The government may have opted for a Monday afternoon Budget over the usual Wednesday to avoid Halloween jokes, but what ghoulies and ghosties lurked in the Autumn 2018 Budget for small business owners?
IR35 changes in the private sector
At the moment, if you’re a contractor and your clients are in the private sector, it’s up to you to determine whether you are an employee in all but name and should follow the IR35 rules.
From April 2020, if your clients are “medium or large” businesses, it will be up to them to assess whether or not you are caught under IR35 – meaning you should be taxed as an employee rather than as a contractor without receiving the benefits of employment such as holiday pay.
This rollout to the private sector follows controversial changes made to IR35 rules in the public sector in April last year.
The Budget report did not define a “medium or large” business, but my suggestion would be that this will follow the Companies House thresholds, where a small business is one that has at least two of:
- annual turnover (sales) not more than £10.2 million
- the balance sheet total not more than £5.1 million
- the average number of employees no more than 50
A medium-sized business is one that has at least two of:
- annual turnover (sales) not more than £36 million
- the balance sheet total not more than £18 million
- the average number of employees no more than 250
And a large business is one that does not meet the criteria of either of the above.
Whether the “number of employees” will also include affected contractors has yet to be determined.
Employment Allowance restricted to small businesses
The Employment Allowance, which gives many businesses a £3,000 reduction in their employer’s National Insurance (NI) bill, will be available to fewer employers from April 2020.
From that time, it will be limited to employers whose annual employer’s NI bill was under £100,000 in the previous tax year.
Annual Investment Allowance (AIA) increased
At the moment, businesses can claim tax relief on the cost of qualifying capital assets up to a limit of £200,000 a year.
From 1st January 2019 to 31st December 2020 that allowance will be increased to £1 million a year.
Digital services tax for large businesses only
From April 2020, a new 2% digital service tax will be introduced on sales made by large, established digital services businesses.
There was speculation before the Budget that this new tax could directly impact small digital services businesses; however, it only applies to groups generating over £500 million a year globally from these services.
VAT threshold remains at £85,000
The UK’s VAT threshold (the level of annual VATable sales at which a business must register for VAT) will remain at £85,000 until April 2022.
In some ways this is good news, as it could have been reduced; however, in real terms it is a reduction in the threshold as inflation is rising.
No mention of Making Tax Digital (MTD)
There was no mention of MTD in either the speech or the full report, so we have to assume that the current plans are going ahead, with MTD for VAT due to be introduced in April 2019.
Business rates to be cut for small retail businesses
Business rate bills will be cut by one-third for retail properties with a rateable value below £51,000, for two years from April 2019. The government says this will benefit 90% of retail properties.
Not much good news for small businesses!
Although there are promises of more support available to small businesses, such as a new Small Business Leadership Programme and a pilot in Greater Manchester to test what government training could help the self-employed, sadly this Budget does not contain a lot of good news for the smallest businesses.
The IR35 changes could introduce additional complications in building relationships with clients, while the Annual Investment Allowance increase is unlikely to be very helpful and the Employment Allowance continues for the smallest businesses as it has been.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.