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The good and the ugly: Summer Budget tax changes

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At the forefront of his speech, chancellor George Osborne announced that the Office for Tax Simplification has been given further powers to slash red tape and simplify tax – something successive governments have been promising for quite some time. However, the latest pledge, including the coinciding tax changes, appear to have teeth. 

Previously, the principle determining tax bills was the amount of income generated by a business. Christopher Mahon, director of asset allocation research at Multi Asset Group, said it best when he concluded that the taxman had cared about the size and not the source. 

But now the actual source of income will play an increasing role in determining tax bills. With arguably such a large amendment being made, we rounded up the tax changes set to evolve Britain’s economy in the future, and what it would mean for small businesses.

Corporation tax

According to Real Business’s Rebecca Smith, the Conservatives had cut corporation tax from 28 per cent to 20 per cent over the course of the last parliament, deeming it “one of the biggest boosts British business has ever seen”.

Ambitious entrepreneurs across the nation will now be pleased by the announcement that corporation tax is set to be lowered from its current figure to 19 per cent on 1 April 2017. This will further be decreased to 18 per cent by 2020, which should assist UK corporate growth and help to attract overseas inbound business. 

Osborne also said he would broaden the base for corporation tax by removing the annual deduction for acquired reputational value. 

“For big companies with profit over £20m a year, we will bring forward corporation tax payments dates. Tax will be paid closer to the point at which profits are earned,” he said. So for startups and small businesses which only generate a marginal profit, this is unlikely to have a big impact.

Essentially, Osborne is giving businesses lower taxes so they can grow “with confidence”, invest “with confidence” and create jobs with – you guessed it – “confidence”. And given that Britain now has by far the lowest rate of corporation tax in the G20, as well as one of the lowest rates in the world, the UK is set to become a highly attractive location for foreign investment.

Howard Sears, managing director of venture capital firm Astuta, summed up that the corporation tax a country charges is integral to the due diligence companies undertake when deciding where to set up or expand. This will not only benefit local businesses, but also make the UK more competitive. 

Annual investment allowance (AIA)

AIA is currently set at £500,000 but was due to be reduced to £25,000 on 1 January 2016. This has been changed to £200,000 on a permanent basis, and is expected to add £1bn to GDP by 2020.

The allowance was £100,000 when the Conservatives first came into power, and the new permanent level is the highest the allowance has ever been. The cut, Osborne said, “would especially hit middle-sized companies in areas like manufacturing and agriculture” – both sectors of which are being increasingly focussed on by the government.

Having been changed six times over the last five years, the fixing of the AIA at a permanent figure will be particularly beneficial to SMEs investing heavily in plants and machinery, common in industries such as manufacturing and technology. Indeed, given the increase in investment made in automated production lines and cells across the UK manufacturing base, a long term rate will surely boost productivity and help leverage the UK at the forefront of the global manufacturing sector.

Read more from our summer Budget commentary:

The boost applies to all qualifying investments made on or after 1 January 2016 and is expected to benefit 75 per cent of businesses located outside of London and the South East.

Osborne said the move is a “major and permanent change to incentivise investment” for SMEs across the nation.

Not only will it allow businesses to plan long-term R&D strategies, Earl Yardley, director at Industrial Vision Systems, believes it will offer more stability to key industries, such as pharmaceutical, medical device, and automation, which, in turn, will also enhance the performances of UK engineering firms.

National Insurance (NI), National Living Wage (NLW) and employment allowance (EA)

Businesses will be required to pay all workers aged 25 and over a new NLW of £7.20 an hour from April 2016, rising to £9 per hour from 2020. Of course, small firms, as well as businesses employing a significant number of staff on the minimum wage, are likely to feel the brunt of this change. 

Osborne added that the Low Pay Commission would be recommending future rises that achieve the government’s objective of reaching 60 per cent of median earnings by 2020. That is the minimum level of pay recommended in the report to the Resolution Foundation by Sir George Bain, chair of the Low Pay Commission.

However, not only will increased wages incentivise more candidates into work, the government has also implemented some new measures to reduce any negative impact. Osborne said that the cost to businesses of providing higher wages would be offset through the planned corporation tax reduction and an increase in the EA against employer NI contributions. 

The EA, designed to cut NI contributions for smaller employers, is to be withdrawn from companies where the director is the sole employee from April 2016. For other employers, the chancellor announced a 50 per cent increase to the EA, which will see it increase from £2,000 to £3,000 from April 2016. 

The independent Office for Budget Responsibility (OBR) has said that the new policy will have only a “fractional” effect on jobs. And according to Treasury calculations, up to 90,000 employers will see their employer NI contributions liability reduced to zero.

The OBR also estimated that the cost to business will amount to just one per cent of corporate profits.

Dividend tax

Previously, individuals in receipt of dividends benefitted from a ten per cent tax credit, which for basic rate tax payers meant they could enjoy their dividend tax free. Higher rate tax payers paid a 25 per cent tax rate.

However, after Osborne’s tax overhaul, anyone who receives dividend income will not pay income tax on the first £5,000. Basic rate taxpayers will pay 7.5 per cent tax on any additional dividend income, higher rate taxpayers will pay 32.5 per cent and additional rate taxpayers 38.1 per cent. 

Small business will see little change, but there is arguably far more at stake. There is much debate, however, about these latest announcements hitting entrepreneurship hard because there will be no incentive to grow a business into a larger organisation. Those who receive significant dividend income will pay more. For example, an entrepreneur with profits of £100,000 will see their annual tax bill increase by over £3,500.

This could encourage small business owners to sell up, and take advantage of the much lower capital gains tax, which is set to remain at 28 per cent.

“This simpler system will mean that only those with significant dividend income will pay more tax,” Osborne said. “Investors with modest income from shares will see either a tax cut or no change in the amount of tax they owe.”

In fact, it was suggested that 85 per cent of investors would be paying the same, or less, tax.

Income tax and the Innovative Finance ISA (IFISA)

The Budget saw the launch of the IFISA and a public consultation on whether to extend the list of ISA eligible investments to equity offered via crowdfunding platforms. 

From April 2016, the IFISA will include peer-to-peer loans. This means everyday consumers will be able to lend over £15,000 tax free, with the ISA limit due to rise in line with inflation.

According to Giles Andrews, co-founder of Zopa, “it is only fair that peer-to-peer is treated in the same way as bank savings and stock-market investments when it comes to the tax system.” 

The ISA will surely go a long way in boosting Brits to earn more by lending to fellow consumers or businesses. The move also further highlights that peer-to-peer lending has truly become a mainstream investment option. 
 
It will be launched at the same time as the new personal savings allowance, which will allow individuals to receive up to £1,000 in savings or loan interest without being liable for income tax. It means peer-to-peer lending will have a double tax efficiency from the start of the new tax year in 2016.

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