After reading some of the changes made in the new “Napkin budget”, a budget written in haste, without truly comprehending the chaos it will cause for a large percentage of the population.
Owner Managed Businesses (Private Limited Companies)
Naturally as tax advisors and accountants for small to medium-sized owner managed companies, it is in our interest to talk about how Owner Managed Business (OMBs) will be affected first and foremost.
The government hasn’t been kind to OMBs in the last few years, despite their stance on being “open for business” we suspect the slogan should be changed to “Open for business (Listed Companies need only apply). With the movement from 28% corporation tax to 20% (and soon to be 17%), this was a welcome change for larger organisations, but sadly no additional reliefs were awarded to Smaller businesses, unless you count the AIA accelerating the tax relief on capital items.
First RTIs were brought into effect from 2013, creating yet more administrative headaches for small business which was meant to improve the efficiency of the HMRC by allowing them access to real time information. However PAYE/CIS Refunds to employers are still processed, as slowly as they ever were despite the change.
The sneaky removal of entrepreneur’s relief on goodwill from incorporation of OMB and SSP reimbursement.
Then came Auto-Enrolment which asked all employers both large and small to contribute to their worker’s pensions, providing yet another cost to the small employer and additional compliance procedures followed by hefty penalties for non-compliance.
With the latest proposals in the new budget, there are four areas which will affect small business greatly.
- National Minimum wage increases to £7.20 (£9 by 2020) for over 25s. While to some this is welcome change but for start-up businesses this could make an initial venture costly and unviable
- Dividend Changes which will affect any OMBs which utilizes the Min Salary and Max Dividend model for profit extraction from their companies due to the removal of the automatic tax credit and instigation of a 7.5% and 32.5% dividend tax rates
- Removal of the Employer Allowance £3000 where the director is the sole employee
- Funding from outside investors may be reduced due to the dividend tax imposed
- Another £300 (or 5% of the tax you owe, whichever is greater) if you haven’t filed within a year
- More penalties - including up to 100% of the tax owed, if HMRC believed you are deliberately delaying
Based on my examples you can see there will be an additional tax liability for those earning using the max/min model of £1,720.50 or £3,401.67. Refer to the spreadsheets below for a detailed breakdown.
According to statistics from 2014, SMEs account for 99.9% of total businesses and provide 60.1% of overall employment. Given the above statistics, I am quite surprised by the radical blanket tax on dividends suggested by Mr Osborne which will affect capital investors and OMBS.
We can only hope that enough businesses will oppose the new changes, that they will have no choice but to issue a relief on the dividend tax on closed companies.
Buy-To-Let Properties
Another attack on the higher rate taxpayer with the restriction on mortgage interest deductibility where the tax relief granted is capped at 20%, thus disincentivising higher rate tax payers to invest in property. Furthermore, they are planning to remove 10% wear and tear allowance for furnished properties. However they are proposing to provide an alternative relief based on actual replacement of furniture.
In summary, it is difficult to see who the conservatives are planning to receive support from based on the above proposals, it certainly won’t be from SMEs, landlords or those receiving government assistance cuts.
For a full round up of the changes to tax reliefs, allowances and rates please read our comprehensive Summer Budget Report 2015/16 and Summer Budget Tax rate plan 2015/16.
