For many farmers and landlords, the changes announced in Philip Hammond’s Spring Budget will not take effect until April 2018, which gives time to consider the detail and is to be appreciated. However, the changes already announced to tax relief on interest where some of the borrowing relates to let residential properties will have an impact from this April, so landlords should consider this if they have not already done so when arranging borrowing.
The significant change for most businesses will be the requirement to submit quarterly income and expense details to HMRC electronically from April 2018 (although this may be delayed until later in 2018/19, depending upon the year end of the trading business).
You may be aware of this from last year’s annual update which noted that HMRC had published “Making Tax Digital” setting out their vision that by 2020 most businesses, including those letting out property, would be required to keep track of their tax affairs digitally and report their results using integrated software to HMRC quarterly.
Following consultations issued in August 2016 and HMRC’s responses at the end of January to the feedback provided by professionals (including ourselves), it was thought that all unincorporated businesses with a turnover in excess of £10,000 would be required to start using the new Making Tax Digital (MTD) service from April 2018.
However, for one year from April 2018, the Chancellor has announced that businesses (including landlords) will only be required to start using the MTD service if their turnover exceeds the VAT registration threshold (£85,000 for 2017/18, but will increase slightly for 2018/19). This increase in the MTD threshold will benefit those who receive rental income personally, although they will still need to report the income and expenses quarterly from April 2019, when the MTD threshold reduces to £10,000.
This one year relaxation will not affect most trading businesses (sole traders and partnerships), as their turnovers will exceed the VAT registration threshold.
The £10,000 MTD threshold is a low turnover figure (note that this is turnover, not profits), which has already been criticised for being far too low by many respondents to HMRC’s consultation and remains subject to amendment as the Finance Bill is debated and made law (usually in early July).
HMRC anticipate that these changes will reduce errors by around 10% on an ongoing basis (I consider this overly optimistic), and give businesses “a clearer view of their tax position in-year, enabling them to plan to meet their tax obligations at minimum cost and minimum disruption”. As most farming is a seasonable business, I suspect that the in-year position will be little clearer for farmers, although it may benefit landlords, but that there will be administrative costs associated with supplying HMRC with the information required.
For our most recent update regarding Making Tax Digital please click here.
As noted in our separate article, in the Budget on 8 March, the Chancellor provided a lengthy explanation comparing the position of the self employed and employees, noting the more favourable tax treatment of the self employed and changes that make the benefits system more comparable with employees (with the introduction of the new state pension), but omitting to mention the real risks for genuine entrepreneurs.
As a result of this striving for “fairness”, he proposed that the main rate of Class 4 National Insurance contributions paid by the self employed would increase by 1% to 10% from April 2018 and a further 1% to 11% from April 2019, with flat rate Class 2 National Insurance contributions being abolished from April 2018 as previously announced.
However, following criticism from his backbenchers that this did not honour the Conservative’s 2015 manifesto commitment not to put up National Insurance, Income Tax or VAT, the Chancellor reversed this decision on 15 March (the flat rate Class 2 National Insurance contributions are still to be abolished from April 2018).
Although an understandable U-turn for political purposes, this does leave a Budget deficit from April 2018 (as the proposal was estimated to raise £2 billion by 2022), so expect the Chancellor to announce other tax raising measures in the Autumn Budget, to “balance the books” and retain increase to the cash basis threshold for unincorporated businesses section.
The threshold for the cash basis method of computing taxable profits increases from £83,000 (the old VAT registration threshold) to £150,000 from 6 April 2017.
Although this is a welcome simplification for accounts record keeping purposes, it is unlikely to benefit most farming businesses, whose turnover is likely to exceed £150,000 and care does need to be taken that opting for this method does not create a bunching of income, making individual taxpayers liable to higher rates of Income Tax (or exceeding Universal Credit and Child Benefit thresholds) in particular years.
It is to be welcomed that there have been no Capital Gains Tax or Inheritance Tax changes, other than those already announced.
Please see Measures omitted from Finance Act due to General Election for an update following the shortening of 2017 Finance Bill measures due to the June General Election.
If you have any queries, please contact your usual consultant or Carlton Collister on 01993 886418 or firstname.lastname@example.org.