Budget 2018: Business taxes
Changes in taxes for business owners
The big announcement on employment taxation, which was widely predicted, was the extension of the off-payroll worker rules (or “IR35” to use the common term) to the private sector for those workers providing services via Personal Service Companies from April 2020.
This will have a significant impact across the whole business community in Scotland as many sectors rely heavily on a contingent and flexible workforce and it could mean many of these workers being paid through payroll as employees in the future.
The upside to this week’s Budget announcement was that the new rules will not apply to ‘small’ businesses. The definition of ‘small’ for these purposes is likely to be in line with the Companies Act definition which broadly covers companies of less than 50 employees. It is therefore expected that many SMEs in Scotland will fall outside the scope of the new law.
Entrepreneurs’ Relief is a valuable relief for entrepreneurs producing gains on the sale of their business or shares. In most cases it reduces a capital gain from 20% to 10% when selling a business.
There were three main ER announcements in the Autumn Budget to be aware of.
Firstly, to claim the relief you must now have had involvement in the business for two years, previously it was just one year. The rule comes into effect from April 2019. For the genuine business owner, this is unlikely to be a significant hurdle in terms of securing ER on a future sale but for shareholders looking to sell their share they may wish to delay the sale to ensure they meet this new holding period requirement.
Secondly, the shareholder must now have a 5% interest in both the distributable profits of the company and the net assets (not just 5% of the voting rights and share capital as was previously the case). This measure came into effect immediately on Budget day, meaning this measure may apply to sales on or after 29 October 2018. In light of this, owners may wish to review their current position to confirm what rights are attached to their shareholding to ensure they meet this new measure.
Lastly, as previously announced, the Government will legislate in the 2018/19 Finance Bill a measure that will allow shareholders whose shareholding dilutes over time to below the 5% threshold to still qualify for ER relief in certain circumstances. Looking ahead, this will enable business owners to grow the business and still qualify for this valuable relief should their shareholding fall below 5% as a result of an external investment.
R&D relief under the SME scheme
The Budget has announced a cap on the amount of Research and Development (R&D) relief available for loss-making companies claiming under the ‘SME’ scheme. From April 2020, the amount of payable R&D tax credits that a qualifying loss-making company can receive will be capped by three times the company’s total PAYE and NICs liability for that year. This measure is being introduced to prevent abuse of the R&D tax relief scheme by fake companies, in response to £300 million fraudulent claims identified and prevented by HMRC.
These fraudulent claims have involved companies set up to claim the cash relief available under this scheme even though there was no legitimate R&D activity taking place, or companies set up deliberately to claim the payable tax credit despite having no or little employment or activity in the UK. The Government recognises that fraudulent companies typically will not employ many people or pay much PAYE and NICs, and so this measure should help in targeting these fraudulent claims.
Nevertheless, this measure could affect the cash flow advantage of companies with genuine R&D activity that may have low PAYE and NICs liability relative to their R&D spend, for instance start-up companies with low employee costs, but with significant investment in other eligible cost categories, such as on specific R&D activities subcontracted out, software licences or materials consumed during the R&D process. Genuine commercial companies caught by this measure will still be able to claim the payable credit up to the cap and carry forward any excess losses to be set against future profits.
The Budget certainly had a lot more in it than initially anticipated for businesses but overall the Chancellor’s key message that the UK is open for business and an attractive place to invest and do business from is echoed in these measures.