Summer budget 2015 – Richard’s blog

Summer budget 2015 Richard Ellis July 15th, 2015

Crikey! Crikey! Crikey!

Well that was a proper budget. A good old fashioned too much information to properly digest-smoke and mirrors-blinkin’ ‘eck that’s gonna sting budget!

I know I’m a boring tax practitioner. I know I’m slightly warped in my excitement at seeing a chancellor stand outside Downing Street with his tatty red box in hand (I know, it’s been refurbished but it’s still tatty in my world). The thing is, this budget really did have an impact on pretty much everyone in our country, and for many, a pretty hefty impact.

We had the usual pre-budget leaks, almost matching Gordon Brown’s herculean standard of leaking in past budgets. There was the IHT threshold, the tax credits, the benefit caps; it just kept coming. Usually, the budget speech is an anti-climax, just a procession of pre-leaked policy changes. Not this time. Yes, vast chunks had been leaked but there was also a lot of very juicy stuff that didn’t appear until the actual day.

This blog is written with my clients in mind and, consequently, will mainly focus on the items that I believe will be of most importance to them. I may also look at some of the less relevant items just because they are a bit interesting. I will exclude items that were already announced in the previous budget and are being recycled. For a more detailed analysis of all the announcements in the budget, check out our budget guide.

Enjoy, or not, as the case may be:

Dividend taxation
Personal Tax – rates and allowances
Corporation Tax rates
Annual investment allowance
Living wage
Buy-to-let landlords: restriction of interest relief
Wear and tear allowance
Rent-a-room relief
Pensions
Employment allowance
IR35 and personal service companies
Restriction of relief for goodwill amortisation
IHT – new exemption for passing on the family home
Insurance Premium Tax (IPT)
Extra funds for HMRC – £750m
Tax credits and state benefits

Dividend taxation

I know this sounds like a strange one to discuss first, but I think this will have the greatest overall impact on my clients. Anyone running their business through a limited company, and let’s face it, most people are, will face an increase in the personal tax they pay.

This doesn’t come as a surprise. What comes as a surprise is that it’s taken the government so long to do this. They have been grumbling about the perceived unfairness of small business owners drawing income from their businesses as a dividend for over a decade – now they’ve decided to act.

Although we don’t have the exact mechanics of the calculation available at this stage, it appears that the ultimate objective is to bring the tax position of an owner/director of a limited company more closely in-line with that of a sole trader or partner in a partnership.

As part of this process, an additional £5,000 dividend allowance has been introduced. This, we understand, is separate to the £1,000 savings allowance that’s already been introduced.

These changes have not been flagged up anywhere near as much as other measures in the press – I suspect that’s because it’s a little convoluted and difficult to understand for your average non-financial journalist. We can’t hide from the fact that this is a big one, though. The measure is expected to bring in an extra £6.79bn to the exchequer over the next five years.
Small business owners operating through limited companies – brace yourself for increased tax bills!

We’ll be providing more information on this as and when it becomes available……

Personal Tax – Rates and Allowances

The Chancellor has continued with his increases to the personal allowance and higher rate threshold. Both of these measures seem to make a fair bit of sense. The ongoing increase in the personal allowance helps those on the lowest incomes and also encourages people back into work.

The increase in the higher rate threshold helps to keep more people out of the 40% rate. This seems fair, as the lack of upward movement in this threshold to date has dragged more and more people into the higher rate of tax who, in all fairness, probably shouldn’t be.

The Chancellor has also delivered the promised tax lock on income tax, NIC and VAT, as pledged before the election. This removes the Chancellor’s wriggle room to adjust the main income tax, NIC and VAT rates this parliament. Although, a sceptic might argue that there are plenty of other areas he can, and probably will, tinker with.

You can find more detail on new tax rates and allowances in our budget summary.

Corporation Tax rates

Now, this one did come as a surprise. Most of us felt that the corporation tax rate had now reached its lowest point and didn’t anticipate a change anytime soon. Instead, the Chancellor announced that the rate would reduce to 19% from April 2017 and to 18% from 2020.

2020 is a long way away, and it will be interesting to see if the Chancellor holds true to this promise, particularly as our European partners apply pressure to him on this.

One suspects that this (future) cut has been offered to ease business’ concerns over the new “Living Wage”.

