Initial Reaction to the 2016 Budget


Chancellor George Osborne today (16 March) announced his eighth Budget which contained measures that he described as putting the 'next generation first', 'supporting the small business owner' and 'helping build an economy fit for the future'.

HMRC Door Sign

As a North West business advisor, it is pleasing to see that the Government is trying to give certainty with the launch of the Business Tax Roadmap, reducing tax for small businesses and encouraging budding entrepreneurs to take the plunge. 

There were many business tax announcements made by the Chancellor, and following the publication of the detail by the government we will be analysing the effect that they will have for our clients going forwards. However, Mitchell Charlesworth's initial analysis on the key measures that will affect SMEs are listed below (click for further information):

You can also read a snapshot of the other key announcements here.

Finance Bill 2016

Whilst we have some information today (16 March 2016) on the above announcements, all of the detailed provisions will not be published until 24 March in this year's Finance Bill.

Contact us further:

If you would like to arrange a meeting to discuss any specific issue related to the budget please contact us.

--------------------------------------------------------------------------------------------------------------------------------------------

  • Corporation Tax:

Two of today’s announcements that potentially affect all SME’s are the proposals to reduce corporation tax further and the changes to the rate of corporation tax on loans to participators:

Corporation Tax Rates

Readers will be aware that in 2015 the government announced that the rate of corporation tax applicable to a company’s profits would fall from 20% to 19% from 1 April 2017, with a further reduction to 18% from the 1 April 2020. In today’s budget the chancellor announced that the rate of corporation tax will be reduced to 17% from 1 April 2020.

This will obviously be a welcome reduction for SME’s who will see this as a move to allow them to retain more of their profits.

Loans to Participators

Close companies (broadly those controlled by 5 or fewer shareholders) who make loans to the participators (broadly shareholders and individuals/organisations associated with them) currently face a tax charge equal to 25% of the amount of the loan. This tax charge is commonly known as “s455 tax”. Essentially this tax is paid over to HMRC if the loan is not repaid by the participator within 9 months following the end of the accounting period in which the loan was made. If paid over to HMRC this tax is subsequently repaid to the company 9 months following the accounting period in which the loan is repaid or written off.

In order to align the rate at which this tax is charged to the dividend upper rate, from 6 April 2016 it will be increased to 32.5% of the outstanding loan. For companies whose accounting periods straddle 6 April 2016 the old rate (25%) and the new rate (32.5%) will both apply dependent on the date the loan is made.

Shareholders in SME’s who use loans from their companies as a method of extracting profits should consider their remuneration/dividend strategy in light of this change.

Back to the top

  • Capital Gains Tax:

In a surprise move the Chancellor announced changes to the capital gains tax regime that will affect individuals, trusts, and personal representatives.

Currently the rate of capital gains tax payable on a gain realised on the disposal of a chargeable asset is dependent on a) whether or not Entrepreneurs Relief is available (10%) and then b) the availability of the basic rate band (18%) with any gain over and above it being charged at a higher rate (28%). Personal representatives and trusts are currently liable at 28%.

Those owning assets that do not qualify for Entrepreneurs Relief (for example shares in a non trading company) will welcome the news that the rate of capital gains tax applicable on the disposal of that asset will be reduced from 28% to 20% (at higher rates) and 18% to 10% (at the basic rate).

It should be noted that these reduced rates will not apply to the disposal of residential property that does not qualify for private residence relief or the receipt of carried interest.

We await clarification as to the position whereby an individual owns shares in a company whose activity consists of the ownership of residential property investments.

Watch out for further publications on this topic as the detailed legislation becomes clearer.

Back to the top

  • Stamp Duty Land Tax Reforms:

Stamp Duty Land Tax “SDLT” was mentioned frequently in today's budget with changes planned to both the residential and commercial property acquisition regimes.

1. SDLT – 3% on additional residential properties:

As announced in 2015, the government will introduce higher rates of SDLT on purchases of additional residential properties such as second homes or buy to let properties from 1 April 2016. The higher rates will be 3% above the current SDLT rates.

If, at the end of the day of a transaction, an individual owns two or more properties and has not replaced their main residence, the higher rates will apply. Purchasers will have 36 months rather than 18 months to claim a refund of the higher rates if they buy a new main residence before disposing of their previous main residence. Purchasers will also have 36 months between selling a main residence and replacing it with another without having to pay the higher rates.

Companies purchasing residential property will be subject to the higher rates, including the first purchase of residential property. Following consultation, there will be no exemption from the higher rates for significant investors.

Properties purchased for under £40,000, caravans, mobile homes and houseboats will be excluded from the higher rates.

2. SDLT
– Commercial Property:

Today the Chancellor announced significant changes to the way SDLT is calculated on the acquisition of non-residential property.

At present SDLT is charged at a single percentage of the price paid for the property, depending on the rate band within which the purchase price falls. With immediate effect SDLT will instead be charged at each rate on the portion of the purchase price which falls within each rate band.

Essentially the portion of the transaction value up to £150,000 is charged at a rate of 0%, the portion between £150,001 and £250,000 is charged at a rate of 2%, and the portion over £250,000 is charged at a rate of 5%. SDLT on non-residential leasehold rent transactions, where the rates already apply to the portion of the purchase price within each band, will be reformed to include a new 2% rate for leasehold transactions with a Net Present Value over £5 million.

The government claim that this measure will cut the tax that many SME’s pay when purchasing non-residential property.

Back to the top

A snapshot of the other Budget points

  • £12bn to be raised from anti-tax avoidance measures
  • From April 2017, where the public sector engages an off-payroll worker through their own limited company, that body (or the recruiting agency if the public sector body engages through one) will become responsible for determining whether the rules should apply, and for paying the right tax.
  • Entrepreneurs relief will be extended to long term investors in unlisted companies. This will provide a 10% rate of CGT for gains on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016, and subject to a separate lifetime limit of £10 million of gains
  • New government Business Tax Roadmap to help simplify tax for businesses to be launched from 2017
  • M62 upgrade: The government will provide an extra £161 million on top of the existing road programme to bring forward by 2 years the upgrade between junction 10-12 Warrington to Eccles, and to accelerate work on junction 20-25 Rochdale to Brighouse
  • From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates (it is estimated 6,000  business will pay no rates)
  • Tax free allowances of £1000 for micro businesses
  • Fuel duty frosen again (end of 2016-17 is the sixth year)
  • Termination of employment payments/pay offs over £30,000 will attract employers NIC from 2018
  • From 2018, Class 2 NIC paid by the self employed will be scrapped
  • Higher tax rate threshold to be raised to £45,000 from April 2017 (£42,385 in 2015)
  • Every school to be an Academy by 2022
  • A longer school day for 25% of secondary schools who opt in from September 2017
  • Personal allowance to rise to £11,000 in 2016 and to £11,500 in 2017
  • New Lifetime ISA launched in 2017 meaning anyone under 40 can save up to £4k a year and the Government will pay £1000 as well
  • ISA annual limit up to £20,000 from April 2017
  • Insurance premium tax rate increased by 0.5% to help fund flood defences
  • North region to benefit from £60million investment in infrastructure to improve connections with cities and HS3 rail link between Leeds and Manchester to go ahead
  • New tax allowances for people generating income from property such as renting a driveway or loft space will be tax free
  • Duty rates on beer, spirits and most ciders will be frozen this year

Contact Us

To discuss any points raised in this year's Budget, please contact your usual Mitchell Charlesworth contact, a member of our tax team or e-mail Cara Bartlett who will direct your enquiry.

Post a comment

Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales and authorised and regulated by the Financial Conduct Authority for investment business