Tom Biggs summarises the key announcements from the Budget briefing.
The tone from the Chancellor was optimistic, jovial at times, even with Brexit negotiations casting a long shadow over the Budget 2018. Both the EU and UK have acknowledged that no-deal is a real option even if it's not the desired end goal. The EU has however, appeared to take control of the negotiations over the issue of a potential Northern Irish border.
As James Forsyth points out in the Spectator, Brexit negotiations are at a pivotal moment and no deal planning doesn't have to be about logistics only. Philip Hammond could have set out what the UK would look like as a tax jurisdiction and economy in the event of no-deal. He could have stated an ambition to eliminate much of our overly enormous and complex tax code.
This could have included an aspiration to eliminate tariffs where possible, to further reduce corporation tax, to cut capital gains tax and enhance tax relief on business investment. The EU would have faced the prospect of a very competitive economy, close to its borders. It might have made them more open to compromise. Hence the Budget perhaps represented a missed opportunity, to wrestle back negotiating power and set out a bold vision of a post Brexit Britain.
Below is a summary of the main points from the Chancellor's Budget:
The annual investment allowance (AIA) will increase to £1 million (from the current level of £200,000) for all qualifying investments in plant and machinery made on or after 1 January 2019 until 31 December 2020. Businesses thinking of investing heavily will now have a two year window in which to maximise this tax relief.
The writing down allowances available on expenditure qualifying for and included within the special rate pool will reduce from 8% to 6% from April 2019. It is suggested that this is to more closely align the capital allowances tax relief on such qualifying assets with the average accounts depreciation.
The impact of this measure will be to increase the time taken to gain full tax relief but for most SME businesses, this is only likely to be an issue for existing assets given any new special rate assets will possibly be covered by the increased annual investment allowance.
Business rates bills will be cut by one-third for smaller retail properties, those with a rateable value below £51,000, for two years as of April 2019.
From 1 April 2020, companies will be subject to a 50% limit on the proportion of annual capital gains that can be relieved by brought-forward capital losses. Companies will have unrestricted use of up to £5 million capital or income losses each year. This will result in minimal impact for the vast majority of SMEs.
As of 1 April 2020, the amount of payable research and development (R&D) tax credits that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. This has been designed to prevent the abuse of the R&D tax credit under the SME scheme.
The VAT registration threshold remains at the current level of £85,000 until April 2022.
There will be a consultation on the taxation of Trusts with a view to making this legislation simpler, fairer and more transparent. This was first announced in the 2017 Budget and will be a welcome paper given the complexity of this aspect of the tax system.
Commencing in April 2020, when a business goes into administration, HMRC will be treated as a preferred creditor for taxes such as VAT, PAYE income tax, employee NICs, and construction industry scheme deductions. This does not apply to taxes such as corporation tax and employer NICs however.
The personal allowance will be raised to £12,500 from the current threshold of £11,850, in April 2019. This is one year earlier than planned. This could result in a typical basic rate tax payer benefiting from a £130 per annum reduction in their tax bill. The personal allowance will be frozen in 2020/21 and then increase in line with the CPI.
The higher rate threshold will also rise to £50,000 from the current £46,350, in April 2019. This is also a year earlier than planned. Again this will remain at the same level in 2020/21. The measure is expected to result in around one million fewer higher rate taxpayers than there were in 2015/16.
However, there are some important changes to NIC thresholds that impact on the expected savings for higher rate tax payers. The lower earnings limit for NIC rises from £116 per week in this tax year to £118 for 2018/20. The primary and secondary earnings thresholds increase by £4 from £162 per week to £166.
Finally, the upper earnings limit changes from £892 to £962 per week. As an illustration this means an income earner on £50,000 per annum would have a reduction in their tax liability of £860 a year based on the tax threshold changes but after factoring in the increase in class 1 primary NIC due, they will actually only be better off by £523.
Entrepreneurs’ relief is not being withdrawn contrary to some pre-Budget speculation. That said the minimum qualifying holding period will be extended from 12 months to 24 months effective from 6 April 2019.
Whilst not mentioned directly in Hammond's speech, from 29 October 2018, shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to benefit from the relief. This is a tightening of the rules that could easily go unnoticed.
The lifetime allowance for pension savings will increase to £1,055,000 for 2019/20, this is in line with the CPI measure of inflation.
First-time buyers of shared ownership property will get backdated stamp duty relief for properties up to £500k. Meanwhile there's more pressure applied to landlords.
The capital gains tax lettings relief will only apply where owners share occupancy with the tenant. The final period exemption is also reduced from 18 months to 9 months.
A consultation will also be published on a Stamp Duty Land Tax surcharge of 1% for non-UK residents buying residential property in England and Northern Ireland. This is a further measure aimed at reducing the appeal to non-UK residents investing in UK property and therefore in turn freeing up the housing market.
Following the introduction of the IR35 rules to the public sector, it was announced that reform would be introduced to the private sector to bring it in line with the public sector rules. In order to provide time to prepare for these proposed changes, this will not occur until April 2020.
The national living wage will increase from £7.83 an hour to £8.21.
Fuel duty was frozen along with beer and spirits.
Tobacco duties will continue to rise in line with inflation and this is also the case for Air Passenger Duty commencing from April 2020.
Again the Chancellor portrayed optimism given tax receipts were better than expected over the Summer months. Other numbers suggest otherwise. Since the financial crisis Britain's national debt has ballooned and there's little sign of it coming down. At the end of the last financial year, March 2018, it stood at £1.86trn.
Then if you consider the UK's assets of around £3trn according to the International Monetary Fund (IMF), and subtract our long term liabilities of £5trn, we are left with a negative net worth of £2trn. The IMF states this number has doubled since the start of the financial crisis a decade ago. It means to pay down our debt and thereby reduce the interest bill will require the Chancellor to eliminate the budget deficit.
Such an undertaking will be very difficult to achieve by the stated 2025 target date without further cuts to spending, or more likely given the proclamations of "the end of austerity", tax rises in the future. This budget was something of a steadying of the ship. The really big decisions on investment and taxation will come in the 2019 spending review when there is greater clarity on what form Brexit will likely take.
The content of this post is up to date and relevant as at 31/10/2018.
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