What does the 2017 Budget mean for Small Businesses?
Philip Hammond’s spring Budget announcement last week caused huge reverberations and discontent across SMEs and the self-employed. Since then, the Conservative party has been in a state of concern as the party faces infighting and criticism for what many views as a betrayal of the self-employed. Hammond had been expected to provide reassurance on the back of the Brexit debate for SMEs reliant on EU trade, instead, the chancellor failed to reference Brexit once in his speech. Furthermore, the Tory party had promised at the last election that their manifesto would not raise National Insurance. Yet, last week Hammond announced an increase of 2% on NI for the self-employed by 2019. For many small businesses and self-employed workers, who Hammond had described as ‘entrepreneurs and the innovators who are the lifeblood of our economy’ in his speech, this was a hugely unpopular budget that caused only further worry.
National Insurance hikesThe chancellor revealed that lower contributions from the self-employed workforce were costing the government to the tune of near £5 billion a year. Hammond suggested that current NI rates were too low for the self-employed and therefore to offset this, an increase in Class 4 national insurance contributions for self-employed workers was required. Described as a “fairer” system, the move would see self-employed NI increased by 1% to 10% in April 2018 and then to 11% the following year. This is roughly the equivalent increase of £240 a year for the 2.4 million self-employed workers. Critics of the tax hike say that this was a clear breach of the Conservative’s election promise to not increase National Insurance. However, the Treasury has since rebutted that their election promise was only in regards to Class 1 national insurance.
Reduced dividend allowanceTo add further insult to injury Hammond then announced that directors/shareholders would see their tax-free dividend allowance drop from £5,000 to £2,000 from April 2018. This news came as a shock to many as the current tax-free dividend allowance only came into force in April 2016. The chancellor argued that the £5,000 tax-free allowance was an “unfair discrepancy” when employed workers were not allowed any similar scheme. The Treasury, however, failed to respond to criticism that the entitled protections and perks for employed workers such as paternity/maternity cover, sick pay and pension, do not translate across to the self-employed. This was undoubtedly a concerning announcement for many self-employed workers who often rely on dividend payments to supplement their income rather than having an increased salary.
Why should I think about Isas?As dividend allowance is to be slashed, we expect to see more self-employed workers look to invest further in Isas. From April 2017, Isa limits are being raised from £15,240 to £20,000 and dividend growth within this Isa is tax-free. By placing more money into Isas, self-employed workers can reduce the cut to the allowance without being as heavily taxed.
Changes to VAT thresholdsA less talked about change in the budget was an increase in VAT thresholds from £83,000 to £85,000 for registrations. Likewise, deregistration thresholds fell from £83,000 to £81,000 and will come into effect from 1st April 2017. The change brings VAT in line with inflation and could see 4,000 small businesses not being able to register for VAT by the end of 2017-18.
Delay to Making Tax Digital initiativeAnother lesser noticed change was the government’s promise to businesses below the VAT threshold an extra year before they have to follow the digital system for tax returns. For many small businesses, this is a welcome relief as the initiative requires owners to submit tax returns four times a year as supposed to once a year. Despite a rollout of the initiative being expected in April next year, 20% of the smallest UK business owners told an independent survey in January that they had not even heard of the government’s digital tax plan. For many, this will allow them more time to get up to speed with the proposed changes as well as put pressure on the government to provide more information and guidance.
Good news for business rates?It wasn’t all doom and gloom however for small businesses as the chancellor did look to try resolve growing criticism regarding higher business rates. From April, business rates (that are based on the rental value of company premises) are set to be revalued for the first time in seven years. For many small businesses, this could see a substantial increase in rates. Though many small businesses had sought for business rates to be abolished entirely, Hammond stated that with an annual income of £25 billion, this was not feasible or realistic. Instead, he set out what could be described as three compromises:
- The spring budget set out that any business losing small business relief would not see their end bill increase by more than £50 per month. Hammond believes this cap should protect many businesses from costs spiralling out of their control.
- Secondly, the chancellor revealed that British pubs would benefit from a £1,000 business rates discount for pubs that held a rateable value of less than £100,000.
- Thirdly, the government stated that they would provide £300m over four years for local authorities so they could apply discounts at their own discretion.
What did the Budget say about the Economy?The government did have some positive news in regards to the growth of the economy. The Treasury forecasted a 2% growth for 2017 (up from 1.4%) and some further improvements for future years (e.g. 2.1% growth in 2019 as supposed to the previous forecast of 1.9%). Contrary to criticism and negative commentary regarding the economy, Hammond seemed upbeat that the British economy was on the rise and that should continue to do so even despite the above changes coming into play in the next year. For many small businesses this may provide some short-term reassurance but many we’re left pondering just whether Brexit had been incorporated into the forecasting model.
Brexit guidanceOne of the key outcomes many small businesses hoped for was clarity around how Brexit might impact them. Theresa May is expected to invoke Article 50 to formally leave the EU imminently, yet many businesses are still left in the dark regarding governments plans to solidify the economy in the very best and worst case scenarios. Unfortunately, the SME industry were left disappointed as Philip Hammond failed to even mention Brexit from the EU at any point in his entire speech. For many businesses, the fear of the unknown and lack of clear direction other than political rhetoric will continue cause concern both in and out of the stock markets. Whether the Chancellors forecasts were realistic or fantasy is yet to be seen.
What can small businesses do about the Budget?The best possible thing to do is to speak to an experienced and knowledgeable accountant. We’re always on hand to help our clients stay up to date with the very latest changes to tax legislation and can talk you through what your options are. No business is the same, and as such we make sure that whatever guidance we advise, it’s tailored to your business, industry and financial situation. Your accountant will be able to provide a more in-depth breakdown of the changes as well as help start creating solutions to tax arrangement plans. If you’re considering investing more into an Isa, it’s worth working together with the accountant so that you can review, revise and implement any major financial changes or strategy correctly. View our range of services, or speak to us today on 01216297768 or 02070784001 if you’d like to know more about how the spring budget is likely to affect your business.
Since this blog was published HMRC have updated amendments made to Finance Bill 2017.