The Fizz! Blog

The Fizz Summer Budget email newsletter

We don't usually put our monthly email on the blog, since it's a client care thing to us rather than a marketing thing.  But from time to time we like to give a flavour of it to people we don't work with, so here's this month's email, our summary of the Summer Budget.

More thoughts on dividend tax in our earlier article here.

It was the second Budget day of the year yesterday!  And it was a big one for small business owners - particularly those operating via limited companies, or thinking of doing so.

New tax on dividends

This is the thing that's going to be of most significance overall to small business.  As a basic summary at this stage, as of 2016, for business owners planning on getting most or all of their profits into their own hands each year, there will no longer be any material tax/National Insurance incentive to operate via a limited company, as opposed to operating as a sole trader, partnership or LLP (see later).  We could go through detailed numbers, but that's the key thing to understand.  It's pretty much the same at all profit levels.

There do remain some reasons why limited companies will still be appropriate for many businesses, though!

• Many business owners *don't* want to draw out all of the profits that the business makes - limited companies remain a great way of sheltering profits that you don't need right now from higher-rate tax.
• They remain a very useful tool for keeping income below £50k so as to retain Child Benefit.
• It's easy to forget that the most fundamental benefit of a limited company is the "limited" - provided you're not naughty or reckless, you're less at risk personally if things go wrong with the business than you would be as a sole trader or partner.
• Very often, a customer will insist on your invoicing them via a limited company, so you don't have a choice anyway.
• Limited companies will also remain the most appropriate way for most businesses with multiple owners / investors to be set up.
• We look after lots of businesses that qualify for Research and Development Tax Credits - for those claims, a company is still essential (even an LLP can't claim).

However, it's definitely now the case that there's significantly less of an incentive for a typical one-person freelancer to work via a limited company.

One thing we think we'll see more of is LLPs - Limited Liability Partnerships.  They effectively offer the personal protection of a limited company, but the tax regime of a sole trader or partnership, with more flexible profit splits than limited companies too.  Up until now, they've been somewhat niche, because most people preferred the tax regime of limited companies and the attractions of flexible profit splits weren't enough to tempt them away.  Now that there's not much to choose between the tax regimes, the greater flexibility of an LLP is bound to tempt people towards them.  We imagine we'll be setting up quite a lot of them in future!  They're no good for sheltering "unneeded" profits from higher-rate tax though.

Of course, we'll be talking to all our affected clients about this individually over the year, and we'll be making very clear recommendations to you when the time comes.  It's quite probably going to be the case that most limited company owners remain in their current format, but it'll mean changes for some.  The biggest effect is likely to be deterring small businesses from shifting to a limited company in future.

People will come up with ideas for alternative ways of operating via a limited company to make the position better (we've had a couple already) but overall the tax and NI burden of a business owner is going to become much less of a factor in choosing their business structure.

We're not saying all this is a bad thing, by the way - there's a very good argument that company owner/directors have had things unfairly tilted in their direction until now.  In any case, it's the new reality!

Employment Allowance

At present, employers get let off the first £2,000 of Employer's National Insurance in a tax year.  That's going up to £3,000 next year.

However, it's being withdrawn from "director-only" businesses - allowing such businesses to claim the allowance had created a situation in which we'd been able to save about £200 per year per director by exploiting the interaction between the allowance, National Insurance and corporation tax.  We won't be able to do that for you next year!

For many employers of course, the extra £1,000 saving will be more than wiped out by...

Increases in National Minimum Wage

George got lots of headlines by calling it a new National Living Wage, but of course it's really just a change in the NMW.  It's a big one, though.  Within a few years, the NMW for over 25s will be £9 an hour.  Since it's presently £6.50 an hour, that's a 38% increase.  Anyone employing lots of people at that level but only making modest profits is going to have some serious issues with their business model.  Will it incentivise employers to sack people on the eve of their 25th birthday?  We'll see.

As an aside, it'll also of course mean an equivalent rise in the pension contributions employers will have to make on behalf of their employees once they've got an Auto Enrolment pension scheme in place.  There was nothing of any relevance to Auto Enrolment in the budget, by the way - it remains the case that small employers are going to need to have schemes in place in 2016 or (more likely) 2017.  Do talk to us about that if you've got worries about it.

