‘The era of austerity is finally coming to an end’…. but what did the 2018 Budget mean for tax policy?

07 November 2018

07 November 2018 by Androulla Soteri Tax

Last week, the Chancellor Philip Hammond was labelled a "stubby pencilled accountant” by fellow Cabinet member Matt Hancock. Accountants typically have a grey reputation and are known for using too much jargon, talking a language that no one else understands. Hammond on the other hand displayed many signs of a decent stand-up comedian in this Budget.

But when you stop allowing yourself to be distracted by the gimmicks, and strip the Budget bare, what has it told us about tax policy going forward, and what will this mean for business and individuals?

Business tax

The Chancellor announced a raft of unexpected measures which will affect businesses both positively and negatively.

Annual Investment Allowance (AIA)

What has happened?

The AIA, which has sat comfortably at £200,000 for almost two years will, from 1 January 2019, rise to £1m per annum for two years. This is the highest level it has been set at since it was introduced in April 2008, previously peaking at £500,000 for almost two years back in 2014.

What does this mean for my business?

It’s good news. Businesses will now be able to claim 100% relief in the year of acquisition on the cost of purchasing plant and machinery up to the value of £1m. Some business may like to consider deferring investment until after 31 December 2018 in order to take advantage.

Are there any pitfalls?

Of course. The rules can be complex for accounting periods that straddle the date of the AIA rate change. The available AIA will be determined on a pro-rata basis and if the past is anything to go by there will be restrictions on how the amount is used depending on when the business incurred the expense.

Enhanced Capital Allowances (ECA)

What has happened?

ECAs which are essentially a 100% first year allowance for expenditure on qualifying plant which uses energy efficiently or is environmentally beneficial, was introduced in 2001 and from April 2020 will be scrapped.

What does this mean for my business?

Advanced planning to incur qualifying expenditure before the scheme is scrapped is required, but of course only if expenditure on total allowance-qualifying assets will exceed the new £1m AIA limit.

Are there any silver linings?

Yes, ECA for electric vehicle charge points will still be available until 31 March 2023.

Capital allowances on buildings – the Structures and Buildings Allowance (SBA)

What has happened?

This is a new allowance, for expenditure on new non-residential structures and buildings where the contracts for the construction works are entered into on or after 29 October 2018. The relief will be at 2% on a flat rate basis, essentially spreading the cost of construction over 50 years. The relief is reminiscent of the Industrial Buildings Allowance (IBA) which gave relief on a 4% straight line basis (so write off over 25 year life) on qualifying expenditure and was scrapped back in 2011.

What does this mean for my business?

Good news for businesses who for many years have been depreciating such assets in the financial statements but not been able to claim tax relief on this running cost of the business. The relief also applies where a structure or building is renovated or converted so that it becomes a qualifying asset. This will help businesses that are considering bringing warehousing functions back in house as a consequence of Brexit for example.

Are there any pitfalls?

There’s no forward planning that can be done around the introduction of this relief as it has been brought in with immediate effect. So if contracts were entered into in the last few days before the budget, business owners are going to be a little bit miffed.

Business rates

What has happened?

For the two years until the next revaluation in April 2021, retailers who operate from premises with a rateable value of up to £51,000 will be entitled to a one-third cut in their rates.

What does this mean for my business?

Ultimately, the chancellor is attempting to save the struggling High Street. Many businesses are closing stores amid biting online competition, higher wage bills, and weaker consumer confidence. The hope is that this concession will work some way towards cutting the substantial overhead costs retail is facing.

Are there any pitfalls?

The relief does not benefit retail giants that ultimately also create thousands of jobs. Scores of chains have run into trouble this year, including House of Fraser, New Look and Toys R Us, and other struggling giants remain at the mercy of escalating business rates and the failure to address this issue will mean the carnage on the High Street will continue.

Research and Development tax credits (R&DTC)

What has happened?

From April 2020 the amount of payable R&DTC that qualifying loss-making SMEs can receive in any tax year will be restricted to three times the company’s PAYE and NIC liability for that year. When R&D was first introduced, there was such a restriction at the time but this was scrapped in 2012.

What does this mean for my business?

Where the business outsources their R&D activities, the cash rebate available to them could be significantly curtailed.

Are there any silver linings?

The treasury has stated that close to 95% of companies currently claiming the payable credit will be unaffected; the anti-avoidance measure is hoped to target abuse instances where entities were set up specifically to claim the R&D credit without employing anyone or carrying out activity in the UK.

 

……And for bigger businesses

 

Capital losses

What has happened?

A restriction on the use of brought forward capital losses by corporates, in a similar way to the recently introduced restriction on the use of trading losses will come into effect from April 2020.

What does this mean for my business?

Well, for 99% of companies….nothing, as there will be unrestricted use of the first £5m of income or capital losses each year. For the larger companies though, only 50% of gains will be eligible to be relieved by brought for losses.

Are there any silver linings?

Other than there’s still over a year until this comes in, sadly not. And given the complexity surrounding streaming of the losses for income purposes, we would expect this to add an extra layer of complexity to the compliance process.

Entrepreneurs

Entrepreneurs relief (ER)

What has happened?

In addition to current requirements on share capital and voting rights, in order for shareholders to qualify for ER, they must also be entitled to at least 5% of the distributable profits and net assets of the company as of 29 October 2018. The Chancellor also announced that for disposals on or after 6 April 2019, the minimum period for which conditions must be met is increased from one to two years.

What does this mean for me?

Shareholders may like to consider accelerating the disposal of qualifying holdings where commercially viable in order to benefit from the relief where the holding period may not meet the new requirements from 6 April 2019.

Are there any silver linings?

Not news, as this had been previously announced, but in respect of new issues of shares diluting holdings to below the 5% requirement to qualify for ER, new rules will allow ER to apply to gains accruing up to the time of the share issue where the new shares are issued on or after 6 April 2019.

And for the ‘hard-working British public’?

The tax-free personal allowance is rising to £12,500 and the higher rate threshold increasing to £50,000, one year earlier than planned on 6 April 2019.

But for home owners and sellers, disposing of their principle private residence from April 2020, the final period exemption is falling from 18 months to 9 months. Secondly, letting relief will only be available if there is shared occupancy with the tenant. Bad news in a market that is becoming increasing less buoyant in the wake of Brexit.

Finally, some further relief for first time buyers in respect of Stamp Duty Land Tax. The exemption currently available for properties costing up to £300,000 will be extended to shared ownership properties valued at up to £500,000. The relief is also being backdated to 22 November 2017 when the exemption was originally introduced.

Find out more

This Insight is part of exclusive content being provided by our experts on the Autumn Budget. View our special Autumn Budget 2018 coverage to read more commentary and analysis to help your business. Alternatively, send us an online enquiry to contact one of our business experts or speak to our Tax Director, Androulla Soteri.