Inevitably, given the stage we are at in the political cycle, yesterday’s Autumn Statement was heavily politically charged and full of a whole raft of detailed claims and figures, particularly in relation to the delivery of, and forecasts for: growth, deficit reduction, the level of national debt, jobs and inflation.
In terms of measures specifically aimed at, and changes specifically affecting, small businesses and self-employed individuals, there was not a huge amount to report.
Income Tax Thresholds & Umbrella Company Consultation
Perhaps the two areas that will have a specific impact on self-employed workers and contractors relate the changes to the income tax threshold and and a fleeting reference to umbrella companies.
From April 2015, the tax-free personal allowance will increase from £10,000 to £10,600 (up from the planned £10,500) and the higher rate threshold, where individuals start to pay 40% on salary income, will increase to £42,385. For freelance contractors and small limited company business owners remunerating themselves through a mixture of director’s salary and dividends, this will increase the amount they can take out of their companies, which is effectively free of tax, i.e. before the effective 25% higher-rate dividend tax comes in. For business owners where a spouse owns half of the shares and also works for the business, this means the couple will be able to take nearly £85, 000 per year from the business without incurring an additional personal tax bill.
In his section on tax avoidance, the Chancellor declared an intention to review the practices used by umbrella companies – one of the two main options used by freelance contractors to compliantly manage their pay arrangements. It is not yet clear when this will take place, what it will focus on, whether it will have any effect, or how it will link in with the numerous consultations and reviews already in underway in relation to expenses claims.
Whilst the detail of the statement refers to stopping expenses being claimed specifically as part of a salary sacrifice scheme, which was expected following the recent Reed case ruling, it also refers to a review of the use of ‘over-arching contracts’ by umbrella companies, which allows employees of umbrella companies to claim travel expenses against their tax bill that ‘would not normally be available to employees’. The use of over-arching contracts certainly is key in allowing umbrella company contractors to legitimately and compliantly claim these travel and subsistence expenses in a way that reduces their personal tax liability, so we will be watching this develop with interest.
Other Measures Aimed at Small Businesses
In terms of a round up of other measures affecting small businesses and SMEs:
- Business rates: an extension to the 2% cap on annual increases, an extension to Small Business Rates Relief and a wholesale review of business rates overall to be undertaken. However, the review is not going to happen until after the election, throwing into doubt when and if it will happen and with inflation running at less than 2%, the cap is still above inflation and these measures fell short of what the business community was hoping for.
- Access to Finance: government guarantees on a further £500m of SME bank lending, an extra £400m for the British Business Bank for venture capital investment in fast-growth SMEs and a year’s extension to the Funding for Lending Scheme
- Exports: £45m of extra support for exporters
- An increase in R&D tax credits for SMEs
- Investment in science and technology centres and post-graduate education; linked to a simultaneous focus on re-balancing the UK economy through investment in infrastructure in the North of England, including transport and education and a sovereign wealth fund that will allow the North to directly benefit from shale gas production in that region
- A reduction in the oil industry supplementary charge from 32% to 30%
- Abolition of national insurance on young apprentices
The biggest change, perhaps of the whole statement, was the overhaul of stamp duty. Instead of the tax applying to the entire value of a house when it is bought, it will now apply in bands, with the various percentages affecting only the element of value above a certain threshold, not the whole value. The Chancellor said that this will mean 98% of house sales will now incur a lower stamp duty cost, i.e. on all but the sales of the most expensive houses – those over around £937,000 in value. This was an overhaul of a very unpopular tax that seeks to reduce the huge impact when a house is priced just over a given threshold and also an attempt to shift the burden to the buyers of much higher value properties, which must surely have been partially a response to Labour’s calls for a mansion tax.
Other measures included:
- An increase in the annual tax-free ISA allowance to £15,240 and the ability for ISAs to be transferred between spouses without losing their tax-free status
- The previously announced measures to increase flexibility for those drawing down their pension, extended so that beneficiaries of an annuity can inherit such benefits tax-free in the event of the death of the pension annuity-holder
- Further freeze on fuel duty – who knows whether this will ever be unfrozen, given the mass unpopularity of such a move, the Green party excepted
- Abolition of Air Passenger Duty for under 12s – another measure aimed at the ever-present ‘hard-working family’ and another that will anger the environmental lobby – along with the continued freeze on fuel duty, the sovereign wealth fund for shale gas exploration in the North and and the reduction in the oil industry supplement
Some pretty major and radical measures were announced, that were greater in scope than anticipated and were heavily focused on big business:
- A 25% ‘Google tax’ on profits of multinational companies that are artificially shifted to low-tax jurisdictions, such as those reportedly used by Google, Amazon and Starbucks. This will be phenomenally difficult to actually implement but does allow Mr Osborne to rightfully portray himself as a leader among the G20 on the issue of tax avoidance by multinationals.
- Tax relief on losses incurred by the banks in the crash to be limited to 50%. Without this, these losses, incurred at a time when the tax payer bailed out the banks, would be available to be offset against profits, now they are back to strong profitability, cutting the tax they now pay to help the economy to recover.
General Economy and Spending Highlights
- GDP growth to continue but to slow in 2015/16 and continue at broadly 2.3-2.5% pa
- Deficit has fallen to 50% of what it was at the start of this parliament, not in absolute terms but as a percentage of GDP
- Deficit to be eradicated and the economy to be in annual surplus by 2018/19
- Spending on public services to fall to lowest level as a percentage of GDP since the 1930s by this point – i.e. more cuts to come
- An extra £2 billion pa for the NHS and £1.2 billion for GPs, financed by fines from banks for conduct breaches (e.g. interest rate and foreign exchange manipulation)
- Further reform and caps on welfare and public sector pensions
- Tax breaks for childrens’ TV producers and orchestras
The statement can be reviewed in full at: https://www.gov.uk/government/topical-events/autumn-statement-2014