Following the 2015 budget announcements, the dust has now settled. Let’s highlight some of the surprises that crept under the radar.
We have also spent a bit of time with our tax colleagues understanding the implications of these and what actions might be taken that would be in your best interests.
We have highlighted the main areas below that might be relevant to you either now or in the future and have summarised what has been said and how to counter-act this. Of course this e-mail is only a summary though so if you wish to discuss anything in greater detail please get in touch.
This was one of the major announcements and can be summarised as follows:
- From April 2016, notional 10% tax credit on dividends will be abolished.
- A £5,000 tax free dividend allowance will be introduced.
- Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
- Dividends received by pensions and ISAs will be unaffected
In light of this there are really no ways round avoiding this and the benefits of having a limited company over and above a sole trader or partnership remain; though the financial benefit will reduce.
We do however recommend three things prior to these changes being implemented:
- Maximise the distribution of any dividends prior to April 2016 in order to avoid unnecessarily being caught up in the new rates;
- Consider whether shareholdings could be split any further, in accordance with the necessary guidelines of course, to increase the benefit of the £5,000 tax free dividend allowance allocated to each individual; and
- After the initial £5,000 is utilised look to extract any money owed to you by the company rather than continuing with further dividends as this will be more tax efficient.
2. Holiday pay
Though not part of the budget announcements this has been hanging around for a little while now and a lot of people are still unsure of implications of recent court cases regarding it.
What has happened?
The accepted payroll practice in the UK for workers who work normal working hours (NWH’s) is to calculate holiday pay by reference to basic pay and average overtime pay, but only if the overtime is both obligatory and guaranteed.
Excluded from the holiday pay calculation for those with NWH’s is remuneration that is made up of voluntary overtime, shift premiums (unsocial hours/night shifts), allowances (attendance/geographical), status payments (acting up/shift or team leader allowance), emergency call out payments and commission payments.
However, a number of recent Employment Tribunal decisions and an ECJ decision (in relation to commission payments), has thrown the issue of the correct manner in which to calculate holiday pay into a state of uncertainty.
The Employment Tribunal decisions are subject to appeal and are due to be heard but it is highly likely that the UK Government will intervene and refer the cases to the ECJ.
There is a widespread belief amongst employment lawyers that the courts will continue to adopt an expansionist approach and seek to include in the holiday pay calculation variable elements of remuneration which are linked intrinsically to the performance of the tasks that the worker is required to carry out under the contract.
What does this mean for me?
For employers, the issue of rectifying the miscalculation going forwards is going to come as an additional and unforeseen financial cost. Moreover, there is the scope for employees to “claw back” as far back as 1998 any shortfall in holiday pay.
Depending on the number of workers you engage these payments could run into millions of pounds.
What should I do about this?
- You should look into your current payroll practice and determine whether you are legally compliant. The overwhelming majority of employers will not be legally compliant.
- If you are not legally compliant, then as a business you need to make provision and accruals for significant back pay and increased holiday pay going forwards which takes into account variable elements of remuneration when calculating holiday pay. Any back payments are also likely to attract the attention of HMRC in relation to tax and NI and late payment interest penalties.
- Consider the strategy you are going to take should workers/Trade Unions lodge individual or collective grievances.
- Consider the strategy you are going to take should you receive a Tribunal claim.
- Consider whether you can minimise your financial exposure.
- Consider whether your current payroll systems are capable of calculating holiday pay taking into account variable remuneration.
What should I not do?
- Make payment of any shortfall and introduce a new method of calculating holiday pay.
- Communicate the findings of any exposure internally without seeking to maintain legal advice privilege.
- Do nothing and wait and see what happens.
How can I minimise my financial exposure?
- It may be possible to engineer a break in the last in a series of holiday pay shortfalls so that the worker then has 3 months to make a claim for historical back pay from the point that the break takes place.
- You could withdraw or amend entitlement to the variable remuneration elements that should be taken into account when calculating holiday pay. However, note that in the majority of cases these are likely to be contractual and you will need agreement. There is also scope for the collective consultation obligations to be triggered if more than 20 dismissals arise in a 90 day period.
Will it not alert staff if I make a payment?
At this stage very few workers, Trade Unions, claimant lawyers and most importantly claims management companies are aware of the potential holiday pay miscalculation liability for employers.
