Updated: Aug 24, 2020
Written by Freddie Phillips
What is the Budget?
On Monday 29th October 2018, the Chancellor of the Exchequer Phillip Hammond presented the annual budget for the current government to Parliament. The budget is an update on the nation’s finances and includes proposals for the government’s revenues and expenditures for the financial year (parliment.uk, 2018). The budget includes a wide range of spending measures and changes to taxation which affect all members of the public and the economy including; consumers, the self-employed, SMEs, large organisations and charities.
What Changes were Announced?
One of the major changes to taxation in the budget was in business rates. Business rates are a tax levied on the use of non-domestic properties, for example shops, offices, pubs, warehouses and factories. From April 2019 and the two years following, businesses with a rateable value of £51,000 or less will have business rates reduced by 33%. This is an aim to help small high street retailers struggling to compete with the rise of online shopping and targets almost 500 million retailers in the UK. This is not only beneficial for high street retailers however, as it extends to all businesses in the UK with non-domestic properties valued below £51,000 who can benefit from this rate cut.
Further to this, as business rates are set on the value of non-domestic property, valuations of the properties used by businesses greatly affects the rate they pay. To ensure the rates that businesses pay fairly reflect the value of their properties, revaluations of properties will take place every three years instead of five, bringing forward the next review to 2021.
All businesses which use non-domestic properties in their operations should therefore be aware of the upcoming review and how this may affect the rate they pay, as well as adjusting to revaluations taking place more frequently (every three years instead of five).
Annual Investment Allowance
The Annual Investment Allowance is a tax relief scheme for assets which are to be used within the business e.g. equipment, machinery and vehicles. The full value of an item which qualifies for the annual investment allowance can be deducted from profits before taxation (gov.uk, 2018). The following qualify for the Annual Investment Allowance:
Items kept for use in the business, including cars.
Costs of demolishing plant and machinery.
Parts of a building considered integral (integral features).
Some fixtures e.g. fitted kitchens or bathroom suites.
Alterations to a building to install other plant and machinery, not including repairs.
The budget proposes an increase in the annual investment allowance from £200,000 to £1 million. Whilst beneficial to all businesses, this is particularly beneficial for SMEs who need to invest heavily to grow. Being able to offset the cost of equipment, machinery and investment against profits reduces the cost of investment for many businesses, whilst also increasing the demand for the suppliers of such equipment and machinery.
The Apprenticeship Levy was introduced in April 2017 and applies to all businesses with a payroll of £3 million and above, requiring them to contribute 0.5% of this into the Apprenticeship Levy, to which the government adds 10%. Businesses can then use this money to pay for apprenticeships – either through apprenticeship standards or frameworks. Businesses which are not levied due to their payrolls being below £3 million, receive ‘co-investment’ from the government. This is where the employer pays 10% of the cost towards the cost of apprenticeship training, with the rest (90%) being paid for by the government.
Two key changes were announced in the budget. Firstly, for all non-levied employers, the amount of co-investment from the government will increase from 90% to 95%, meaning the employer only pays 5% of the cost towards apprenticeship training. This is an important development for start ups and SMEs as it reduces the cost of training and investing in their workforce.
Secondly, large businesses which pay into the apprenticeship levy will be able to use 25% of their apprenticeship levy funds to support apprentices in their supply chain. This again creates an opportunity for SMEs involved in the supply chain of larger businesses to benefit from training and development of their workforce.
Addressing the housing crisis in Britain has been a key area of government policy over the past few years. In 2017, 80% (267) of local authority areas saw fewer homes built annually than what was estimated to be needed by the government (Iqbal, 2018). There were a range of announcements in the budget regarding housing, relating to local councils, large developers and SME developers.
Firstly, stamp duty (a tax placed on value of property or land purchased) has been abolished for first-time buyers of ‘shared ownership’ properties up to the value of £500,000. This is a type of mortgage when 25%-75% of the value of a home is purchased, and rent is paid on the remaining value, with the opportunity to buy more share in the house value in future. This is likely to lead to greater demand for these properties, and as these homes tend to be in new build developments or resales of existing shared ownership properties (Telegraph, 2018) there is an opportunity for developers to build these homes with this increased demand in mind.
