How does the Budget affect small businesses?

01.11.2018

The last Budget before the UK leaves the EU was revealed by the Chancellor Philip Hammond at the Houses of Parliament this week.

With the country edging close to Brexit, and no deal in place, small business community is facing an uncertain time. The Chancellor has tried to immunise the community from the uncertainty surrounding Brexit and give a well needed boost to high street businesses.

There was a lot contained within the Budget; several relatively small giveaways and short-term fixes but with the 29 March departure from the EU looming the Chancellor opted to tweak a number of existing regimes and not perform wholesale changes to the system. Perhaps next year, hopefully with all uncertainty resolved, the Chancellor will be able aid small businesses and their owners further.

The economy

The Chancellor opened with positive news on the current state of the economy and expected future growth and pledged to help hard-working families with the Budget, while at the same time holding funds in the event that a positive deal in relation to Brexit is not agreed. He stated that he was confident but not complacent that a good deal would be reached which would provide a double ‘Brexit dividend’, improved economic performance accompanied by the release of funds reserved for the event of no deal being reached.

The Chancellor expects a further 800,000 jobs to be created by 2023 as part of the ‘jobs miracle’ the country is currently experiencing. Most of this growth in jobs has been possible due to small businesses supporting such enterprises. It is vital over the next five years to see jobs come to fruition, accompanied by continued real wage growth and the deficit to fall to under 1% of GDP.

The high street

Turning to the high street, the Chancellor announced that he would cut business rates for properties with a rateable value under £51,000 by a third. This in effect gives ailing high street shops, pubs and business approximately £8,000. While this will provide some support to such businesses, there is an argument that the modern and future high street will be such a change from the high street of the past that a more structural change is required. As such, the Chancellor has provided funding to local authorities to help with the transformation of the high street and he is looking at how to increase footfall on the future high street with incentives to convert commercial property to residential, among other measures.

The Chancellor also announced that the British Business Bank would be given £1bn to help fund SME home builders in an effort to increase construction in this sector. Previous efforts to stimulate SME home builders have failed, but the continued efforts to promote small businesses are welcomed.

Impact on business owners

The VAT registration threshold was kept frozen for a further two years at £85,000. This was despite widespread rumour that it would be reduced. With the added administrative burden of making tax digital looming this is to be welcomed as it will allow business owners to focus on their business.

Small business owners will also be pleased that Entrepreneurs Relief (“ER”) is not going to be abolished as was rumoured before the Budget. This important tax relief for business owners and entrepreneurs allows owners to benefit from a 10% tax rate on the proceeds of the sale of their business, rather than the higher capital gains rate of 20%. The minimum holding period throughout which certain conditions must be met to quality for ER was increased from one to two years. 

There will be additional changes to ER to ensure the 5% qualifying holding is of full economic rights, not just 5% of share capital and voting rights. This has been done to crack down on perceived avoidance where share classes were designed to enable an individual to benefit from ER whilst not being economically entitled to 5% of the profits or assets of the company. 

Business investment

Small businesses which perform research and development through outsourced partners will be limited to the level of relief they can claim as part of the R&D tax credits system. This will now be capped at the level of the annual PAYE tax bill. For accounting periods beginning on or after 1 April 2020, the limit will be set at three times the total PAYE and National Insurance Contributions (“NICs”) payment for the period.

Business will welcome the continued high level of the annual investment allowance which has increased to £1m per annum for the next two years, will affect from 1 January 2019. This significant increase from £200,000 per annum will help stimulate companies to invest in plant, machinery and equipment with 100% tax relief for the spend up to £1m given in the year of the spend. While this change is welcomed, the continued change to the threshold makes it increasingly difficult for businesses to plan their expenditure and the increased level of the allowance should be maintained going forward. The capital allowances regime is crying out for simplification to make it much clearer for small business owners to understand how they will receive tax relief for the amount they spend. However, the chancellor declined to make any significant changes in this regard.

Other measures of note

The Chancellor also announced that SMEs would be given access to the financial ombudsman service (“FOS”). Small companies with turnover under £6.5m and fewer than 50 employees can now take claims to the FOS as a business rather than as individuals as of this month. The plans will allow an estimated 210,000 more companies to benefit from the FOS to resolve disputes with the financial services industry.

There is a continued crack down on the ‘self-employed’ operating through personal service companies, however the expected extension of the public-sector rules to the private sector were limited to large and medium companies. This will likely be revisited in future Budgets as the Chancellor continues to focus on this area, as it is thought that over one third of people operating this way should actually be taxed as employees.

The Chancellor confirmed rumours that he would restrict the employment allowance, which gives a £3,000 rebate to all employers with NICs under £100,000 per annum from 2020/21.

While there were a significant number of measures announced to attempt to combat climate change and plastic waste, including a tax on the import and manufacture of plastic packaging which is under 30% recyclable, the Chancellor stopped short of introducing a tax on single use plastics at this point in time.

Some of the things that didn’t happen

Before the Budget there was some speculation that there could be changes to Inheritance Tax (“IHT”), including possible modifications to the ‘7-year rule’ that exempts gifts to individuals, in the event any IHT changes were of a technical nature.  Going forward business owners await the outcome of the current Office of Tax Simplification (OTS) review of IHT.  One of the areas under review is business property relief, which was introduced to allow businesses to be passed on to the next generation without needing to fund an IHT bill.  Whilst the outcome of the OTS review is far from predictable, now would be a good time to give IHT planning the once over.

Despite speculation that pensions tax relief might be changed in the Budget, the only announcement was to increase the lifetime allowance by the standard inflationary amount. The revised amount is £1,055,000 in 2019/20, increasing from £1,030,000 in 2018/19. The annual allowance remains unchanged at £40,000.
 
For more information, please contact Simon Rothenberg, senior manager, at simon.rothenberg@blickrothenberg.com