The biggest news on the tax front is the planned consultation on the tax differences between the employed and self employed, writes Steve Roberts, Tax Director, Armstrong Watson.
In his first, and last, Spring Budget, Philip Hammond set out an economic picture which has surprised many of the economists who had speculated on how the British economy would react to leaving the EU. He was able to confirm that GDP grew by 1.8 per cent over the whole of the year and also that employment had reached a record high. Furthermore, the OBR had changed the profile of growth over the next five years, ending in 2021, with the two per cent they originally suggested but with growth ranging from two per cent in 2017, dropping to 1.6 per cent in 2018, before increasing steadily.
On borrowing, there were a number of one-off factors that reduced this in 2016-17 although the medium term forecast remained as it did four and half months ago, in the Autumn Statement. No doubt this has created the ‘war chest’ we have been hearing a lot about to provide a buffer in what remain unpredictable waters, as the Prime Minister looks to trigger article 50.
From a tax perspective there wasn’t a great deal in the Budget, and as in his previous Autumn Statement he re-confirmed Parliament’s intention to increase the personal allowance to £12,500, and the higher rate tax threshold to £50,000 by the end of this parliament as well as reducing the rate of corporation tax.
Although what he pledged to give away with one hand he is likely to take back with the other. He announced that there will be a consultation on making the tax system fairer when comparing the amount of tax paid by an employee in comparison to a self employed person and a person operating through their own company.
With making the tax system fairer in mind he also announced a 1 per cent increase in Class 4 National Insurance Contributions (NIC) for the self employed effective from April 2018, and a further one per cent increase effective from April 2019. This takes the Class 4 NIC rate to 10 per cent and then 11 per cent which will align it with the NIC rates paid by an employed individual. A second measure was to restrict the only recently introduced tax free dividend allowance from £5,000 per annum to £2,000 per annum.
The effect of the above measures mean that law firms operating as a sole practitioner or a partnership will see their NIC costs increase, and those operating through a limited company will see their personal tax costs increase.
Tackling tax avoidance has often taken a high priority in previous Budget speeches and while it was included in this Budget, the theme took on a slightly different slant this time. While not a new subject, the Chancellor talked about financial penalties for professional firms that help their clients avoid tax using a scheme that is later defeated by the Courts. Therefore any firms that could be seen to fall into this bracket should bear this in mind.
One other announcement that is worth noting is one that was announced before the Budget. This is relevant to law firms that offer Probate services. The cost of Probate Registry Court fees is going to increase from as little as £155, to £20,000. The new system will be tiered depending on the value of the estate and is being introduced in May 2017.
In summary, this year’s Budget wasn’t the most eventful one, with a few tweaks to the tax system, but possibly the biggest news on the tax front being the planned consultation on the tax differences between the employed and self employed.
Steve Roberts is a Tax Director at Armstrong Watson and is part of Armstrong Watson’s specialist legal sector team. The legal sector team advises law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services. Further information can be found at: www.armstrongwatson.co.uk/legalsector
The Law Society has exclusively endorsed Armstrong Watson for the provision of accountancy services to law firms.