A couple of updates on the Budget released in July 2015

Please see a couple of articles with links to the website below.

Buy-to-let investments

The other major property-related changes in the Budget statement will affect “buy-to-let” investors in residential property (whether in the UK or overseas). Investors in commercial property are unaffected; as are investors in properties which meet the criteria to be treated as furnished holiday lettings. There are two separate changes.

Wear and Tear

The first change relates to the “Wear and Tear” allowance for furnished lettings. It applies to companies as well as to individual landlords (but not to furnished holiday lettings). At present, the costs of replacing furniture and fittings are not tax-deductible. Instead, a notional deduction is given for tax purposes equal to 10% of rents. HMRC seem to consider that in many cases this is over-generous and from April 2016, it is intended that the 10% deduction will be abolished and instead tax relief will be given for the actual costs of replacements. Note that this change does not affect tax relief for expenditure on routine repairs to the property, including furniture and fittings in it, which will continue, as now, to be tax-deductible in full.

Financing costs

The second change is in relation to “finance costs” such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. Starting from 6 April 2017 (and phased in over 4 years from then) tax relief for these costs will be restricted the basic rate of Income Tax. This restriction will apply to individuals (presumably including individual members of partnerships or LLPs) only. It will not affect companies, but the position of trusts is not yet clear. No Income Tax relief is of course in any event available for capital repayments of a mortgage or loan.

Instead of deducting finance costs from rents to arrive at taxable profits, landlords will instead receive relief in terms of tax by deducting an amount equal to tax at the basic rate on the finance costs from the tax otherwise chargeable on the profits. If the tax deduction for finance costs exceeds the tax otherwise payable on the profits the excess can be carried forward and used in subsequent years.

The change will be phased in so that for 2017/18 the new rule will apply to 25% of the finance costs (with the other 75% being deducted in computing taxable profits as now); for 2018/19 the restriction will apply to 50% of the finance costs; for 2019/20 to 75%; and from 6 April 2020, 100% of the finance costs will “disallowed” and dealt with under the new rule.

Although its impact is ameliorated by the delayed and phased introduction, this change will significantly change the economics of some buy-to-let portfolios. Since the change does not affect companies, one response may be to consider adopting a limited company structure. But there are many factors to consider in choosing the right structure, summarised in our recent briefing note and the position is further affected by the change from April 2016 of the way in which dividends are taxed, also announced in the Summer Budget. The tax credit attaching to a dividend will be abolished and dividends will be taxed as normal income albeit at special rates of tax (with exemption for the first £5,000 of dividends). Broadly, this will increase the effective rates of tax on

http://www.bkl.co.uk/resources-and-publications/budget-insights/summer-budget-2015/summer-2015-budget-effect-on-property-investors/

Small firms face another taxation shake-up

KEY POINTS

• The changes to dividend tax are the start of a process to reduce the tax advantages of incorporation.
• For existing companies dividends are still generally more tax efficient that salary, though the advantage are reducing.
IR 35 and personal service companies are back on the government’s agenda.
• The OTS has been asked to look again at the alignment of tax and NIC and at small company taxation generally.
• There will be much to talk about with clients – many of them could face significantly higher tax bills next year.

• Employed versus self-employed.
• Incorporated versus unincorporated.
• Dividend versus salary

Seeing the bigger picture

So what is happening? After a couple of days reflecting on the Budget announcements I am starting to see what I think are the overall themes, although many of the details need to be firmed up. I’m writing this in advance of the publication of the Finance Bill so what follows will need to be reviewed against the small print.

The most obvious change is in the taxation of dividends. From next year dividends will have no tax credit attached (thus removing the often confusing distinction between “gross” dividends and “net” dividends) and the amount received will be all that matters.

Dividends will be taxable at 7.5%, 32.5% and 38.1% respectively, depending on the marginal rate. As we will no longer have to take into account the grossed-up amount of the dividend in determining which rate band somebody falls into there are likely to be some odd results close to the rate band changes.

Those rates represent real increases in tax. The blow is, however, softened by the introduction of a £5,000 dividend allowance for all taxpayers. The assumption is that this will mean that an individual who receives total dividends in a year of £6,000 will be taxable on £1,000.

I did see some commentators suggest that it meant something different: that if the dividends were less than £5,000 no tax was paid, but once they got to £5,001 tax was paid on the whole amount.

I don’t think that that can be right but, until we see the legislation, we can’t be certain. I will assume in the rest of this article that the former reading is the right one.

What’s the objective?

Why has he done things this way? First, I believe that the £5,000 limit is all linked with digital tax accounts. Just as we saw earlier in the year with savings income, taking out small amounts from tax should reduce the compliance burden considerably.

A typical self-assessment taxpayer whose dividend and interest income are small should have little to enter onto his digital account (I say should because we don’t yet know the mechanics of all this).

Second, the changes will raise more tax from those few extremely wealthy people with massive dividend portfolios. But third, and this is the key change, it will directly affect small businesses.