Annual investment allowance

This relates to the amount of up-front tax relief a business can receive when it buys plant and machinery, equipment, etc. The allowance was due to decrease to £25,000 from the current figure of £500,000 from January 2016. There was little doubt that the allowance would be increased again but it’s pleasing that it has been set at £200,000 and frozen at that level for this parliament. This should be welcomed, as it helps businesses to plan their capital expenditure with confidence.

Increase to the minimum wage ALL SINGING, DANCING, LIVING WAGE

I can barely supress my chuckle as I type this. The noise in the Commons. Ian Duncan Smith’s vitriolic cheer. All part of the pantomime of a budget.

£9 per hour. £9 per hour. Yes £9 per hour. Oh, it reaches £9 per hour by 2020, you say. Oh that’s not actually that much, you say. It’s only for people aged over 25, you say. The London rate of the ‘real’ living wage is already £9.15 per hour. A fast one is being pulled, you say. And you’d be right.

Whilst a fast one is clearly being pulled, let’s not be too cynical here – it is an unexpected increase to the minimum wage (I point blank refuse to call it the ‘living wage’) albeit for those over 25. For many, this will be very welcome and does set the tone for a sharing of responsibility for social change between business and the public. And let’s not forget, this is a massive deviation from the Conservative party’s traditional stance in this matter.

Nestling alongside this announcement was the introduction of an apprenticeships’ levy for large employers. This is designed to encourage an increase in the number of apprenticeships, with a view to reversing the long term trend of employer under investment in training.

The above two policies have a distinctly ‘Labour’ feel. They work in two ways for the government; firstly they get business to fund welfare and training, at a time when the government is seeking to cut expenditure, and, secondly, they pull the rug from under an already struggling Labour’s feet.

If a tad disingenuous, at first glance both policies seem quite astute, politically.

Buy-to-let landlords: restriction of interest relief

The Chancellor has decided to restrict the tax relief available on interest on loans used to finance buy-to-let properties. The restriction will be introduced gradually, culminating in relief being restricted to the basic rate of tax by 2020 (a lot’s going to happen in 2020).

This measure is designed to counteract the perceived unfairness of wealthy individuals, effectively, getting taxpayer subsidised loans to fund buy-to-let properties. One suspects it is also designed as an attempt to gently slow the already overheating property market in the South East.

This will affect any higher rate taxpayers who have a buy-to-let property.

If you are a basic rate taxpayer, this won’t affect you.

Wear and tear allowance

From 2016, landlords who let furnished property will lose the 10% wear and tear allowance, which will instead be replaced by a new system that only allows them to get relief when they replace furnishings.

I suspect this measure could be surprisingly costly in tax terms to a lot of landlords. I would be surprised if many landlords, on average, spend 10% of annual rents on the renewal of furniture and white goods. Saying that, the current allowance does simplify the claim process. HMRC may well need to increase their checks on annual claims of expenditure once people are forced to make a claim based on actual expenditure rather than at a flat rate.

Rent-a-room relief

Having been stagnant at £4,250 for longer than many can remember, the rent-a-room relief sees an uplift to £7,500.

I suspect this is a measure designed to encourage house sharing during a period of high property prices. Again, this is probably mainly focused on the South East and I can’t really get that excited about it.

Pensions

This is an area we’ve been getting excited about for some time. The new pension regime really is a game changer for people wishing to save into a pension. The increased flexibility now available to pension savers and their ability to retain pension assets and pass them down through the generations, has been a massive change for the good.

The problem is, this made me wonder whether it was all too good to be true. I suspected there might be some sting in the tail, and I thought that sting might arrive in this budget.

As it happens, it didn’t. What we had were three main announcements:

Firstly, the lifetime allowance for pension pots would be reduced from £1.25m to £1.0m.

Secondly, the annual allowance of £40,000 would be tapered for taxpayers with adjusted income in excess of £150,000. Where an individual is subject to the taper, their annual allowance will be reduced by £1 for every £2 by which their income exceeds £150,000, subject to a maximum reduction of £30,000. An annual allowance of £10,000 will, therefore, apply to taxpayers with adjusted income of £210,000 or more.

Thirdly, the government has published a green paper Strengthening the incentive to save: a consultation on pension tax relief.

The green paper seeks to review, apparently with an open mind, various options for the future of pension contributions and associated tax relief. One option, highlighted by the Chancellor in his speech, would be for a withdrawal of pension contribution tax relief, a zero tax environment in the pension and zero tax on the pension when it is drawn.