Annual Investment Allowance

This was non-news really.  The AIA is the cap on the tax relief you can get for buying new fixed assets (computers, machinery, vans, tools etc).  It's bounced around an annual limit of £250k to £500k of purchases for the last few years.  It was due to come down to £25k.  That was never going to happen.  Instead, it's going to be £200k for a year - a level which is going to be completely fine for 99.5% of businesses, needless to say!

Corporation Tax

Big headlines for corporation tax coming down to 19% then 18%.  The reduction to 18% is in 2020 though!  Amazing the headlines you can get for something that won't happen for five years.  For limited company owners, it's a trivial reduction compared to the new dividend tax.

Insurance Premium Tax

This tax (which is added on to your insurance premiums, so you might pay it without even noticing most of the time) is going up from 6% to 9.5%, so a pretty hefty increase if you've large insurance costs.

Tax relief for landlords

At present, a wealthy Buy To Let landlord might save tax at 45% on the mortgage interest they pay for the property.  The maximum tax saving is going to be restricted to 20% (phased in from 2017) - effectively a landlord who is a basic rate taxpayer will be no worse off, but higher earners will be.

In addition, the ability to claim a 10% wear and tear allowance when you're letting out a furnished property is going too.  Though HMRC have previously redefined "furnished" to such a strict level that few landlords could legitimately claim to be letting out a furnished property in any case.

Inheritance Tax

The government's obsessed with the idea of passing on the family home tax-free for some reason.  By 2020 there will be an extra bit of IHT allowance available when a home is included in the estate (or even if it's been sold when the owner, say, downsized but there are equivalent other assets in the estate), effectively increasing the amount a couple can pass on tax-free to £1m.  IHT for estates over £2m will go up to cover the cost.

Decreased pension allowance for high earners

At present (subject to some other rules) anyone can contribute up to £40,000 to a personal pension each year.  That's going to be reduced for those earning over £150,000.  For every £2 your income is over that limit, you lose £1 of the allowance.  So, by the time your earnings hit £210,000, you'll have lost £30,000 of the entitlement, and can only contribute £10,000 in a year.  It stops there - you're still able to contribute up to £10k and get tax relief, no matter how high your income.

If anything else came up in the Budget that you weren't clear on or think could be of use to you, do call or email - we'll be pleased to talk about it.  Similarly, if you'd like to talk about any of the topics above, let us know (although it's a bit early to delve into the detail of dividend tax - let's wait a little while on that until the dust has settled and the small print's clear!).

www.fizzhq.com

The Burden sisters lose out

Another tax case that has been dragging along for a few years has now been concluded in the European Court of Human Rights.

The Burdens are elderly sisters who have lived together their whole lives.  When one of them dies, this will trigger an inheritance tax bill as the deceased sister's half share of the house passes to the other.  Their complaint was that, were they to be a married couple or in a civil partnership, then that tax bill would not arise, and that this was discrimination.

It seems to me that they are 100% right.  I cannot think that a big tax relief should be granted to a couple purely on the basis of their having had sexual intercourse.  Does that make any sense at all as a trigger for an inheritance tax break?  Not to me.

In any case, they lost.  The European Court found that the situation of cohabitating siblings was substantially different from that of a civil partnership, on the basis that civil partnership is a legally binding agreement whereas as cohabitation isn't.  As far as I can see, that legally binding agreement is so easily broken that I can't think it's equitable for civil partners of a few months to get the tax relief while cohabiting siblings of more than 80 years don't.  But there you go - as is often the case, looking for fairness and logic in tax is a waste of time.

Fortunately, the Burdens are apparently in position to pay any tax that becomes due anyway - they own another couple of properties and have a healthy estate.  The case was brought as a point of principle, not one of hardship.  I still think they were right, though.

www.fizzhq.com

IHT - why spin works

As you are probably aware, the Chancellor yesterday claimed that he is doubling the IHT allowance for married couples from £300,000 to £600,000.  This is a classic piece of spin - it is literally true, but utterly misleading, in the same way that a promise not to increase income tax was, literally speaking, adhered to, but ultimately meaningless given that National Insurance was increased.