The Budget Red Book is clear on this. It says at 1.189:

“These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019-20. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of corporation tax.”

There are two limbs to this: incorporation and dividend versus salary. Let’s take them in reverse order. A low-salary, high-dividend route still looks to be more tax-efficient even after these changes. Everybody has a different way of doing the comparison.

I like to keep it simple and look at a basic rate taxpayer who has used up his personal allowance against salary and is looking to take another £10,000 out of his company.

This confirms that the dividend route is still more efficient. This is consistent with what is said in the Red Book with its reference to “start to reduce the incentive”. I can only read that as a very strong hint that dividend tax rates will eventually be ratcheted up to align salary and dividends.

The chancellor hasn’t done it by putting National Insurance on dividends – with all of the problems that would have caused elsewhere in the tax system – but the new dividend tax is in some ways a back door way of doing the same thing.

So, the message to clients is: expect to pay more tax next year. If, as a result, they question the chancellor’s triple-lock announcement about no increases in tax rates, this query might be passed to 11 Downing Street.

Tax-motivated incorporation

What about the other element – the tax-motivated incorporation? Many people incorporated their businesses at the time of the 0% corporation tax band and, to an extent, all actions taken since have been trying to close the stable door after the horse has bolted. But these new changes are intended to discourage individuals from incorporating purely to obtain a tax advantage.

The computations here are trickier because we do not yet know the National Insurance bands for next year and therefore complete precision is not yet possible.

But the tipping point at which incorporation starts to deliver significant tax systems has clearly gone up. It looks as if incorporation at earnings even as high as £30,000 will now deliver a very marginal benefit.

I think of it this in the following broad terms. The advantage of incorporation has been that much of the income could be received as a tax-free dividend. Of that £30,000, something like £20,000 could be taken as dividend (using the personal allowance to cover salary).

Next year that £20,000 will create additional tax of £1,125 (£15,000 x 7.5%). That is a significant increase whereas, broadly speaking, the self-employed will see little change. Additional tax at that level would make incorporation much less attractive.

In our heart of hearts we all know some taxpayers who could not cope with operating through a company. The additional hassle of dealing with benefits in kind, loans to participators and company returns is often a nightmare for them, and hence for advisers.

With the tax benefits of incorporating being reduced (and I expect them to be further reduced in the coming years) there is a lot to be said for them to remain as self-employed.

Other changes

The dividend tax was not the only small business measure. Personal service companies are back on the agenda.

There is not only the decision to withdraw the employment allowance for one-person companies, but yet another review of the IR35 provisions to “find a solution which protects the Exchequer and improves fairness in the system”.

So where does this leave us? As I have said many times over the years the system for taxing small businesses lacks any coherence.

What we have is the result of various strands of the tax system designed for different purposes all crashing together on the small businesses that are the lifeblood of the economy.

This creates complexity and administrative burdens. We need a system designed specifically for small businesses and which addresses the triangle of tensions outlined above.

http://www.taxation.co.uk/taxation/Articles/2015/07/13/333367/all-change

We’re in the full swing of the Summer Holidays, as a business owner this can be a very busy time if youre in the food and leisure industry, it can also be a quieter time as many owners see because everything appears to be put on hold when suppliers and customers take time off and are on holiday.

How does Summer affect you? I see many business owners not taking time away from their business and carrying on regardless. Its important to have time away to recharge the batteries and to re-evaluate where you are going with it.

A lot of my clients are small micros businesses who might not have an army of staff to take care of things whilst theyre away. Heres a few tips they’ve shared with me on how they still manage to run their business but still take some important r & r.

Plan the diary around their holiday, do the bigger more important jobs in the run up to the holiday then plan the next jobs to be in the diary when they return.

Take small breaks so time away isn’t too dramatic and they don’t face backlogs coming back. Ie a long weekend away a couple of times a year.

Use a subcontractor to keep things ticking over until they come back.

Those companies with staff, leave clear instructions on what is to be done whilst theyre away.

Others leave the mobile phone on in case of emergencies but limit their workload reduced over the time period.

Whatever your business please take that rest time, you will read time and time again, those owners who take time away and have the rest are far more likely to succeed, than someone who never takes time away.

Work life balance is important to keep in the mind, we all like to think of ourselves as workaholics, and fully committed. Our health and wellbeing, and feeling motivated and energised is important too.

This blog is intended for information purposes only and is only advice from past experience, you may have other suggestions of your own. It is not intended to be used to make all of your business decisions but as a guide only.

