Autumn Statement 2018. Main points
Chancellor Philip Hammond on 29 October 2018 presented at the House of Commons a new Autumn Budget, which will be the last before the UK leaves the European Union.
Let’s have a closer look at the most important points of the chancellor’s speech.
The economic growth in 2019 will reach 1.6%. This number is higher compared to the spring statement, which showed 1.3%. The expected annual forecast has also raised to 1.4% in 2020, 1.5% in 2021 and 1.6% in 2023.
From a UK income tax perspective, the allowances and rate bands were increased as expected with the personal allowance rising from £11,850 to £ 12,500 starting from April 2019. The level at which higher tax rate (40%) starts has risen from £46,350 to £50,000. This change is also implemented from April 2019.
National living wage
The minimum wage rate will increase from £7.83 to £8.21 per hour from April 2019.
£1 billion will be invested in the Universal Credit system over the next five years to ease the transition period. This system was introduced in 2013 to simplify the payment of six state benefits, including jobseeker’s allowance and housing benefits.
National Insurance Contributions (NIC)
Starting from April 2020, the Employment Allowance benefit of £3,000 per year will be available only to those employers whose NICs in the previous year were less than £100,000, which means that this benefit will be available mostly for smaller businesses. At the same time, National Insurance Contributions for individual entrepreneurs (class 2 NIC) will not be abolished.
Self-employed workers (IR35 rules)
IR35 rules describe how to treat self-employed workers, as private contractors or full-time employees, hired in accordance with employment law.
This definition is very important for tax purposes, because self-employed workers usually pay less tax than regular employees hired directly by the companies. In addition, it is important that when a company hires self-employed worker, it is not entitled to pay national insurance contributions.
IR35 rules were introduced by Gordon Brown in order to prevent self-employed contractors, who are actually acting as full-time employees, to unreasonably avoid paying taxes. The changes were introduced in public sector a year ago and showed successful results, bringing more taxes paid to the budget, because employers were forced to hire employees who previously worked for them on self-employed basis.
Now, after the changes were implemented in the public sector, the government is considering incorporating them in private sector, but such changes will be accepted not earlier than 2020 and will affect only medium and large companies.
Digital Services Tax
In April 2020 the UK government introduces a new 2% tax on revenues of search engines, social networking platforms and online markets such as tech giants Google, Facebook, eBay.
The Corporate Tax rate is due to fall to 17% by 2020.
Research and Development (R & D) Relief for small businesses from April 2020 will be limited to the amount of three annual payrolls, including the National Insurance Contributions. It is believed that this measure will prevent the alleged abuse of the current system.
The Annual Investment Allowance (AIA), which is currently at £200,000 level, will be increased to £1 million from 1 January 2019. AIA allows for business tax relief on investments on fixed assets.
However, if you are planning significant capital investments, we would advise you to discuss it firstly with Law Firm Limited specialists, as there will be complex rules for companies, whose financial periods do not correspond with the calendar year.
A new Structures and Buildings Allowance is introduced and is applied to contracts signed after 29 October 2018. It will give 2% relief in relation to the costs of construction of non-residential buildings and structures.
The “special rate” of capital allowances applicable to particular types of plants and machinery equipment will be reduced from 8% to 6%.
MTD - Making tax digital
As previously announced, Her Majesty Revenue and Customs (HMRC) is committed to make the tax system completely digital. Digitalization of taxes will be implemented in several stages. The first one begins in April 2019 by introducing a new data report system for VAT. Digitalization will affect all VAT-registered businesses with a turnover above £85,000. The Chancellor also confirmed that the turnover threshold of £85,000 will be fixed at this level for 2 years. Businesses will have to keep their records in specialized programs and submit VAT returns to the tax authorities only using MTD-compatible software. Digital records will have to be stored in special accounting program approved by HMRC or spreadsheets that can connect to HMRC database through an Application Programming Interface (API). Such spreadsheets should also contain more information in comparison to current requirements.
The next step in MTD integration is planned for 1 April 2020 and will affect income tax.
If you have not started preparing your accounts for MTD or do not know where to start from, we would recommend you to contact Law Firm Limited specialists without any delays, as the changes are due to come in force in the nearest future. At Law Firm Limited, we help businesses of any size to adapt to new conditions and smoothly switch to a new digital tax system. We constantly keep in touch with HMRC in order to be up-to-date with the latest news and to anticipate how certain changes in the tax system can affect your business. We also have a number of accounting solutions for small and medium-sized companies that will help you prepare for the smooth MDT transition.