Budget Analysis – Spring 2017

The Headlines

This Budget could be re-named an attack on the self-employed and SMEs, especially those in traditional manufacturing, construction and service industries! It could have been worse, but we’re struggling to see how. It’s a give with one hand and take away with the other. Larger companies, the employed and those in high-tech industries have got off very lightly.

• Class 4 NICs (self-employed NICs) to rise by 1% in April 2018 and another 1% in April 2019 (that’s a 22% effective increase in the rate!)
• The dividend tax-free allowance to come down from £5,000 to £2,000 in April 2018, affecting many owner-managers
• R&D tax relief administrative burden to be reduced
• Further anti-avoidance measures
• Personal allowance rate will rise for the seventh year to £11,500 and the higher rate threshold to £45,000

 Setting the scene

Philip Hammond’s first and last spring Budget was delivered against a backdrop of economic resilience since the EU referendum last summer, but there is still uncertainty as the government prepares to invoke Article 50 to leave the EU.

The economy has performed better than the Office for Budget Responsibility expected in the latter half of 2016 and started this year with significant momentum which has raised the growth numbers for this year. Headline growth forecasts for 2017 have been revised sharply higher from 1.4 per cent to 2 per cent. The OBR also forecasts that the economy will grow at a slightly slower rate in 2018, before picking up to 2% in 2021. Household finances will be squeezed by higher inflation this year and that there is little sign that the medium-term outlook has improved.

Tax receipts for 2016-17 have proved stronger than was expected at the time of the Autumn Statement and the deficit is around £12bn smaller than feared in November. But part of the improvement is unlikely to last as it was caused by people bringing forward income and paying tax in January rather than in future years. The medium-term improvement in the public finances is also limited because higher tax revenues will be offset by greater interest payments on government debt. There will be a larger projected war chest for use if the economy swoons in the years ahead, but the Chancellor has not been tempted with a give-away Budget.

So, what were the key announcements and what is either in the small print or likely to emerge over the coming days?

Self-employed NICs: The main rate of national insurance contributions (NICs) for the self-employed will increase. Currently, the self-employed may have to pay both Class 4 and Class 2 NICs:

• Class 4 NICs at 9% are paid on profits between £8,060 and £43,000
• Class 2 NICs are paid on profits of £5,965 or more

From 2018, Class 2 NICs will be abolished. Class 4 NICs will rise to 10% in April 2018 and to 11% in April 2019.

Tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018: it is claimed that this will reduce the tax difference between the self-employed and those working through a company. Typically, general investors will need over £50,000 worth of stocks and shares outside an ISA to be affected.

Making Tax Digital: small businesses and landlords under the VAT threshold will have an extra year to prepare for MTD.

Unincorporated businesses (businesses owned privately by one or more people) that have an annual turnover below the VAT registration threshold will have until April 2019 to prepare before MTD becomes mandatory. Under MTD, businesses must use digital software to keep tax records and update HMRC quarterly.

Cash basis accounting: self-employed and partnerships of individuals with trading income within the cash basis thresholds will be given the choice to use the simplified cash basis of calculating profits.

Cash basis accounting (‘the cash basis’) is an optional and simplified method for calculating taxable profits for trading businesses with straightforward tax affairs. This measure increases the entry threshold for the cash basis from £83,000 (cash basis threshold for 2015 to 2016) to £150,000.

Research and development (R&D) tax review: there will be administrative changes to research and development (R&D) tax credits, following a review of the tax environment for R&D. This will increase the certainty and simplicity around claims, and will take action to improve awareness of R&D tax credits among SMEs. We have yet to see the details but on the face of it, this is good news.