As usual there are many changes to the 2018 Autumn Budget, however they’re not all relevant to our clients. So here we have set out the important changes that may affect our clients. The 2 main issues are IR35 changes for contractors and limits on R&D cash refunds. We’ve also added a reminder about the changes in property taxes and an update for MTD for VAT registered clients.
1) Income tax / dividends: good news from company owners
The personal allowance threshold has increased to £12,500 per year and the higher rate tax will start at £50,000.
This means that more dividends can be taken out at the lower rate of 7.5%. We’ll soon advise on the monthly amount of salary and dividends that can be taken without paying the higher rate from April 2019 onwards.
2) R&D: bad news for cash refunds
Currently many of our clients are claiming R&D tax credits to reduce their corporation tax bill if they are profit making, or to receive a cash refund if they are loss making.
Many do not have any staff or have very low payroll costs as the majority of development is outsourced or directors are not drawing salaries.
However, under the new rules that may come into play from 1 April 2020, companies will only be able to receive a cash refund of upto 3 times the total PAYE/NIC bill for that year.
So for example, a client who has outsourced 100% of its R&D will not receive any cash refund at all.
Although the rule change has not yet been confirmed as HMRC will consult on this change, many of our clients are claiming cash refunds every year and so forecasts/cash burn and run rate calculations will need to consider that R&D refunds may be restricted in future.
Clients who use R&D tax credits to reduce their tax bill and don’t normally receive cash refunds will not be affected.
3) IR35: bad news for contractors
Private sector engagers (agency or “hiring” company) will now have to be responsible from April 2020 for deciding if contractors are within IR35 or not.
Currently, the contractor can setup a limited company and when they start a contract they can decide themselves if they’re inside or outside IR35. They then invoice the engager their daily rate under both circumstances, but if they’re inside IR35 the contractor’s limited company has to pay NIC and PAYE.
The agency/employer isn’t affected either way. (our clients are all outside IR35 and so currently avoid NIC/PAYE)
But under the new rules, engagers will have to decide if the contractor is inside or outside IR35. If they’re inside IR35 because they’re basically like a shadow employee, then the agency/employer will have to pay them via payroll and deduct PAYE/NIC. The contractor can only be paid via an invoice if they’re outside of IR35.
What we saw last year with public sector engagers such as the NHS, is that they generally deemed most contractors to be inside IR35 and so paid them via PAYE.
Its not clear at this time what medium and large private companies such as banks and IT companies will do, buts its possible that our contractor clients may end up being paid via PAYE. In this case, it may not be worth continuing to use their limited company other than for investment purposes or to withdraw profits.
Small engagers will be exempt, but the majority of our contractor clients seem to work for medium and large engagers.
4) Other changes
Training costs may no longer be tax deductible – but we’d need to look into the circumstances, please check with us if the tax deduction is a factor in deciding to undertake training.
Employment allowance: the £3k NIC allowance will no longer be available to employers with an employers NIC bill greater than £100,000 per year. This won’t affect most clients, but there a few with large wage bills. We/you’ll need to ensure that its not claimed from April 2020.
Entrepreneurs’ Relief: the minimum term to hold qualifying business investments is increasing from 1 year to 2 years. Although practically speaking, most clients with a capital gain on selling their business will have held it for more than 2 years anyway, so this may not have much of an impact.
Annual investment Allowances: increased to £1m temporarily. Some of our clients invest significant amounts in computer hardware or software which is capitalised as tangible fixed assets. Previously the tax deduction was limited to £200k.
Digital services tax of 2% on revenues for online marketplaces > £25m per year: we’re mentioning this as we have a number of tech startups with online marketplaces but their revenues are currently below the limits. Maybe something to consider if future growth plans are met.
5) MTD from 1 April 2019 for VAT registered businesses with > £85k turnover
We have been a bit quiet on Making Tax Digital as the Government kept delaying the start date and its only recently been confirmed that it will kick in from 1 April 2019 (although it could possibly be delayed again as this is straight after Brexit).
The first phase of MTD will only be compulsory for VAT registered businesses with > £85k annual taxable turnover.
Records will need to be kept digitally and submitted to HMRC in a different way than before.
Xero will be MTD compliant but for clients who currently use spreadsheets, we are currently trialling different solutions to find the easiest/cheapest way to deal with MTD.
In the past we haven’t charged extra for dealing with new laws/regs eg flat rate VAT changes or auto enrolment pensions, but MTD is likely to increase our time spent working on jobs and there will be a cost for this.
Once we’ve estimated the extra time that we’ll need to spend on Xero and non-Xero clients we’ll inform you of the extra costs that we’d need to charge if you’d like us to deal with MTD. As usual, we’ll try to keep these fees as low as possible and for some clients we may not need to charge extra if it doesn’t take us long to deal with.
6) Property tax restrictions for mortgage interest
As discussed previously, mortgage interest will only be tax deductible at 20%. There were no changes mentioned in this 2018 Autumn Budget, but we’d like to remind our clients about the reductions in tax relief as 2017-18 was the first tax year that the restrictions started and its being gradually implemented by 2020 at which time there will be no 40% relief available.
