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S&W Narrow Margin Template Spring Budget 2017 Commentary March 2017 Contents 1. Introduction 4 2. Personal and trust taxes 5 2.1 Increases to the rates of Class 4 NIC to be introduced 5 2.2 Income tax rates and above inflation rise in the personal allowance 5 2.3 Reduction in the dividend allowance 5 2.4 New £1,000 tax allowances for property and trading income 6 2.5 Further update on changes to the taxation of 'non-doms' 6 2.6 Consultation on rent-a-room relief to better support longer-term lettings 7 2.7 Simplifications to the cash basis and increase to the entry threshold 7 2.8 Simplified cash basis for unincorporated property businesses 8 3. Pensions, investments and capital taxes 9 3.1 Part surrenders and part assignments of life assurance policies 9 3.2 Money purchase annual allowance reduced to £4,000 from £10,000 9 3.3 Aligning the tax treatment of UK and foreign pensions 9 3.4 Qualifying recognised overseas pensions schemes (QROPS) transfers 9 3.5 Master trust pension schemes tax registration process amended 10 4. Employment taxes and payroll 11 4.1 Other employment taxes measures 11 4.2 Off-payroll working in the public sector 11 4.3 Disguised remuneration 11 4.4 Call for evidence on employee expenses 12 4.5 Employer-provided accommodation 12 4.6 Taxation of benefits in kind 12 4.7 Guidelines on making payments for employees' image rights 13 5. Business taxes 14 5.1 Corporation tax rate to fall 14 5.2 Amendments to the social investment tax relief (SITR) scheme. 14 5.3 Tax advantaged venture capital scheme amendments 14 5.4 All profits realised by offshore property developers are subject to tax 15 5.5 Simplification of substantial shareholding exemption (SSE) rules 15 5.6 Reform of brought forward corporate losses 15 5.7 Hybrid mismatches regime changes 16 5.8 Museum and galleries tax relief 16 5.9 Patent box: cost sharing arrangements 17 5.10 Corporate interest expense restrictions on deductibility 17 5.11 Appropriation to trading stock rule changes 17 5.12 Plant and machinery leasing rules following accounting changes 18 5.13 Administration simplification for claiming R&D tax credits 18 Spring Budget 2017 5.14 Creative industry tax reliefs extension 18 5.15 Non-resident companies' UK income and the corporation tax regime 19 5.16 Risk profiling of large business consultation 19 5.17 Partnership taxation consultation response reaction due 19 6. Indirect taxes 20 6.1 VAT registration limits 20 6.2 Mobile phone services ‘use and enjoyment’ provisions 20 6.3 Other measures to combat VAT avoidance 20 6.4 Stamp duty land tax (SDLT) reduction of filing and payment time limits 20 6.5 Insurance premium tax (IPT) rate increase anti-forestalling rules 21 6.6 Landfill tax disposals clarification 21 7. Making tax digital and general tax matters 22 7.1 Making tax digital: one year deferral 22 7.2 Making tax digital: tax administration including interest and penalties. 22 7.3 Removing the effects of the Limitation Act for National Insurance 23 7.4 Promoters of tax avoidance schemes (POTAS) strengthened 23 7.5 Strengthening tax avoidance sanctions and deterrents 23 7.6 Crackdown on the hidden economy 23 8. Appendix: Rates and allowances 25 9. Glossary of terms 37 Spring Budget 2017 1. Introduction The right Budget at the right time? For the first time in years it appears the Chancellor has listened. Spreadsheet Phil has lived up to his name; no swingeing changes to taxes, little tinkering at the edges of policy but solid, if uninspiring, steps forward. Individuals and businesses crave certainty within the tax system. Philip Hammond chose to keep Britain living within its means by not pushing forward with excessive spending following the additional money highlighted recently by the OBR. So is this a case of ‘Right Budget, right time, right Chancellor,’ as echoed by Philip Hammond in his Budget speech? Unlike Norman Lamont, who first coined the phrase, we don’t expect Mr Hammond to be fired within the next week. History will tell whether he’s the right Chancellor at the right time, however, his handling of the country’s tax affairs as we are about to enter a new global future has been generally positive. However, there were immediate calls from some of the self-employed to rein in the 2% hike in Class 4 national insurance, which are due to be phased in from 2018/19, and even to sack the Chancellor. And some owner managed small businesses have understandably grumbled about the reduction in the dividend allowance. However, the bigger picture supports these changes, which do help to level the playing field. While none of us yearn tax