Previously, the same reduction in IHT could be achieved by simple, standard tax planning - either by a couple electing to be tenants in common of the family home, or by using a trust.  All the change does is remove the need to do that bit of planning - for the well-informed it saves the need to pay some professional fees; only for the ill-informed or lazy does it save any tax.

But that is not the point, of course.  The important thing to the Chancellor is the headlines immediately after the event.  And until 6 o'clock (at least) last night the BBC were reporting that the threshold had been doubled, with no qualification at all.  On Sky News it was worse - far worse.  At 8 o'clock one of their reporters was doing a piece to camera on the subject.  The presented mentioned to him that the Conservatives had pointed out that the rule change made no difference to those who had planned their affairs properly already.  The reply from the reporter was that although the Conservatives had made some objections on the detail, what was "for certain" was that half as many people were now subject to IHT before!

This is unbelievable on two grounds.  Firstly the accurate objections to the change were just dismissed - because, I suspect, the reporter was out of his comfort zone and didn't really understand them; his piece was not exactly convincing.  Secondly, because Sky had someone covering the matter who clearly lacked pretty basic numeracy.  Even if Labour had doubled the threshold, what are the chances that half as many people would be exposed to IHT?  To put it another way, say 2 million people were liable to pay IHT before, what are the chances that precisely one million have estates worth £300,000 to £600,000, and the other one million have estates worth £600,001 or more?  Absolutely unbelievable.  Next time, get someone with a grade C in their maths GCSE to cover the pre-budget report, please!

A better form of Inheritance Tax

Following on from yesterday's post, I'd like to suggest a better form that Inheritance Tax could take.  As discussed, it's a good tax in that it will rarely cause hardship for the payer - even the person inheriting wealth will, in most cases, not *need* the money.

But it could be said to be a bad tax in that it perpetuates unfairness in our society - the rich stay rich and the poor stay poor.  So, to correct that, why not just tax inherited money on the recipient, treating it as just another slice of their income?  That way, the wealthy pay more on inherited funds than the poor, and there is an incentive to spread legacies out across a number of recipients, sharing the wealth more widely.

Is Inheritance Tax really so bad?

Inheritance Tax has rumbled on in the news at about the same level of interest (or lack of) for a long time now - at least six or seven years.  The Conservatives, via George Osborne, have brought it back on to the radar via a proposal to increase the threshold where IHT kicks in from £350,000 to £1,000,000. 

Now, as an aside, even with the boom in house prices, I'm not convinced that IHT is going to hit that many estates.  Firstly, IHT planning is becoming more mainstream.  Secondly, a lot of people have borrowed against their houses.  If someone borrows £300k against their £500k house as part of an equity release scheme to create some spending money for retirement, then they've slipped the IHT net.

And in any case there are some good things about IHT.  Principally, it's unlikely to cause hardship to anyone.  The person who accumulated the money and needed it to provide for themselves in retirement rarely objects, principally because he or she is dead.  If the children were hoping to inherit £1,000,000 but only inherit £740,000, then they should be pretty happy, in the view of many people.

So, I can't get too excited about IHT.  The tax revenue (well, some quantity of tax revenue anyway) has got to come from somewhere.  If the money isn't collected from those estates, it will have to be collected from someone else.  The Conservative party are proposing to collect it from "Non-Doms" - wealthy people who live in the UK but claim that they ultimately belong somewhere else and avoid paying tax on their non-UK income, unlike me and (probably) you, who must pay UK tax on our worldwide income.  Now, I would have to say that this probably isn't fair.

However, there's no need for those two issues to be associated at all - although all the newspaper articles in the aftermath of the Conservative proposal appear to be doing so.  They are entirely separate. I suspect that most people probably aren't too bothered by Inheritance Tax, but think that the minimal tax paid by the non-doms is unfair.  Well, 95% of people have no interest in either subject, but for the 5% of us that have some passing interest I'd speculate that may be the position.  Hopefully the two issues will be uncoupled and can be debated separately in the future.