Budget Statement March 2016

Budget Statement March 2016

Recruitment Industry and Accounting Provider Soundbites 

The below summary includes direct ‘lifts’ from the Chancellor’s Announcement (the red boxes) for ease of reference. The Sapphire Comment is an initial view and is subject to change following more detailed consideration and additional information such as Guidance Notes and the Finance Bill which will be published in the last week of March 2016

Personal Service Companies (PSCs)

  • Off Payroll Engagement in the Public Sector (‘IR35’)

The Office of Tax Simplification (OTS) and House of Lords have all commented that the IR35 legislation is not effective enough and it was widely believed that there would be an announcement in today’s autumn statement. As it is, the status of the IR35 legislation will remain unchanged for the time being and the “Discussion document” Consultation responses are still being considered:

 

Sapphire Comment: In the end, the government has been less heavy handed than many had feared with limited company workers but the ‘direction of travel’ in attacking PSC structures is clear. It should be anticipated that the IR35 legislation will be modified (inevitably it will only be made far more aggressive) and it seems that the initial action will be in the public sector. This is presumably because government can determine which public sector assignments are inside and which are outside IR35. This will result in the “enshrining” of the emerging One Man Umbrella model inside government policy.

 

  • Increase in the taxation of dividends (previously announced)

From April 2016 the government will remove the 10% Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of £5,000 a year for all taxpayers. The government will then set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

 

Sapphire Comment: This is best explained in a graph. Interestingly, because there will no longer be a “dividend tax gross up”, those on the margins of higher rate tax thresholds will find themselves paying slightly less tax:

 

 

  • Director Loans accelerated Corporation Tax Charge

From April 2016 the government will increase the tax rate on loans outstanding for more than 9 months after a company’s year end from 25% to 32.5% to ensure director/owners are not incentivised to take loans rather than dividends due to the new dividend tax

 

Sapphire Comment: Loans of up to £10,000 will still be permitted from PSCs but this is a logical change to that the new dividend tax is aligned with the advanced corporation tax charge.

 

  • £30,000 tax free redundancy payments

It would appear that, on the face of it, these are still permitted as tax exempt payments

 

Sapphire Comment: When a temporary worker closes their PSC, this still remains an appropriate manner in which to extract surplus reserves but it is important that this is done in the correct manner.

 

Umbrella Companies and Recruitment Agencies

  • Restricting Travel and Subsistence (T&S) Claims for Umbrella and PSCs from 6th April 2016

As expected, T&S expense claims for Umbrella workers and those in PSCs who work on “inside IR35” assignments (where they are working under Supervision, Direction and Control (SDC)), can no longer claim T&S expenses.

 

HM Revenue and Customs and HM Treasury have published a further document this week which states that the draft legislation for restriction of tax relief on travel and subsistence for workers working through an intermediary (published on 9th December 2015) has been amended to “prevent organised misuse of Personal Service Companies in order to avoid the restrictions.

It seems fairly clear that there will be some form of debt transfer in place for Recruitment Agencies with the detailed legislation due to be published on 9th December.

Sapphire Comment: The final legislation has not yet been published so we can only speculate on the contents of the amendments until Finance Act 2016 is published in the next 2 weeks.

 

  • Trivial Benefits in Kind under £50 will no longer be subject to tax

‘Expense dispensations’ will no longer be part of the employment taxes regime from April 2016, and it is also announced that ‘trivial’ benefits in kind will no longer be subject to tax either.

 

Sapphire Comment: It is assumed that it is possible to make a trivial benefit payment each month, meaning that a total of £600 can be paid in this manner without being subject to tax.

 

Apprenticeship Levy (effectively an additional payroll tax of 0.5%) from April 2017

This new tax will be a huge cost for Umbrellas (to the extent that they survive until April 2017) and for Recruitment Agencies. The threshold of payroll cost, above which this levy will apply, is just £3m which will catch many operators in the temporary labour market.

