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Summer Budget 2015: Key tax changes for entrepreneurs

Posted on July 15, 2015 by Tax N2K 0

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Listen to an audio version of this Summary Budget 2015 round up of the key tax changes impacting on entrepreneurs or read the text version below:

An audio download link is available at the end of this post!

Reduction in Corporation tax

Continuing George Osborne’s pledge to make the UK one of the single most attractive places to do business in the G20 he continued with his downward pressure on the UK corporation tax rates. Not content with reducing the main rate to 20% from 28% not too many years ago, he pledged to reduce it further to 19% by 2017 and down to 18% by 2020.

Before we get too excited about the CT rate reductions, it was once again a “give and take budget” as Mr Osborne announced some far reaching changes to the dividend tax regime that will impact on many entrepreneurs and increases to the minimum wage – the now so called “Living Wage”.

Dividend tax changes

It has long been the case that entrepreneurs could extract profits from their companies as dividends rather than salary – the key advantage being NIC savings as dividends are not (currently) subject to NIC. The income tax suffered on dividends is lower than salary as dividends are only available from retained profits that have been subject to corporation tax – so a tax credit system is applied to dividends that, in essence, results in 0% income tax payable by basic rate tax-payers (so broadly up to £42,000 – £43,000); 25% of the net dividend payable for higher rate tax payers and 30.6% for additional rate tax payers.

Seemingly forgetting about the double taxation impact on dividend payments, the Chancellor announced that there will be a £5,000 dividend allowance from 6 April 2016 (whoop whoop!) and then a 7.5% additional tax applied to dividend income – so our rates now become basic rate: 7.5%; higher rate: 32.5% and additional rate: 38.1%.

Looking at the HMRC projected figures, they are looking to net quite a windfall on this change that is a tax grab via the back-door – I don’t think many entrepreneurs have quite grasped this change as it was positioned as a change that might impact on those with substantial quoted shareholdings and contractors.

Will we see larger dividend payments pre 5 April 2016 with founders leaving credit loan balances to draw down over the foreseeable future?

Employment allowance increase

We should see the £2,000 NIC allowance for employers increase to £3,000 from 6 April 2016

Annual investment allowance

The annual allowance for investment into capital equipment (e.g. PCs, servers, desks, chairs, machinery etc) was set to fall to £25,000 pa by the end of this year but this was increased and pegged at £200,000 for the next five years.

EIS restrictions

There were some further changes to EIS building on proposals from the Autumn Budget Statement that include proposals to cap the total amount that can be raised under EIS at £12m (£20m for ‘knowledge intensive’ companies).
Also, a new limit on companies raising EIS making it available only to those companies that have been trading for less than 7 years (10 years for knowledge intensive companies) – this change seems unreasonably harsh for longer more established companies that might want to access capital. The requirement for 70% of the SEIS cash to be invested before shares can be issued under EIS will also be removed as originally noted in the March 2015 Budget. Finally there was reference to ensuring that EIS funds are directed toward developing companies so there will be restrictions on using EIS monies for buyouts and acquisitions and more of a need to demonstrate that the funds are being employed to develop and grow trading companies.

There were no changes announced to the SEIS regime.

R&D tax credits

No significant changes announced for R&D tax relief aside from a restriction aimed at Charities and Universities to prevent them from claiming the R&D tax relief on work subcontracted to them. This restriction takes effect from 1 August 2015.

Buy to let landlords

Many entrepreneurs will have diversified their risk with potentially one or more buy to let properties within their portfolio. These were also hit with some quite serious changes to the tax regime with the most hard hitting being the reduction in interest relief on buy to let mortgages being reduced to the basic rate of tax only. Currently, landlords can offset the mortgage interest at their marginal rate of tax (so potentially up to 45%). These new rules will be phased in to ease the pain of potential deleveraging for some landlords but the writing is on the wall for many – and who’s to say that this is the end with potential for 0% interest relief in the future….?

There will also be the removal of the 10% wear and tear allowance from 6 April 2016. Yet more pain for landlords.

Pension changes

On the downside, there were announcements that those with total income over £150,000 would be hit with reductions in the amounts they can put into their pension with the £40,000 annual allowance being tapered away with it hitting just £10,000 for those earning £210,000 or more. This is a admin headache all round and it comes into force from 6 April 2016.

On the plus side, there was a consultation announce to explore the best ways for pensions to be saved and a seemingly open approach to considering alternative finance in line with improvements to ISAs – this is great news for our thriving Fintech sector.

Inheritance tax changes

Long discussed and unsurprising was the pledge to increase the inheritance tax level to £1m to allow homes to be passed on without incurring IHT. Slightly odd in that the £325,000 nil rate band remains in place for the next 5 years but we have this additional £175,000 especially for the family home. Inflation may start to dig a hole into that £325,000 allowance rendering this less beneficial over time than the headlines suggest.