Secondly, as part of the government’s aim to transform highstreets, £675 million has been announced to help councils transform their existing retail zones, which can be used to transform unused retail shops and commercial buildings into homes. The government has also committed to consulting on how to simplify the process of converting such commercial buildings into homes, making the process quicker and reducing administrative costs. This provides an opportunity for local SME developers, with the Chief Executive of the Federation for Master Builders urging councils to work with local builders and developers to take advantage of this opportunity (BBC News, 2018).
Moreover, in a direct move to encourage SME housebuilders, the government has announced that £1 billion of guarantees will be made available to specialist and high street lenders to smaller housebuilders, in partnership with the British Business Bank (British Business Bank, 2018).
Self – Employed Workers
IR35 is a tax rule targeted at the self-employed working ‘off-payroll’ through an intermediary business, usually through a Personal Service Company (PSC). The main reason for the reforms is to reduce the amount of people claiming self-employed status, and therefore paying less in National Insurance, despite being employees. (Ahmed, 2018).
This crackdown will greatly affect independent contractors who take on regular work through a personal service company for the same employer and should therefore be aware of any potential changes to their self-employed status which could result in them being required to pay higher levels of National Insurance. There are three possible ways for contractors to test whether they may fall ‘inside’ or ‘outside’ IR35:
The completion of work. If you have autonomy over how the work is carried out, e.g. working hours and location, you will likely be outside of IR35 and classed as self-employed.
Obligations. This refers to mutuality of obligations, for example if the company is obliged to provide you with more work when you have finished the current job, you are most likely ‘inside’ IR35 and therefore an employee.
Substituting and Subcontracting. If there is a substitution clause in your contract over which you have control of the substitute, you are most likely ‘outside’ IR35 and therefore self-employed.
Reforms to IR35 mean the responsibility of deciding whether a contractor is self-employed and therefore outside IR35, or whether they are an employee and therefore inside IR35, will shift from the contractor to the employer. This is important for businesses which employ contractors set up as PSCs or other intermediary businesses as they will now be responsible for classifying them as contractors or employees. These reforms will be rolled out to SMEs and large organisations in April 2020 (Richardson, 2018).
National Living Wage and Minimum Wages
The national living wage is the legal wage floor for all employees in the U.K. aged 25 and over, and as of April 2019 this will rise from £7.83 to £8.21. This is important for businesses, notably SMEs, in the retail and hospitality sectors who tend to employ a large amount of minimum wage employees. The National Minimum Wage will also increase for all other age bands; for 21-24 years from £7.38 – £7.70, for 18-20 years from £5.90 – £6.15, for under 18 years from £4.20 – £4.35 and for apprentices from £3.70 – £3.90. (gov.uk, 2018). This is estimated to affect 2.4 million workers in the U.K. (gov.uk, 2018).
Ahmed, K., 2018. Hammond plans tax crackdown on ‘synthetic self-employed’. [Online] Available at: https://www.bbc.co.uk/news/business-45822650 [Accessed 19 11 2018].
BBC News, 2018. Budget 2018: What do the housing measures mean?. [Online] Available at: https://www.bbc.co.uk/news/business-46024789 [Accessed 20 11 2018].
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gov.uk, 2018. Claim capital allowances. [Online] Available at: https://www.gov.uk/capital-allowances/annual-investment-allowance [Accessed 20 11 2018].
Gov.uk, 2018. National Minimum Wage and National Living Wage rates. [Online] Available at: https://www.gov.uk/national-minimum-wage-rates [Accessed 20 11 2018].
Iqbal, A., 2018. UK house-building ‘below pre-crash levels’. [Online] Available at: https://www.bbc.co.uk/news/uk-england-45050276 [Accessed 20 11 2018].
parliment.uk, 2018. The Budget and Parliament. [Online] Available at: https://www.parliament.uk/about/how/role/check-and-approve-government-spending-and-taxation/the-budget-and-parliament/ [Accessed 19 11 2018].
Richardson, D., 2018. Autumn Budget 2018: private contractors face National Insurance crackdown under IR35 reform. [Online] Available at: https://www.which.co.uk/news/2018/10/autumn-budget-2018-national-insurance-calculator/ [Accessed 19 11 2018].
Telegraph, 2018. How does shared ownership work?. [Online] Available at: https://www.telegraph.co.uk/financial-services/money-comparison/mortgages/is-shared-ownership-a-good-idea/ [Accessed 20 11 2018].