Another of Mr Hammond’s Budget announcements has come under close scrutiny this time from the House of Lords Economic Affairs Committee.
10 days after the 2017 Spring Budget, Simon Littlejohns, Partner and Head of Tax at Birmingham accountants and business advisers Friend Partnership Limited, considers the implications of the U-turn on National Insurance Contributions (NICs) and welcomes the House of Lords’ suggestion to put the brakes on the Making Tax Digital initiative.
The dust had barely settled on the Budget announcements before Mr Hammond stirred it all up again with his dramatic U-turn on National Insurance. The light hearted quip at the expense of Norman Lamont, with which Mr Hammond opened his first and last Spring Budget speech, may yet come back to haunt him if, as a number of commentators have suggested, his occupation of 11 Downing Street turns out to be similarly short-lived.
U-turn on NICs
In making his ill-fated announcement with regard to his proposed increase in the rate of NICs for the self-employed, he cited the inequality between employees and the self-employed when considering the amount of NICs they currently pay.
What Mr Hammond surprisingly failed to appreciate was that self-employment carries with it some material risks that are not faced by the employed:
- no guarantee as to the receipt of income,
- no holiday pay,
- no sick pay,
- no maternity or paternity pay, etc etc.
Why he didn’t consult on this measure before making the announcement we can only wonder.
The self-employed will no doubt welcome the about-turn, but where does it leave Mr Hammond following his statement that he wanted to ensure that the budgetary measures were self-financing?
The loss of £2 billion that the proposed measure was expected to secure may now need to be financed from other sources.
Owner managed businesses
I have detailed in previous postings my concern that Mr Hammond may look more closely at the OMB sector.
Mr Osborne and Mr Hammond have both stated that they want to ensure that they support the entrepreneurs and innovators. Surprising then that Mr Osborne introduced changes to the taxation regime for dividends. In many respects this was an almighty kick in the teeth for the OMB sector because many OMB entrepreneurs and innovators use dividends as part of their tax efficient profit extraction strategies.
So, that was the first blow. And then Mr Hammond comes along and delivers a further blow by reducing the dividend allowance from £5,000 to £2,000, seemingly to ensure that the OMB sector remains on its knees.
We now have a change to legislation one year after its introduction, with Mr Hammond claiming that the tax to be saved with his new measure would be £860 million. How he can come up with such a figure, when the first year for which the new rules are applicable is yet to end, I do not know. The anticipated tax receipts for this tax year can only be estimates.
As we have seen over the weekend Mr Hammond is considering another ‘attack’ on the OMBs to plug his NIC U-turn tax gap. This time there is talk of a restriction on the amount an individual may be able to save towards their pension. Mr Hammond is looking at the possibility of reducing the annual allowance from £40,000 to £35,000 or possibly even £30,000. This is favoured over a restriction in the level of income tax relief for pension contributions.
A reduction in the annual allowance would be a further blow for OMBs in that pension planning often sits alongside dividend planning for business owners, especially for those OMBs with owners who are close to retirement age and may be planning their exit from the business. It may be less of a worry for younger entrepreneurs but nevertheless, with the restricted state pension, how is the cost of retirement going to move from the public to private sector if further measures such as this are to be imposed.
Any such proposal, or indeed any further change to the taxation regime for dividends, is unlikely to go down well with colleagues, or a vast swathe of the electorate, which on the back of the Brexit issues could result in a change at No.10 in addition to a change at No.11.
Tax planning opportunities
Whilst the reduction in the dividend allowance could be seen as a blow, there is still benefit to be secured with dividend planning for those businesses able to do so and in particular where basic rate capacity exists within the shareholding base.
In simple terms, a shareholder paying tax at the basic rate will pay tax at a rate of 7.5% on any dividend that they receive in excess of the dividend allowance, whilst shareholders paying tax at the higher and upper rates will respectively pay 32.5% and 38.1%.
Compare this with a shareholder in receipt of employment income paying income tax at rates of 40% or 45% with 2% NICs on top. Is this potentially another ‘inequality’ that Mr Hammond may seek to address?
Taking a very simplistic view, employees who do not own shares are not able to benefit from such planning, unlike their employers. This may be viewed as offensive by the Chancellor and his team, who may choose to ignore all the other issues that are relevant with such an analysis.
It would be very easy for Mr Hammond to increase the rates of tax on dividends so to eliminate the ‘advantage’ – but at what cost? This would be a clear and obvious blow to the OMB sector. Any such change would potentially affect all those who, in the light of poor investment returns on cash deposits, have invested surplus funds in shares that are not covered by their ISA allowance.
Review shareholdings and profit extraction strategies before April 2018
I think that it is clear that in a period between now and 6 April 2018 OMBs should look very carefully at their shareholdings structure and profit extraction policies to see what planning may be possible before we see further changes to the taxation regime for dividends.
It may also be appropriate for those holding equity investments to make sure that, where possible, an equity ISA is used as a tax efficient wrapper.
It may be that the tax year 2017/18 is the year of opportunity beyond which the planning possibilities will become more limited.
House of Lords calls for a delay to Making Tax Digital
Another of Mr Hammond’s Budget announcements has come under close scrutiny, this time from the House of Lords Economic Affairs Committee.
In his Budget speech Mr Hammond announced a delay of twelve months in the implementation of Making Tax Digital (‘MTD’) for certain taxpayers. The House of Lords has suggested, following an extensive grilling of tax accountants, software developers and HMRC, that the implementation of MTD should be delayed until 2020. In addition the committee went further suggesting that MTD should be optional for small businesses and the self-employed.
The committee recognised the increasing burdens that are being placed on businesses with this and other measures and believe that it is too much too soon.
This is exactly in line with my own thinking that HMRC is speeding ahead far too quickly without taking appropriate heed of the feedback they are receiving from those involved with and potentially affected by the initiative.
Whilst the overarching aim of the MTD proposals is to be welcomed, I fear that the undue haste with which HMRC is attempting to introduce the changes will give rise to many problems for taxpayers. The problems are likely to be time consuming and costly for them to resolve.
I for one would welcome further U-turns in this area.