For owner managed businesses the Chancellor delivered a Budget that showed some consistency with his overall message of ending austerity and driving growth.
The Chancellor resisted calls to abolish Entrepreneurs’ Relief, saying that encouraging entrepreneurs must be at the heart of the Government’s strategy for a dynamic economy. He did however opt to tighten the rules to ensure that those individuals qualifying for the relief have a true material stake in the business. The minimum period for the qualifying conditions to be met will be increased from one year to two years for disposals on or after 6 April 2019. In addition, two new tests around rights to distributable profits and assets on a winding up are added to the conditions for relief on a disposal of shares.
There was also a positive change, which had been previously announced, which applies where shareholdings are diluted below the required 5% qualifying threshold for Entrepreneurs’ Relief. The amendments will allow for situations where a new share issue results in an individual whose shareholding is diluted below the 5% qualifying threshold, as relief for gains up to that time will now be available. This should remove a barrier to growth for firms where a company’s financing efforts risk diluting a founder’s personal shareholding below this threshold.
In order to further encourage investment and growth in business, the Budget included a temporary increase in the annual investment allowance to £1m, providing immediate tax relief for qualifying capital expenditure. Transitional rules will apply for businesses with a chargeable period that spans either the date of the increase on 1 January 2019, or the date of the reversion back to £200,000 from 1 January 2021. The timing of any expenditure could therefore be important from a planning perspective. Balancing this benefit to some extent is the proposed decrease in the writing down allowances provided on the special rate pool from 8% to 6%, and the withdrawal of environmental enhanced capital allowances.
Changes to the National Insurance (NICs) Employment Allowance have also been announced. Currently, employers of all sizes may reduce their Class 1 NICs liability by £3,000 per annum. This claim is available for one employer per group of companies. From 6 April 2020, this relief will only apply to employers who had a NIC liability of below £100,000 in the previous tax year.
The off-payroll working rules that have applied to the public sector from 2017 will be rolled out in the private sector from 6 April 2020. This change shifts the responsibility for ensuring compliance with these rules and applying tax and NICs due from the personal service companies or intermediaries to the party paying the individual’s personal service company. There will be an exemption for small organisations but the measure will have a significant impact for all other companies, and it is not yet clear how small organisation will be defined. There will be increased administration required when taking on contractors, increased national insurance costs for engagers and decreased net income for contractors where the new rules are applicable. Penalties and interest for non-compliance in this area are already a material issue, and care is needed to ensure that this shift in responsibility does not result in substantial additional liabilities for businesses.
For companies specifically, a consultation was announced on limiting the benefit of Research and Development tax relief for small and medium-sized enterprises. The proposal is to reintroduce a cap on the amount of payable tax credit that can be claimed by a company under the relief which will be set at three times the company’s total PAYE and National Insurance contribution payment for the period. Although any loss that a company cannot surrender for a payable credit will be carried forward and can be used against future profits, this could have a detrimental cash flow impact for companies that rely on this important relief.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.