Budget 2020 in depth review
Becky Maguire, tax partner at Garbutt + Elliott has shared her review of the 2020 Budget and provided analysis of what it means.
Well, what a Budget that was – spend, spend, spend was the order of the day for things as varied as a Nature for Climate Fund and filling in potholes.
Not surprisingly, Coronavirus was a focus right from the off with a package of £30bn of measures to help individuals and businesses. And the NHS was a winner – £6bn of new funding over this Parliament alongside some welcome relief for consultants and GPs with a significant increase to the pensions taper threshold.
And whilst most governments start their term by getting tax rises out of the way, there was little in the way of bad news on that front. It’s true that for many business owners, the reduction in the Entrepreneurs Relief Lifetime Allowance from £10m to £1m will hurt – a tax increase of £900k for anyone putting pen to paper on a deal right now and expecting to use the full £10m allowance.
Others may be more sanguine – a 20% CGT rate on a business exit is still pretty low compared to current income tax rates. But on the flip side, despite rumours suggesting changes were coming to the Business Property Relief rules, the Budget speech and press releases made no comment whatsoever on BPR (and IHT for that matter), much to the relief of business owners across the country.
From a devolution perspective, it was exciting to hear the news that West Yorkshire will be getting a metro mayor from May 2021. Personally, the British Library of the North to be built in Leeds was a highlight!
The Chancellor’s phrase “Get it done” was a repeating theme throughout but with detail on spending in some areas pushed back to the Spending Review later in the year, it remains to be seen how the numbers will balance up.
Getting into the detailed Budget papers, it is interesting to note that the previously announced cap on R&D tax relief for SMEs will be delayed by a year and there will be a review of the Enterprise Management Incentives (EMI) Scheme which sounds like it may expand access to EMI rather than reduce it. Both good news for growing small businesses.
Our summary of the key tax announcements in each area is below. We already knew that corporation tax would stay at 19%, with previous budget plans that it would be reduced to 17% from this April now being scrapped. There is more detail to follow from the Treasury on its other Budget measures as material drips out over the next few days, but please read on for highlights of what we know so far.
In the run up to Budget 2020 there had been a background of louder than normal pre-Budget noises from government on Entrepreneurs’ Relief (ER), including that it might be for the chop. ER is staying but capped at a lifetime limit of £1m qualifying gains per individual. The Treasury is lopping off £9m of the lifetime allowance on the basis that 80% of entrepreneurs will still benefit from it, and ER will continue to act as an incentive for many business owners. The Chancellor suggested that only around 5,000 individuals each year benefitted from the higher level of relief, and so ER becomes a more focussed, and lower cost policy tool. ER allows business owners to dispose of their business at just a 10% rate of tax, compared to the standard capital gains tax rate of 20% for higher rate taxpayers.
Interestingly, looking at the detail of the legislation, anti-forestalling rules will mean that people who entered into unconditional contracts to “bank” ER ahead of the Budget will not have achieved their aim.
Commercial property tax relief
The Structures and Buildings Allowance (SBA) was introduced in October 2018, enabling commercial building owners to write off building works entered into after that date against tax over 50 years. The Treasury has announced that they are speeding up tax relief, with the annual rate of relief to increase from 2% to 3% from 1 April 2020, and meaning that expenditure will be written off over 33 years instead. The SBA can’t be claimed on “fixtures” within the building such as air-conditioning, plumbing and other “active” features; so property “fixtures” claims are still of huge benefit in many cases, especially as such costs can be claimed much faster.
Research and Development Relief
The Research and Development Expenditure (RDEC) rate increases from 12% to 13%, also from 1 April 2020. This is beneficial to “large” companies that cannot benefit from the more beneficial SME R&D tax relief. HMRC statistics show that R&D relief as a whole benefits over 3,300 companies in the Yorkshire and Humber area alone each year, with around 430 of those being within the RDEC relief.
The increased rate of relief for RDEC claims will become worth an extra 10.53% on qualifying expenditure.
The government will also consult on whether expenditure on data and cloud computing should qualify for R&D tax credits under both the large and SME regimes.
Digital Services Tax
The previously announced Digital Services Tax will be introduced as planned from 1 April 2020. This 2% tax will apply to the revenue of search engines, social media platforms and online marketplaces which derive value from UK users. It will mainly impact large multi-national businesses as it applies to groups with worldwide revenues from these digital activities of more than £500m, and where more than £25m are from UK users.
Stamp Duty Land Tax
No changes for UK property buyers, but for foreign owners there will be an SDLT 2% non-UK resident surcharge. More details are to follow, but expect that to be a 2% surcharge for commercial property on top of existing rates; and 2% on top of the existing 3% surcharge for residential property purchases. Revenue raised from this will be used to help address rough sleeping.
To support small businesses affected by Coronavirus the government is increasing the Business Rates retail discount relief to 100% for 2020-21, and will expand it to the leisure and hospitality sectors.
Freezing is the order of the day. The planned rise in beer duty will be cancelled. Duties are frozen too for spirits, cider and wine drinkers. It is only the second time in almost twenty years that every single one of the alcohol duties is frozen. Fuel duty will also remain frozen.