With pension contribution tax relief costing the government some £35bn per year, you can understand why they are reviewing their options. The problem they have is that if they withdraw the incentives to save into pensions, then the objective of the new pension regime is defeated – making sure people provide for their retirements.

We shall see what happens once the review is completed but, in the meantime, clients may be well advised to take advantage of the pension allowance available to them. We feel the attractive tax relief available from pensions could be further cut in future years.

Employment allowance

The employment allowance (a relief from employer’s Class 1 NIC) will increase from £2,000 to £3,000 per annum. I suspect that this is designed to soften the blow of the increase to the ‘minimum wage’ detailed above.

The employment allowance will be withdrawn for companies where the sole employee is a director from April 2016.

IR35 and personal service companies

Blah blah blah……review ongoing……we don’t like this…….we’re going to legislate……another review……blah blah.

And that about sums it up on this. I’m genuinely losing the will to live on this subject now.

Restriction of relief for goodwill amortisation

We have already seen a restriction of Entrepreneur’s Relief on the transfer of goodwill into a limited company in previous budgets. Now, we see the withdrawal of Corporation Tax relief on the amortisation of this goodwill from July 2015. This is the final nail in the coffin of the good old ‘money box’ scheme.

I remember being taught about this planning technique back in the late nineties, when I was training as a Chartered Accountant. It had a good innings and will be missed by many practitioners.

RIP – Money Box Schemes

IHT – new exemption for passing on the family home

Headlined as a £1,000,000 IHT exemption, this measure requires a fair bit of examination as it’s anything but straightforward. Basically, the current IHT nil rate band stays in place and is frozen until 2020/21. On top of this, the government adds another nil rate band for the deceased’s main residence, starting at £100,000 in 2017/18 and increasing to £175,000 by 2020/21. The relief will then increase with CPI from 2021/22 onwards.

Sounds simple – it’s not. The property will need to be left to lineal descendants (children, grandchildren, etc).
The property will qualify if it’s been the deceased property at some point – clarification to come.
The relief is available on death, not on life time transfers.
The relief is transferable, so the estate of the second spouse to die can benefit from the main residence nil rate band of their deceased spouse, regardless of when that spouse died.
The relief will be tapered away for estates over £1m.
The relief will still be available to a person who has sold their main residence to downsize or release cash.

Can’t wait to see the detailed legislation on this. Sounds like the calculations are going to be very interesting.

Insurance Premium Tax (IPT)

IPT is set to increase to 9.5% from the current 6%. This is expected to collect some extra £1.5bn for the treasury per year. Prepare for your house, car and other insurances to increase.

A sneaky one, I think.

Extra funds for HMRC – £750m

On the BBC’s coverage of the budget, I believe it was Robert Peston who queried how HMRC would spend such a vast sum. I hate to admit it but at this point I felt a pang of sympathy for HMRC. HMRC have faced vast cuts to their budget under successive governments that pre-date the 2008 economic crash. Almost since I’ve joined the profession, there has been a constant flow of cutbacks at HMRC. Anyone who has spent hours in a queue on their phone system will be able to testify to their lack of man power.

It strikes me as obvious that if you want to collect taxes efficiently you should invest in HMRC. Unfortunately, many successive governments have seen HMRC as an easy target for cuts – after all, nobody sheds a tear when they hear of tax inspectors losing their jobs.

It seems that the penny might have finally dropped with the Chancellor that investment in HMRC will actually increase your tax yields!

Tax credits and state benefits

I won’t go into detail here, as this is not strictly a tax matter but suffice to say, the Chancellor has gone for a major clamp down. His main targets seem to be “lifestyle” benefits and tax credit claimants. Some of the measures introduced seem to be reasonable and fair to me but I do worry that some innocent people are going to get caught in the crossfire on this one.

Whatever the rights and wrongs of these measures, they seem to be enormously popular, particularly with the working taxpayers who feel they have subsidised others for too long.

Conclusion

And that, believe it or not, is my brief summary of the main budget points. There’s an awful lot more detail yet to be analysed and it will take a few months for the full implications of this budget to be realised.

Myself and my team will now get our heads down and work out exactly what this means for our clients and how best to advise them over the coming year.

If you have any questions about this blog or any items in the budget, please don’t hesitate to give us a call.

Until next time……

Richard