increases the self-employed do generally pay a far lower percentage of their income in tax, including national insurance, than happens for employees. This will continue even after the changes, but slightly reduce the incentive for employees to become self-employed; for example, even assuming the rate bands do not rise further, in 2019/20 a small business offered the chance to do additional work and have say £45,000 to allocate to a new worker could pay an employee a net amount of £44,027, but using a self– employed worker would leave the worker with £48,748 after tax and NIC – still a significant difference. There were further changes in other areas that could have been made; the ongoing issues surrounding pensions have been left for another day. Making Tax Digital will now benefit from a welcome delay for the smallest businesses, though we feel the delay should have gone further to enable all businesses to have a complete cycle under the proposed pilot, before it becomes mandatory. But ultimately, we asked for a steady ship and Philip Hammond has provided that. Tina Riches National tax partner Smith & Williamson March 2017 Spring Budget 2017 4 2. Personal and trust taxes 2.1 Increases to the rates of Class 4 NIC to be introduced The main rate of class 4 NIC will increase from 9% to 10% in April 2018 and to 11% in April 2019. This will have an impact on the self-employed, including partners. Class 4 NIC is payable by the self-employed, including partners in partnerships and members of LLPs. Two rates apply with a main rate of 9% and a higher rate of 2%. From April 2018, this main rate will increase to 10%. A further 1% increase will apply from April 2019 taking the main rate to 11%. The Chancellor’s reasoning for this increase was to ensure the significant disparity in NIC rates for the self-employed and employees was reduced. This disparity was due to increase with the abolition of class 2 NIC (payable by the self-employed) from 6 April 2018. Further to this, many state pension benefits have been aligned for the self-employed and the employed from April 2016. It is perhaps worth noting that class 4 NICs were not included in the legislation covering the 'triple lock'; the Government’s legislative promise not to increase certain taxes during the life of this Parliament. Given the background, it is not surprising that we are seeing an increase on these rates. 2.2 Income tax rates and above inflation rise in the personal allowance The Government has confirmed that the personal allowance will rise by £500 to £11,500 for 2017/2018. It was also re-confirmed that the basic rate band would increase to £33,500, leading to the higher rate threshold increasing to £45,000 in 2017/18, compared to the current level of £43,000 for 2016/17. The personal allowance will rise by £500 to £11,500 for 2017/2018. The basic rate band will increase to £33,500, leading to the higher rate threshold increasing to £45,000 in 2017/18, with tax rates staying the same. The basic rate band will apply when considering: • main rates – which apply to non-savings and non-dividend income in England, Wales and Northern Ireland; and • savings rate – which applies to the savings income of all UK taxpayers. The planned increase in the personal allowance is welcome and represents an above inflation increase for the seventh consecutive year. It supports the Government’s pledge to increase the personal allowance to £12,500 and higher rate threshold to £50,000 by the end of this parliament. Not all taxpayers benefit from the increases to the personal allowance. Those with income above £100,000 will generally continue to see the personal allowance restricted by £1 for every £2 earned above this threshold, leading to an effective 60% tax rate, subsequently dropping back to 40%. In addition, those on low incomes under the current personal allowance will not benefit from the rise. Note that from April 2017 some income tax rates and thresholds for Scotland are being set by the Scottish parliament for the first time, although these do not apply in all cases, so, for example, for savings income and the interest allowance the UK rates and thresholds apply. 2.3 Reduction in the dividend allowance The level of dividend income received tax-free will be reduced from £5,000 to £2,000 from 6 April 2018. The tax rates applying outside this band remain unchanged. The Government has announced that the annual amount of dividends can be received tax-free will be reduced from £5,000 to £2,000 from 6 April 2018. The tax rates applying to dividend income exceeding this allowance remain unchanged.
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