It was a shame that we didn’t see any changes to the VAT MOSS / (#VATmess) regime and I think the changes to dividends and pensions will add to uncertainty for many entrepreneurs and their advisors as the goalposts keep moving which is disappointing.

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Blueprint for Technology demands an innovative tax blueprint

Posted on November 4, 2010 by Digital North West 0

And so David Cameron continues to make the right noises about making the UK a centre for hi-tech digital, technology and creative businesses – a hub or a ‘UK Silicon Valley’ for the Googles and Facebooks of the future.

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Cameron unveiled his Blueprint for Technology today in East London with a commitment to push through with improvements to UK tax competitiveness, a review of intellectual property laws, freedom of movement of skilled workers, access to funding etc – I won’t summarise all the details as you can read the report in full by clicking here.

Let me kick off my saying that I wholeheartedly agree with Cameron’s focus on investing in intellectual property rich hi-tech digital, technology and creative businesses but I firmly believe that having a business-friendly tax regime and regulatory structure is absolutely key. Given this, I do not believe that the tax measures outlined today go nearly far enough. Okay, we’ll have reduced corporation tax for large companies to 27% and 20% for small companies from next April and there’s a pledge to review the taxation of intellectual property this Autumn but we need more. Far more.

Here are a few suggestions (aka a blueprint for tax) for hi-tech digital, tech and creative UK businesses:

  1. Create Enterprise Zones across the major cities ideally near Universities e.g. Manchester, Birmingham, Cambridge etc which will screen start-ups and fast growth companies for entry to these tax incentivised business parks
  2. These Enterprise Zones (EZ) would allow companies to take advantage of certain tax exemptions and incentives for the first 3 years of trading and then, although they will be entitled to stay thereafter (to build a supportive community), they will be subject to many of the tax rules applicable to businesses outside the EZ.
  3. Hi-tech digital, technology and creative businesses only would qualify for admittance to the EZ (this would include cleantech, medtech and gaming businesses).
  4. Corporation tax rates would be 0% for Year 1, 12.5% for Year 2 and then 20% in Year 3 (or whatever the prevailing small companies corporation tax rate is in Year 3). These rates are similar to in some other countries e.g. tax holidays are available for a certain duration whilst the 12.5% rate mirrors the current Irish corporation tax rate which continues to receive admiring glances from many UK hi-tech companies.
  5. National Insurance Contribution (NIC) holidays would be available for the 3 year qualifying period. There is a temporary general NIC holiday scheme in place at the moment although there are many conditions to satisfy plus the postcode finder for qualifying areas is poor. Under this scenario, if you’re in a qualifying EZ, you qualify. No further questions asked. This way startups and growing businesses can recruit without being hit with penal employer’s national insurance contributions (13.8% from next April). At the very least, I would suggest a tax break from employer’s NIC for the 3 year period.
  6. PAYE would be applied to 70% of earnings of employees of companies in the EZ. This would help encourage skilled workers to take the plunge of joining high risk start-ups and help recruit talent from overseas. The Netherlands has a similar tax incentive in operation.
  7. R&D tax credits would be increased to 200% for SMEs within the EZ (from 175% today) in line with the Dyson Review.
  8. Number of companies set up in a group would not impact on the tax rate within the 3 years (subject to point 4). Currently, if a company decides to set up a subsidiary company (e.g. to test a spin-off concept) then the taxable profit band at which small companies rate is payable is divided by a factor of 2 i.e. as a standalone company it could have taxable profits up to £300,000 and pay tax today at 21% whereas if it set up a subsid company it could only earn taxable profits up to £150,000. By eliminating this rule, companies would then have the freedom to experiment with new ideas and concepts in new companies without getting bogged down with tax considerations. When the 3 years draws to a close, they should be in a better position to know which companies in the group can be consolidated, which ones can be killed off and which ones should be kept.
  9. Income of intellectual property companies should be subject to corporation tax rate at a reduced rate of 5% and this rate would continue to apply beyond the 3 years. This rate looks controversially low but we have to face facts that reducing rates of tax to these sorts of levels is essential if we are to encourage – let alone retain – the Google and Facebook companies of the future. Look around locations across Europe and you will see rates that are not dissimilar. Entrepreneurs owe a duty to their investors to maximise returns and likewise tax advisers owe a duty to their clients to explore best possible options for the long term profitability of their clients. Such planning aimed at shifting income overseas could be stopped in its tracks with these sorts of rates. We have proposals for a reduced rate of 10% corporation tax for patent income, however, the Netherlands already offers 5% for a wider range of intangible income. Remember 5% of Google’s annual income from its brand and other intellectual property is an eye-watering figure – plus there would be employee taxes receipts etc to throw into the mix for the UK Exchequer….tempting?

I appreciate that there is plenty to unpack here but radical times call for radical measures. We are standing on the edge of a huge opportunity. We need to be brave and demonstrate decisive action beyond slick speeches and glossy whitepapers.

George, I hope you’re listening in anticipation of your Budget speech on 23 March 2011.

Before then, I welcome your comments, criticisms and further ideas.

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