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Budget 2018

Below are the most pertinent posts announced by the Chancellor in his Budget speech yesterday:-

Off-Payroll Working Rules in the Private Sector (“IR35″)

As expected, the chancellor has gone forward with the extension of the off-payroll working rules (IR35) to the private sector with effect from April 2020.

The IR35 rules are as follows:

  • Businesses will be responsible for assessing an individual’s employment status.
  • The reform will not apply to the smallest 1.5 million businesses, and the large and medium businesses to which it will apply will be given longer to adjust, with the changes being introduced in April 2020.
  • From 6 April 2020, medium and large businesses will need to decide whether the IR35 rules apply to an engagement with individuals who work through their own company.
  • Where it is determined that the rules do apply, the business, agency or third party that pays the individual’s company will need to deduct income tax and employee NICs and pay employer NICs.
  • HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform, and businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years.
  • HMRC continues to work with stakeholders to identify improvements to checking employment status for tax and issuing wider guidance to ensure the reform meets the needs of the private sector. Enhancements will be tested with stakeholders, operational and legal experts before implementation.
  • A further consultation on the detailed operation of the reform will be published in the coming months, and will inform the draft Finance Bill legislation that is expected to be published in summer 2019.

CGT letting relief and final period exemption 

When someone sells their main residence, and it has been rented out at some time, there have been two reliefs available to reduce the capital gains tax payable – Lettings Relief (worth up to £ 40,000 of the gain being exempt from tax) and Private Residence Relief [PRR] (proportion of the time you lived there plus the last 18 months being exempt from tax).

From April 2020 the government will reform Lettings Relief so that it only applies in circumstances where the owner of the property is in shared occupancy with the tenant. The final period exemption [PRR] will also be reduced from 18 months to 9 months.

Entrepreneurs’ Relief

This relief is available when someone sells or disposes of all or part of their ‘trading’ business, resulting in a capital gains tax rate of 10% (rather than a mixture of the 10% and the higher 20% tax rate)

Up until now, one of the criteria to qualify for this 10% rate has been that one must have owned the asset for at least one year.

Legislation will be introduced in Finance Bill 2018/19 for disposals made on or after 6 April 2019, to increase this minimum period throughout which certain conditions must be met to be eligible for Entrepreneurs Relief from one year to two years.

Dividend allowance

The tax-free dividend allowance is unchanged at £2,000.

 

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Making Tax Digital (MTD)

HMRC are making the move to get all businesses to file their accounts via third party software on a quarterly basis.

The first businesses affected by this are VAT registered businesses with turnover over the VAT registration threshold. They will need to file quarterly VAT returns via third party software from April 2019. The business books and records must be kept digitally.

The old government gateway will be closed to businesses that fall within the above so you may need to change how you file your VAT returns. If you use accounting software you will need to check that it is compatible with MTD and possibly upgrade to the latest version.

If you do not currently use software (i.e. you use Excel or a manual cashbook), please speak to us to discuss your best way forward. There are a number of products out there that will do the job – we recommend Xero – a cloud based package that can incorporate an automatic bank feed (so that all your bank transactions are automatically brought into the software). You can also use it to create invoices and run customer and supplier ledgers. If you’d like to try it out, please speak to Henry or David.

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Rent-a-room relief

With effect from 6 April 2016, the rent-a-room relief (the gross income you receive when renting out a room in your own house which is free of tax) rises from £4250 to £7500.

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New dividend tax

It’s not uncommon for directors/shareholders of small companies to pay themselves from their companies via a mixture of salary and dividends.

Up until now, if your total personal taxable income for the current tax year comprises of only monies taken from your company, then you could take £671 per month as salary, plus up to £30900 as net dividends, and pay no personal tax.

However, from 6 April 2016, this all changes.

From 2016/17, if you take the above amounts, the salary remains tax-free, but the dividends will be taxed differently.

Using the £30900 dividend as an example, the new rules state that of the £30900 dividends, the first £5000 will be tax-free, but the remainder, less any unused personal allowance,  will be taxed at 7.5%, meaning additional personal tax of about £1700.

For those who take dividends so that they go into higher rate tax, there will be the 7.5% tax charge up to basic rate limit, plus a further 32.5% on the excess that is in the higher rate tax threshold (rises to 38.1% for additional rate tax payers).

Not all is bad news – the company tax rate will be reduced from 20%, to 19% with effect from 1 April 2017, and to 18% from 1 April 2020.

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Buy to Let Landlords

Landlords paying higher rate income tax will no longer be able to deduct all of their mortgage interest/finance costs from their rental profits. Instead, they will effectively receive a basic rate reduction. This restriction will be phased in over four years starting from April 2017.

In addition to the above, the 10% ‘wear and tear allowance’ will be reformed and replaced with a new relief that allows residential landlords to deduct the actual costs of replacing furnishings.

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