 

Sapphire Comment: This change will accelerate the demise of Umbrella companies and will make Recruitment Agencies with payroll costs close to £3m even more reluctant to add workers to their payroll because of this additional cost.

 

Capital Gains Taxes

  • Capital Gains Tax reduced from 18% to 10%

This was an unexpected boost to those who make capital gains but the ‘sting in the tail’ is that some employee “tax exempt” share arrangements (which typically reward employees for the growth in their company’s value) will now be subject to a new capital gains £100k lifetime limit

 

Sapphire Comment: A welcome reduction in tax rates – very few reductions of this nature have been in evidence in recent years.

 

  • Company Distributions

There is a sinister comment buried in the detailed HMT Budget document regarding capital distributions from companies – typically an approach used at the end of a company’s life.

 

Sapphire Comment: This is an interesting comment and indicates that capital distributions from companies are likely to be restricted by additional rules which may be introduced very soon!

 

Tax Avoidance Structures including Offshore Schemes

  • Marketed Avoidance Schemes

It is well known that there are providers who masquerade as ‘compliant providers’ and secretly (or not so secretly). A new wave of punishments were announced in the Autumn statement but a high er penalty of 60% of tax due will now be introduced:

 

Sapphire Comment: This is a particularly draconian move but underlines the determination of the authorities to eliminate mass marketed schemes and attack the whole “off shore disguised remuneration” supply chain as well as very punitive penalties for those individuals continuing to use them.

 

Digital Accounts

  • The Digital Tax Accounts Initiative continues with Quarterly Reporting on the horizon…

There will obviously be a need for accounting software providers to engage with government on some significant changes which are planned for the longer term. As per the announcement below, it is suggested that taxpayers will be more engaged with HMRC and there is the distinct possibility that tax payments will be made earlier (corporation tax is currently not due until 9 months after a company’s year end for example).

 

Sapphire Comment: The Online world has arrived and the role of the accountant is changing in the modern era. Embracing technology and the use of Apps and online software will be essential HMRC and accountant tools in the very near future.

The intent from HMRC in this area can be accurately predicted in that the above initiative is likely to be coupled with Quarterly reporting of landlord and limited company incomes by 2018.

Tax on Dividends is Changing

Tax on dividends is changing – plan ahead now!

 What are the current rules?

Under current tax rules any dividend you receive is deemed to have been received less a 10% notional tax i.e. you are actually receiving 90% of the full amount of the dividend.  This is grossed up to the full 100% when you enter this is your personal tax return.  In the calculation of your personal tax this 10% is then knocked off as tax paid.

‘This is a ridiculous method of doing things does this really happen?’  Yes, this is a really strange process but that’s what actually happens!

Dividends are taxed on the grossed up amount at 10% on earnings up to £42,385, 32.5% on earnings up to £150,000 and at 37.5% on earnings above this amount.

What’s changing?

Dividends will no longer be grossed up.  i.e. you will be deemed to have received the full 100%.  Under the new rules everyone will get a £5,000 dividend allowance under which no tax is due on dividends.  The £5,000 is included as part of your basic rate allowance.   There will be no ‘notional tax’ deducted in your tax calculation.  Above this dividends will be taxed at 7.5% on earnings up to £43,000, 32.5% on earnings up to £150,000 and 37.5% on earnings above this amount.

 I don’t care about the rules just tell me the numbers!

Example: You currently receive a salary of £10,600 and a dividend of £30,000.

Under current tax rules you would have a personal tax bill of £348.

Under the new rules your personal tax bill would shoot up to £1,845!

Example: You currently receive a salary of £10,600 and a dividend of £60,000.

Under current tax rules you would have a personal tax bill of £7,848.

Under the new rules your personal tax bill would shoot up to £10,995!

Sapphire’s Comment

If you currently draw a dividend from your company then speaking to your accountant about tax planning may save you a significant amount on your personal tax bill and stop any nasty surprises.  At Sapphire we specialise in planning ahead so you always know where you are with your personal finances.