Here is a summary of the main points of July's budget

Personal taxation and pay 

New national living wage will be introduced for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020 - giving an estimated 2.5 million people an average £5,000 rise over five years 

Low Pay Commission to advise on future changes to rates Inheritance tax threshold to increase to £1m 

phased in from 2017, underpinned by a new £325,000 family home allowance 

Personal allowance

at which people start paying tax, to rise to £11,000 next year. The government says the personal allowance will rise to £12,500 by 2020, so that people working 30 hours a week on the minimum wage do not pay income tax 

The point at which people start paying income tax at the 40p rate to rise from £42,385 to £43,000 next year Mortgage interest relief for buy-to-let homebuyers to be restricted to basic rate of income tax Welfare and pensions 

Tax credits and Universal Credit to be restricted to two children, affecting those born after April 2017 

Income threshold for tax credits to be reduced from £6,420 to £3,850 

Working-age benefits to be frozen for four years - including tax credits and local housing allowance, but maternity pay and disability benefits exempted 

Rents in social housing sector will be reduced by 1% a year for the next four years. 

Subsidies for social housing will be phased out with local authority and housing association tenants in England who earn more than £30,000 - or £40,000 in London - having to pay up to the market rent 

Disability benefits will not be taxed or means-tested while state pension triple lock to be protected 

18-21-year-olds will not be entitled to claim housing benefit automatically, with a new "earn to learn" obligation 

Employment and Support Allowance payments for new claimants who are deemed able to prepare for work to be "aligned" with Jobseeker's Allowance 

Green Paper published on proposals for "a radical change" to pension saving system 

The amount people can contribute to their pension tax-free to be reduced for individuals with incomes over £150,000 

The cost of funding free TV licences for the over-75s transferred from the government to the BBC between 2018 and 2021 

The annual household benefit cap will be reduced to £23,000 in London and to £20,000 in the rest of Britain.

The state of the economy 

Economy grew by 3% in 2014 

2.4% growth forecast in 2015, 0.1% lower than predicted in March, followed by 2.3%, 2.4% and 2.4% in the following years 

One million extra jobs predicted to be created by 2020 Public borrowing/deficit/spending 

Deficit to be cut at same pace as during last Parliament - reaching a budget surplus a year later than planned in 2019-20 

Spending to be £83.3bn higher up to 2020 than projected before the election 

Borrowing set to fall from £69.5bn this year to £43.1bn, £24.3bn and £6.4bn before reaching a £10bn surplus in 2019-20 

Debt as a share of GDP to fall from 80.3% this year to 79.1%, 77.2%, 74.7%, 71.5% and 68.5% in successive years 

1% public sector pay rise to continue for next four years 

£37bn of further spending cuts by 2020, including £12bn of welfare cuts, £5bn from tax avoidance and a £20bn reduction in departmental budgets Alcohol, tobacco, gambling and fuel 

No rise in fuel duty this year with rates continuing to be frozen Major reform to vehicle excise duties to pay for a new road-building and maintenance fund in England 

New VED bands for brand new cars to be introduced from 2017, pegged to emissions for the first year. Subsequently, 95% of car owners will pay a flat fee of £140 a year  Alcohol and tobacco duties not mentioned in statement

Business 

Corporation tax to be cut to 19% in 2017 and 18% in 2020 

Permanent non-dom status to be abolished - from April 2017, anyone who has lived in the UK for 15 of the past 20 years will pay same level of tax as other UK citizens, raising an estimated £1.5bn 

£7.2bn to be raised from clampdown on tax avoidance and tax evasion with HMRC budget increased by £750m 

Bank levy rate to be gradually reduced over the next six years and a new 8% surcharge on bank profits introduced from 2016 

Cap on charges imposed by claims management companies and an increase in insurance premium tax to 9.5% from November 

New apprenticeship levy for large employers 

Climate Change Levy exemption for renewable electricity to be removed 

National Insurance employment allowance for small firms to be increased by 50% to £3,000 from 2016 

Dividend tax credit to be replaced with a new tax-free allowance of £5,000 on dividend income. Rates of dividend tax to be set at 7.5%, 32.5% and 38.1%. 

Annual investment allowance will be fixed permanently at £200,000 from January 2016 

A consultation will take place on changing Sunday trading laws Health and education 

NHS will receive a further £8bn by 2020, in addition to the £2bn already announced) 

Student maintenance grants to be replaced with loans from 2016-17, to be paid back once people earn more than £21,000 a year 

The maintenance loan will increase to £8,200

New university professorships to be created to mark the Queen's 90th birthday 

£50 million to expand the number of cadet units in state schools Housing/infrastructure/transport/regions 

Control over fire services, planning and children's services to be handed to consortium of 10 councils in Greater Manchester 

Discussions on devolution of services to Sheffield, Liverpool and West Yorkshire 

£30m for new body, Transport for North, to promote integrated transport - including use of Oyster cards - in the north of England 

Rent-a-room relief scheme to rise to £7,500

Defence 

Government to spend 2% of GDP on defence every year, meeting Nato target 

Spending on defence to rise in real terms - 0.5% above inflation - every year during the Parliament 

New £1.5bn Joint Security Fund for investment in military and intelligence agencies 

Recipients of the Victoria Cross and George Cross will see annual pension annuities rise from £2,129 to £10,000, paid for by bank fines. Government to fund memorial to victims of terrorism overseas.