However, once the Tribunal claims reach the appeal stage and the UK Government steps in to make a reference to the ECJ (which appears likely), the negotiating position of the workers will fundamentally change in their favour, and employers are likely to be faced with collective grievances and/or Tribunal claims.
Of course this is not our area of expertise so should further information be required regarding this then we suggest legal advice is taken.
3. Minimum wage
Don’t forget there has been an increase in the minimum wage from 1 October 2015.
If we already handle the payroll for you then there is nothing to worry about as we will process this at our end. If you yourself maintain your own payroll just make sure you update your system to reflect this.
Unfortunately there is no avoiding this but just factor this into any future recruitment drives.
4. The Living wage
This was another one that may well have crept under the radar for some with the term ‘living wage’ might not be something commonly come across. It may also not be immediately obvious that there is a difference between the ‘living wage’ and the ‘minimum wage’ but not for much longer.
From April 2016, the minimum wage will be replaced by the living wage and this could catch a lot of companies off guard and cost a lot of money. From April 2016 this will start at £7.20 before rising to £9.00 by 2020. This will not however apply to everybody as it is currently only in respect of those aged 25 and over 25. Those under 25 will continue to fall under minimum wage guidelines.
How will this be funded?
Now time for some good news; though there wasn’t much within the 2015 budget:
- The employment allowance is to be increased from £2,000 to £3,000. However, it is currently proposed that this be withdrawn altogether for sole director/sole employee limited companies from April 2016. A further announcement kept well under the radar.
- It is proposed that the rate of corporation tax be reduced to 18% by 2020
Once again there is no avoiding this but just factor this into any future recruitment drives and also don’t forget to factor into auto-enrolment. We will obviously work together with yourselves planning ahead following the announcements to assist with planning ahead for the implementation of this.
5. Change reference amortisation of goodwill
Should you be thinking of expanding further and buying a business that itself has goodwill then just hang fire for a second. As of 8 July 2015, and accounting periods and purchases thereafter, there will be no corporation tax relief on the goodwill.
With regards to purchases prior to 8 July 2015 the old rules remain and corporation tax relief will remain.
Our advice, speak to us before making any such decisions to understand the true cash flow implications of any such expansion plans.
6. North East Powerhouse or just more politics
Not a great deal to say on this matter other than really watch this space. There are continued discussions around devolved responsibilities coming up north and The North East Chamber of Commerce has recently put a proposal together to the Chancellor along with nine other chambers but this one will very much be a case of wait and see.
We won’t take our eyes off this one though and would suggest you do the same as although this may not impact the tax side of things greatly it will impact our businesses and the operation thereof.
7. Buy to let property investors
Restricting finance cost relief for individual landlords was another significant potential change.
This measure will restrict relief for finance costs on residential properties to the basic rate of income tax. To give landlords time to adjust, the government will introduce this change gradually from April 2017 over four years.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Also note that there are consultations currently ongoing as to future plans regarding the wear and tear allowance with regarding to properties let out though this will not impact holiday lets. The proposal is currently that the 10% of rental income; which is used to calculated an allowable ‘wear and tear’ tax deduction, is replaced with an allowance for the actual cost of repairing and replacing items in both furnished and unfurnished properties. Currently the wear and tear allowance is restricted to only furnished properties. More information is expected to be released towards the end of 2015 regarding this.
Following on from these announcements we suggest you consider whether the business structure you currently operate under is suitable following the above changes and whether a limited company might be more appropriate or in the case of commercial properties whether moving properties into a pension fund might be the best option moving forward.
8. Annual investment allowance
This allowance is what you are entitled to received when you buy any ‘assets’ within the business but does not include cars.
It was initially proposed that this be reduced to £25,000 as of 1 January 2016 but instead it has been decided that though this will still reduce significantly from £500,000, it will permanently be set at £200,000 moving forward.
In light of this we would suggest that should this reduction be an issue to yourself then any large purchases, should be discussed with us a matter of priority if you feel that this reduction will impact you.
Summary and some other interesting points to note
We have also prepared a summary budget document which is provided by our professional body, and covers some of the areas above again, with some of the uplifts in registration and tax thresholds etc. Download the budget summary here.
Watch out for insurance going up as insurance premium tax has been increased so we will all be seeing increases here also.
Overall, not the most positive of budgets but by planning ahead and taking everything on board we can work together to mitigate the impact.
Please also note that the guidance above is correct at the time of this document being sent and is subject to change so please contact before any decisions are made regarding the above.