What the Budget means for small businesses

The Chancellor has delivered his latest Budget. Emily Coltman FCA and chief accountant at FreeAgent looks at what it contained for small businesses and freelancers:

A size exemption

It’s always previously been the case in the UK that, no matter how small your business is, you must register it with HMRC and include information about its income and expenses on your tax return.

The Budget states that from April 2017, if you make property income or trading income below £1,000 a year, you won’t need to “declare or pay tax on” that income. I take this to mean that you wouldn’t need to put it on your tax return at all. If your business makes income above that level, you can choose to use the £1,000 allowance in lieu of exact expenses. If your sales amounted to £1,500, for example, then instead of adding up all your actual expenses, you can use the £1,000 instead and pay tax on £500 worth of profit.

Contractors in the public sector

From April 2017, if an “off-payroll worker” operating through their own limited company is hired by a public sector body, then that body (or their recruiting agency if the body uses one) will become responsible for “determining whether the rules should apply, and for paying the right tax”.

The government also promises to consult on “a simpler set of tests and online tools that will provide a clear answer as to whether and when the rules should apply”.

“The rules” in this case appears to be a reference to IR35 and this change would mean that instead of a contractor’s own limited company making a deemed payment, a public sector hirer who determines a contractor to be an employee in all but name will have to operate PAYE and NI on that contractor’s earnings as if the contractor were an employee. This may discourage hiring of contractors in the public sector.

Travel and subsistence

The consultation undertaken in September 2015 (which looked at changing the “permanent” and “temporary” workplace rules for employees and company directors) will be taken no further, since “although complex in parts, the current T&S rules are generally well understood and work effectively for the majority of employees”.

However, legislation to restrict this relief for workers “engaged through an employment intermediary” will still come in. There was no mention in the Budget report of changes to how this will operate, so I assume that the restriction will apply to workers engaged through agencies and through their own limited companies where the contract is within IR35.

Loans to participators

From April 2016, if a close company lends money to a participator (i.e a shareholder in that company), that loan will be taxed at 32.5% instead of 25%.

Farewell Class 2 National Insurance

From 2018, Class 2 NI will be abolished altogether. We’re promised that Class 4 NI will be reformed so that it gives entitlement to State Pension and other benefits, which Class 2 does at the moment. I’ll be interested to see if the rate of Class 4 NI is increased to cover the shortfall left by the removal of Class 2.

Making Tax Digital

The Budget report says: “From 2018, businesses, self-employed people and landlords who are keeping their records digitally and providing regular digital updates to HMRC will, if they wish, be able to adopt pay-as-you-go tax payments – this will enable them on a voluntary basis to choose payment patterns that suit them and better manage their cashflow”.

The voluntary nature of this is interesting, as it seems to imply that businesses will be able to choose when they pay their tax. Presumably there will be time limits on this.

The government will also “explore options to simplify the tax rules for businesses, landlords, and the self-employed, to reduce administrative burdens and ensure that regular digital updates work smoothly”. Consultations on this are due to take place later in 2016.

More funding for HMRC

HMRC is to receive an extra £71m in funding. By 2017 we’re told there will be a seven day per week phone answering service, 800 new staff in call centres (to reduce call waiting times) and a dedicated support phone line and online forum for new businesses and self-employed individuals.

Potential simplification

As well as referencing this in several other areas, the Budget commissions further reviews by the Office of Tax Simplification into National Insurance contributions and the computation of Corporation Tax.

Changes to tax rates

The following changes to tax rates were announced in today’s Budget:

– The VAT threshold will rise to £83,000 from 1st April 2016.
– In April 2017 the personal allowance will go up to £11,500 and the higher-rate threshold will rise to £45,000.
– Corporation Tax, which is currently 20%, will fall to 17% by 2020.

Conclusion: good news or bad news?

There are some useful nuggets in this Budget for certain small businesses, and it’s also interesting to see how some of the big initiatives, such as Making Tax Digital and changes to tax for contractors, are starting to come into play.

Despite the lack of any radical simplifications (which in my view is a missed opportunity, especially given the recent recommendations from the Office of Tax Simplification), the next few years could be very interesting!

*FreeAgent provides a cloud accounting software for freelancers, contractors, micro-business owners and their accountants. Try it for free at www.freeagent.com

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