Making the tax system more complicated

MHA MacIntyre Hudson

1st December 2018

Budget Review

MHA MacIntyre Hudson

By Nathan Sutcliffe

MHA MacIntyre Hudson

THERE were some clear signs the Government would like to pre-empt potentially falling investment and create some goodwill in the electorate through spending - whether in tax cuts or increasing departmental budgets. I've picked out three items I think are worth highlighting here.

Capital allowances provide businesses with tax relief for capital expenses - plant, machinery and certain building works. In Budget 2018, there were two positive changes. The Annual Investment Allowance, the amount on which 100 per cent tax relief is available in the first on capital spending, will increase from £200,000 to £1,000,000 from 1 January 2019 for a two-year period. If you're looking to make significant investments soon, I'd recommend you look carefully at the timing to avoid wasting valuable tax relief.

The other positive in this context was the (re)introduction of tax relief for the cost of new buildings. For contracts signed after 29 October 2018, tax relief will be given at two per cent per year - small, but not insignificant. If you're commencing new building work it will be well worth taking specialist advice from the start to ensure you obtain maximum relief.

Potential changes to Entrepreneurs' Relief (ER) always make business owners and advisors nervous leading up to Budget day. On this occasion, there were two minor but significant tweaks to this relief which provides a 10 per cent tax rate on the sale of a business and certain related assets.

First, the timeframe condition has been changed from one year to two years meaning individuals (in the case of companies) need to have held the shares and been an employee/office holder of a trading company for at least two years prior to the sale.

The more challenging change relates to the size of your stake in the company. Previously, you needed to have five per cent of the shares and voting rights. This has been extended so that, in addition, you now need to have five per cent interest in the 'distributable profits' and net assets of the company.

Shareholders in companies with more complex share structures - certain Alphabet shares, growth shares and participants in other share schemes - will need to carefully review their arrangements. The new rules could give a very nasty surprise if you've been expecting a 10 per cent tax rate which suddenly turns in to 20 per cent.

Finally, there were a couple of changes which employers should be aware of.

First, the rules which force public sector bodies to apply the off-payroll workers (IR35) rules are to be extended to the private sector from April 2020. Although this was widely expected, it was announced that this would only affect 'medium' and 'large' businesses (no definitions have yet been given for medium/large!). If your business is making regular payments to individuals or small companies outside the payroll, I strongly recommend you consider the effect of this now.

The other change related to the £3,000 employment allowance against employer's National Insurance contributions. This will be restricted to companies with an annual employer's NI bill of below £100,000 from April 2020.

As normal, there were plenty of changes - some positive, some less good(!) - but which all make the tax system even more complex than before!

MHA MacIntyre Hudson