (which are yet to be determined).

VAT

Currently, there is no VAT payable on goods imported from the EU.  However, in the event of a no-deal Brexit, VAT will become payable on those goods.  However, there will be a new system introduced whereby rather than paying import VAT at the time of import, VAT will be accounted for on your VAT return.  This will apply to goods imported from the EU and elsewhere, which is designed to help your business cash flow in the event of a no-deal Brexit.

For goods exported to the EU from the UK, VAT will no longer apply to the sale of those goods to individuals or businesses and they will be treated as zero-rated supplies. Neither will you be required to submit an EC sales list, as is currently the case.

For the selling of services to the EU, the place of supply rules remain unchanged, in that the place of supply to businesses will still be the location of the customer and, therefore, no VAT should arise.  The rules are slightly different for the sale of digital services and, if that affects you, you will need to register for the Mini One Stop Shop non-union scheme in a member state. But this can only be done after the UK has left the EU.

Data Protection

In the event of a no-deal Brexit, the UK Government has confirmed that you would still be able to continue sending personal data from the UK to the EU. However, in order to receive data from an organisation in the EU, you would need to check that the EU had made a so-called ‘adequacy decision’.  Without this, there is a significant risk to the EU organisation that they will be in breach of EU law, so it is hoped and expected that an adequacy decision can be made quickly by the European Commission.

Does that clarify things for you?

We appreciate the threat of no-deal can be daunting and that there are other areas not covered in this article, for example travelling to the EU after a no-deal Brexit. Nevertheless, with some careful planning, the impact on most small businesses and professionals should be manageable. We just have to wait and see how things play out politically before further details and exact timescales become evident. Watch this space!

In the meantime, if you would like to discuss your own particular situation in more detail, or if you would be happy to share your own thoughts on contracting and running a business in a post- Brexit world, we are here to provide any support and advice we can. To get in touch, call +44 207 965 7338 or email: enquiries@davidcouch.net

If you are self-employed, a company director, or earn over £100,000 per annum, you will most likely be familiar with the requirement to complete a self-assessment return. But these aren’t necessarily the only parameters. You may also need to file a return if you:

• are in receipt of a pension,
• receive child benefit payments,
• have overseas or investment income,
• have income from a trust,
• have letting income or if you have made capital gains,
• have underpaid or overpaid tax, or wish to claim for expenses.

In unusual circumstances, HMRC may simply request that you complete a return.

Once you are aware that you need to complete a self-assessment return for the first time, you must inform HMRC no later than 5th October following the end of the tax year in which the relevant income arose.

As the name suggests, a self-assessment return requires making a declaration of your taxable income to HMRC. This declaration needs to be made by 31st October following the end of the tax year, or if you file your return online, you are allowed an extra three months (i.e. 31st January).

A UK tax year runs from 6^th April to the following 5^th April and this is the period for which you will need to account for any income received on your self-assessment return.

The Process

When considering what income to include, you should start by looking at any monies received during the tax year and determine whether or not they should be included.  Typically, any payments received from employment or self-employment must be declared, including any bonuses or overtime payments.  You may also need to include repayment of expenses, but in most cases, you should be able to claim relief for these, which is explained later. Personal loans, which are repayable to your employer or company, may also need to be reported to HMRC, but only the interest element is taxable.  You also need to include any other benefits you may have received, for example, company cars or health insurance.

Once you have included all employment income, now turn your attention to other unearned income, such as bank interest, dividends, letting income (net of expenses), pension payments and foreign income. Finally, you need to consider whether you have made any capital gains on the disposal of assets (including buy-to-let property, antiques, and investments).  Generally, there are capital gains tax exemptions for selling your own home, but the situation gets more complicated if you have recently moved out (due to separation or divorce) or if you have been renting out the property at any time.

It’s good to know that there are various income tax reliefs available to you for business expenses incurred personally.  You can also get relief for most pension contributions. These reliefs are deducted from your total income to work out your net income.

Working Abroad

The rules in relation to working overseas are especially complex and you will need to keep records of the time spent abroad, how much of that was spent working and details of amounts paid, as well as any tax withheld.

Provided your taxable income is below £100,000, you are entitled to a full personal allowance.  You receive a reduced personal allowance for taxable income up to £123,700, but above this level there is no personal allowance.

There are further allowances for dividends (2018/19: £2,000) and for savings interest (depending on your other income).  The total of your allowances are deducted from your net income to work out your taxable income.

UK Tax Rates

UK income tax rates are: 20% for taxable income up to £35,000; 40% for the next £103,649; and 45% for amounts above that.

Once the amount of tax due has been calculated, this must be paid by the 31st January of the following year.

You might also be required to make a payment on account in respect of the current tax year.  This is normally calculated by reference to the tax paid in the previous tax year, although no payment on account is due if the amount is less than £1,000.  It is possible to request a reduction in the payment on account amount if you believe your income will be lower than the previous year.  Payments on account are paid in two equal instalments – the first on 31^st January (with the final payment of the previous tax year) and the second on the 31^st July.

Finally, it is important to include your taxpayer reference followed by the letter ‘K’ when making your tax payment – just to make sure HMRC credits the correct account!

We can provide you with all the help you require with your self-assessment returns and to take advantage of our Free Basic Self Assessment Offer for 2018/19, please contact us asap. Offer ends January 31^st 2019.   

Glossary of Terms

Tax year – this runs from 6^th April to 5^th April of the following year

Tax return – your statement of income and claims for reliefs made

Income – any payments received by you either from UK or overseas payers, plus potentially any entitlements from trusts

Business expenses – expenses which you can claim relief for against your income, thereby reducing the tax payable

Payment on account – tax payable in advance based on your previous tax liability