George Osborne’s summer budget was marketed as being a budget for working people. But was that comment aimed at all working people, or just employees in a certain wage bracket? Mixed in with the rhetoric and numbers, and the by now familiar promises to crack down on avoidance and evasion, was talk of ‘addressing imbalances in the system’.
For incorporated businesses, the big shock was changes to the dividend regime. No more grossing up and then claiming back a notional credit; instead, you’ll get the first £5000 tax free, then pay tax at what looks like increased rates on the balance. In practice, even after the £5000 tax-free allowance, the loss of the tax credit means that more tax will be paid overall.
As a rule though, the tax changes won’t have any effect on a company making profits of less than £18,000 – although at that level the tax savings will be pretty much wiped out by the extra administration costs. In fact, that’s pretty much the case on profits up to around £40,000 per year at the moment when the true costs of running a company, either paying someone else or doing it properly yourself (accounts, Companies House filings, pensions auto-enrolment, minimum wage compliance, RTI filings, dividend paperwork, minutes etc.), are totted up.
And with the increases in dividend taxes, that tax breakeven point is likely to shift up to nearer £70,000. Beyond that though, the combined impact of corporation tax and the new, higher, dividend rate actually see the tax benefits starting to fall again.
Although the Chancellor’s ‘triple lock’ should hold VAT, Class 1 National Insurance contributions (NICs) and the main income tax rates steady, Class 4 NICs aren’t bound by that. So if the chancellor decides to align Class 4 NICs with the Class 1 employee rate that might move the pendulum slightly back towards incorporation again.
If you’ve qualified up until now for the NICs Employment Allowance, you may not in the future. Sole director employees won’t qualify any more, and there will be anti-avoidance provisions in place to stop the obvious workarounds like employing additional family members just to beat the numerical limit. In practice, burdens like auto-enrolment and demonstrating national minimum wage compliance already make taking on employees a pretty unattractive prospect for small businesses, and unnecessarily so.
One area the government has long been worried about is disguised employment. Up until now, the tax burdens on the self-employed and companies, have been so much lower than on employees as to make it attractive to try to dress employments up as business contracts. In order to make false self-employment less attractive the government is going to clamp down on travel expenses. Although it’s theoretically aimed at agency workers who are claiming their daily commute on a tax return in a way that employees specifically can’t, it’s almost inevitably going to catch a lot of other targets. The proposal is that anyone who’s employed through one company but subject to a (theoretical) right of supervision, or direction, or control by another third party will be treated as if employed by the third party for travel expense purposes.
The tax legislation IR35, designed to catch disguised employment, is up for a fundamental review as well, with the government consulting on ways to try to improve it. The early indications are that it’s not necessarily going to pan out the way small businesses might want it to. The worry here is that some of the suggested proposals, which aim to put more of the burden on larger businesses when they trade with smaller ones, could drive big business to treat all small companies as a risk to their own tax compliance record.
In the longer term, there’s a deeper review of the whole future of tax and NICs which is going to be run by the Office of Tax Simplification. We can’t even begin to guess yet how that’s going to adjust the balance between employed and self-employed tax burdens, and how it’ll play out against the other changes to company and dividend tax to influence what’s going to be the best legal form for a business. One thing we must hope they remember is that in 2014 HMRC commissioned research which showed that tax isn’t the key driver in deciding what form a business takes – although it was clear that businesses who’d thought about the tax position tended to be more successful.
It’s not just HMRC who are looking at small businesses. The Department of Business Innovation and Skills has launched a review of the whole area of self-employment, looking at what government can and should be doing to support entrepreneurs, traders and all the other individuals who are trying to make it on their own for one reason or another. Some of the areas they are looking at are the benefits, such as maternity pay, which sole traders currently lose out on.
All in all though, it doesn’t look like it’s been a great budget for small businesses. The changes are complex and fiddly, and there are no great giveaways there that you can access just by filling out a few forms.