The Budget created some significant headlines for SMEs. There is the new national living wage, compensated in part for smaller SMEs by NIC reductions, the reduction in corporation tax rates and increased investment allowances. This might make some marginal difference to the way in which SMEs think about their business and could lead to productivity improvements. The commitment to maintaining the Annual Investment Allowance at a rate of £200,000 p.a. will also be welcomed and give them a greater ability to plan their future capital investment strategy.
For the SME owner by far the most important changes will be the new dividend tax regime, combined with the reduced ability to make tax effective pension contributions. This will significantly increase the effective tax rate on owners on profits they take from the company.
SME owners will probably think they are still bearing a disproportionate tax burden compared to multinational companies who are able to move profits offshore.
For large business, the headline reduction in corporation tax rates and minor changes elsewhere should be taken as positive news. There is always more detail in the Budget papers released after the Chancellor sits down for large corporates to absorb as this is usually more technical (and potentially less interesting) than personal tax changes.
Individuals
The focus of the speech was very much on individuals rather than business, the highlights being:
- A new national living wage from April 2016 increasing through to 2020
- Tax free personal allowance to rise to £11,000 from April 2016
- 40% rate threshold of £43,000 from April 2016
- Increase in IHT threshold to £1m
- End of permanent non domicile status
- Immediate end of preferential capital gains tax rates for hedge funds and private equity
- Dividend tax credit replaced with £5,000 exemption and new dividend rates
The tax allowance changes are likely to get some headline coverage as this will reduce the tax burden for 29 million individuals. The new national living wage changes received the most boisterous reception of the speech.
The IHT tax threshold increase felt a little contrived as it is basically a combination of a couple’s existing nil rate bands plus an extra £175,000 each in respect of the family home.
The abolition of permanent non dom status from April 2017 means individuals who have lived in the UK for more than 15 of the past 20 years will lose the beneficial status it provides such that they will pay taxes in the same way as UK domiciled individuals (ie on worldwide income and gains).
The abolition of 10% capital gains tax through Entrepreneurs Relief (“ER”) for “carried interest” in structures used by hedge funds and private equity had been mooted for some time and is introduced immediately. Whilst it is pleasing to see ER not tinkered with further, this is probably more a political move than a significant tax revenue raiser. It will be interesting to see how the industry now responds to a structure that was generally acceptable to HMRC in the past.
In general I would expect our Private Clients and Business Owners to have a positive reaction to today’s news.
Business
The budget contained much less focus on business than in recent years. Many of the corporate tax reliefs and incentives were untouched. The main points affecting business announced today were:
- Corporation tax rates cut to 19% in 2017 and 18% in 2020.
- Investment in the clampdown on anti-avoidance
- Further taxation of banks in the UK
- Restriction in the CT deduction for purchased goodwill and customer related intangibles for acquisitions made post 8 July 2015
The reduction in the corporation tax rate was perhaps the biggest surprise and will once again make the UK the most competitive in this regard in the G20. The “Britain is open for business” message will be further enforced with this message but some of the tax raising plans mentioned above may make the UK less competitive for the entrepreneur compared to, say, multinationals.
However, again I think business will give a thumbs up to the budget that has little but positive change, provided the new minimum living wage doesn’t increase costs substantially. However, the post budget press releases contain details of changes to the CFC rules as well as some potentially significant changes to the IP rules governing the relief for acquired intangibles.
Read more detailed coverage of the post election budget 2015 on our blog, Let's Talk Tax