The plastic packaging tax announced at Budget 2018 and consulted on last year will come in from April 2022. Many of the details are yet to be announced and a further consultation was announced on the detailed design and implementation of the tax.
We also heard about allocating £10 million for R&D spending to help decarbonise UK distilleries and enable them to “go green”, with a particular mention of the whisky sector.
VAT is removed from women’s sanitary products; something that apparently we were unable to do before Brexit due to EU rules. From 1st December 2020 (just in time for Christmas!), books, newspapers, magazines or academic journals, whether in print or digital format, will also have VAT removed.
Due to recent coverage of unexpectedly high tax charges on NHS consultants, the Government has decided to increase the pension annual allowance tapering thresholds by £90,000 each from April 2020, i.e.
- “Threshold income” (i.e. total income excluding pension contributions) will increase from £110,000 to £200,000
- “Adjusted income” (i.e. total income including pension contributions) will increase from £150,000 to £240,000
This means that tapering of the £40,000 annual allowance will not happen until “adjusted income” exceeds £240,000. For those on the highest incomes, the £10,000 minimum annual allowance will reduce to £4,000 from April 2020 – this only affects individuals with total income (including pension accrual) over £300,000.
The lifetime allowance for pensions (the maximum amount someone can accrue in a registered pension scheme) will increase in line with CPI to £1,073,100.
Given the pre-Budget rumours about possible changes to the tax relief on pension contributions, this relaxation to the pension contributions rules will be a welcome relief to many. In particular, this presents an opportunity for business owners to contribute more into their pensions each year from company profits, now a key element of any cash extraction planning.
Off Payroll Working – changes to private sector from April 2020
The recent Government review of changes to the Off Payroll Working rules (commonly known as IR35) concluded last month, resulting in only minor changes to support its implementation. The government confirmed in its Budget releases that it believes “it is right to address the fundamental unfairness of the non-compliance with the existing rules, and the reform will therefore be legislated in Finance Bill 2020 and implemented on 6 April 2020, as previously announced”.
This will come as a huge blow to the professional bodies and sector representatives who lobbied hard for a deferral to 2021, citing the continued uncertainty about some of the practicalities of the rules and that fact that many businesses are not properly prepared.
Those consultants working through their Personal Service Companies who will now be classed as falling within IR35 from April 2020 will see a significant drop in their net income, if they had previously assessed themselves as not caught under IR35.
Electric and hybrid cars could soon become the company car vehicle of choice for many businesses, as electric and efficient hybrid cars will attract a 0% benefit in kind charge (applied to the car’s list price) from April 2020, followed by a 1% charge in 2021/22 and 2% charge in 2022/23. Electric cars also do not attract a fuel scale charge.
Alongside the company car tax changes are a number other tax breaks to help businesses go green – including 100% Capital Allowances, no benefits tax on installing charging points at work or home.
The Chancellor also confirmed in his Budget speech that the government will provide £500m over the next five years to support the rollout of a fast-charging network for electric vehicles, ensuring that drivers will never be further than 30 miles from a rapid charging station. This can only further accelerate the take up of electric cars as drivers begin to embrace this new technology.
Despite rumours suggesting changes were coming to the Business Property Relief rules, the Budget speech and press releases made no comment whatsoever on BPR (and IHT for that matter), not even a review.
Income tax and National Insurance Contributions
No change to the Personal Allowance (£12,500) and higher rate threshold (£50,000) from April, which remain at current 2019/20 levels into 2020/21.
As previously announced, both the Employee (Class 1) and Self Employed (Class 4) NIC thresholds increase from £8,632 to £9,500, which is estimated to save 31m people typically £104 per year, and take around 1.1m people out of paying Class 1 and Class 4 NICs entirely. This is the first step in meeting the government’s ambition to increase the NIC threshold to £12,500 by the end of this parliament, which should save a typical employee over £450 per year.
Savings and ISAs
Individual Savings Account (ISA) annual subscription limits for 2020/21 will remain unchanged at £20,000. But Junior ISA and Child Trust Fund annual subscription limits will be increased from £4,368 to £9,000.
National Minimum Wage (NMW)
A pre-announced large increase to NMW is coming in April – the £8.21 hourly rate increases to £8.72 (over 25 years old rate). This is part of the Government’s plan to have a NMW rate of more than £10.50 per hour by 2024.
The Employment Allowance will increase from £3,000 to £4,000 from April 2020, benefitting around 510,000 businesses by reducing their costs of employment, with an average gain of £850 per year.
Statutory Sick Pay – Coronavirus
SSP will now be payable from day one for those who are self-isolating themselves because of coronavirus. To claim SSP, you need to be earning at least £118 a week, and SSP is set at £94.25 a week (employers can of course pay more if they want to).
Working from home
A long overdue increase to the flat rate deduction for homeworking from £4 to £6 per week will take effect from April 2020 – this hasn’t been increased since first introduced in April 2012. This is how much employees can claim tax free from their employer, or claim tax relief on, without having to keep records when working at home under qualifying homeworking arrangements.