Jim Meakin, tax partner at Armstrong Watson, rounds up some of the key tax developments this year for small businesses.
The world of tax is ever changing, with new legislation being introduced and changes being made to existing rules and regulations. Here we discuss some of the key tax developments we have seen so far this year.
IR35 for the private sector
After the introduction of the IR35 (otherwise known as the ‘off-payroll working rules’) to the public sector in 2017, HM Revenue & Customs (HMRC) is now rolling the rules out to the private sector from April 2020. This will have an impact on legal practices engaging any contractors through private service companies (PSCs).
The aim of the rules is to ensure that contractors pay broadly the same amount of employment taxes and make the same amount of National Insurance contributions as permanent staff. Conversely, as this is a deemed employment status, it is the contractor who will suffer the tax burden without any entitlement to statutory payments or employment rights.
Up until now, businesses in the private sector have not been required to determine the employment status of individuals working through their own service company, as the burden and risk was passed to the PSC.
Under the new rules, the responsibility for ensuring that the taxable status of the contractor is correct, and any resulting tax exposure, will now fall upon the organisation using their services. This determination will need to be made and provided to the contractor prior to the work being undertaken, and certainly within 31 days of the contract being entered into or the services commencing.
To help with the determination, HMRC has created the Check Employment Status for Tax (CEST) tool. For anyone who has already used it, you will know that it does not always give a helpful outcome. However, we understand that HMRC is working on improving the CEST tool and making it more useful for businesses before the rules come into force.
Is there any good news? The rules will only apply to medium-sized or large companies within the private sector. Small companies (less than 50 employees, turnover of £10.2m or less, or balance sheet of less than £5.1m) escape the rules – for now.
Although relatively new to the tax scene, investors’ relief (IR) is an important capital gains tax (CGT) relief which many individuals may not have considered.
IR provides a reduced CGT rate of 10% for individuals who make qualifying disposals of shares in a trading company. There is a lifetime limit of £10m of qualifying gains per individual.
IR may be easier to claim for certain individuals, as unlike entrepreneurs’ relief (ER), the conditions for IR do not require an individual to be an employee of a company, at least at the time the shares are acquired. There is also no requirement to have at least 5% of the voting rights, as there is for ER.
However, IR is only available on new ordinary shares issued on or after 17 March 2016. These shares must be held continuously for at least three years, meaning that this tax year (2019-20) will be the first in which we will see relief claims being made.
It is possible to use a combination of both ER and IR, which could provide individuals with significant gains up to £2m worth of tax savings throughout their lifetime.
IR is potentially a useful relief for new company start-ups, especially for individuals who don’t wish to be involved in the day-to-day management of the business and where ER may not be available if the conditions are not met.
Capital allowances changes
There have been significant changes to capital allowances that have had an impact this year.
Annual investment allowance (AIA)
From 1 January 2019 to 31 December 2020, the 100% AIA for qualifying expenditure on plant and machinery has been temporarily increased from £200,000 to £1m.
The key to being able to maximise the AIA is down to strategic planning around the timing of investment in qualifying assets.
Enhanced capital allowances (ECAs)
Companies that make qualifying purchases on energy-efficient or water-saving plant and equipment can currently claim 100% ECAs on top of 100% AIA. However, this relief is being abolished from April 2020.
Any expenditure incurred up to this date will still be eligible, so the message is: use it before you lose it.
Loss of letting relief
As well as various changes to income tax, the latest Finance Act also brought changes to the CGT reliefs available when selling a residential property.
When selling a property, private residence relief (PRR) is an extremely attractive relief for taxpayers. PRR can reduce a chargeable gain on sale to nil depending upon the periods of occupation and periods of ‘deemed occupation’, as long as the property was a person’s main residence at some point.
As well as PRR, letting relief is also available on the sale of a property which at one time had been occupied as a main residence and has since been let out. The amount of letting relief available is the lower of:
- the gain attributable to the let period
- the amount of PRR.
For disposals from 6 April 2020, however, letting relief will only be available to those who share occupation of the property with the tenant throughout the letting period, making the relief much more restrictive.
Shorter time limits to pay CGT
Just as CGT reliefs are being reduced, HMRC is looking to reduce the deadline for payment of CGT for residential properties.
From 6 April 2020, any disposal of a UK residential property must be reported and the tax paid on any gain arising within 30 days. A ‘residential property return’ must be completed and payment made within the 30 days, although where PRR reduces the gain to nil no return will be required.
This 30-day window runs from the date of completion, not the date of exchange for a normal disposal for CGT purposes.
Currently, CGT is not payable until 31 January following the end of the tax year in which a disposal is made. Therefore this new deadline will cause a major reduction in timescales, and compliance could prove a challenge.
Residence nil-rate band (RNRB)
As well as being able to set off the inheritance tax (IHT) nil-rate band (NRB) of £325,000 against the value of an individual’s estate, the RNRB was also introduced on 6 April 2017 (check).
The RNRB is an additional £100,000 allowance that is available to individuals from 2017/18 onwards to be used against a residential property held within their estate. This allowance is set to increase by £25,000 each year until 2020/21, when it will reach a maximum of £175,000.
As with the IHT NRB, the RNRB is also transferrable between spouses on death. As a result, by April 2020/21, spouses with estates valued at £1m could be exempt from paying any IHT – saving tax at 40%.
Where a deceased’s estate exceeds £2m, the amount of RNRB is reduced by £1 for every £2 that the value of the estate exceeds this threshold. Reliefs such as BPR are ignored when calculating the value of the estate. Therefore an individual’s estate may be valued higher than they anticipated, and as a result the relief is tapered.
Many of these changes have either come into effect or are due to come into effect within the next few months. Taxpayers should be aware of these developments and seek tax advice quickly to utilise any reliefs and allowances before they are lost.
This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances. No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.
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