Autumn Budget 2018: What it means for small businesses

The Chancellor of the Exchequer has delivered his Autumn Budget 2018 and in this article, we take a look at some of the key takeaways for those who run a small business, including individuals who are contractors, sole traders and/or self-employed.

It was an unusual budget because of Brexit. Since nobody yet knows which Brexit deal the UK will be adopting – no-deal, the Chequers deal or something else – Chancellor Philip Hammond said that in the event of a no-deal Brexit, the Spring Statement due in 2019 will in fact become a Spring Budget, with further tax measures. In other words, what you read below is subject to change.

Autumn Budget 2018: Contractors

The UK government has announced that, as of April 2020, larger private organisations should utilise its reformed off-payroll working rules. Also known as IR35, these new rules were introduced for public authorities in April 2017, although they have been in existence in various form since 1999.

IR35 aims to catch “disguised employees” who are essentially identical to an employee yet are self-employed and contracted to the organisation through a third-party such as an agency or, more frequently, their own company (referred to by HMRC in these circumstances as a “personal services company”).

Often cited as an example is somebody whose employment ends on a Friday yet returns the following Monday to continue working in the same job as a contractor. HMRC views this as a form of tax avoidance. Both the organisation and the contractor avoid some tax and National Insurance (NI) payments and the worker can claim expenses against tax.

In a nutshell, the new rules shift responsibility for complying with IR35 from the individual to any larger organisation providing them with work, following a similar scheme this year for public authority workers.

From April 2020, larger privately run organisations will be legally required to examine new and existing contracts used to hire non-employees to determine if the individual resembles an employee. The business might be fined by HMRC if they don’t do this and then, if necessary, deduct the tax/NI shortfall from the contractor’s pay, as well as notify HMRC. The contractor might also be fined.

What does this mean for me?

There are two answers to this question, depending on whether you’re the contractor or the organisation contracting somebody.

IR35 for contractors:

IR35 only applies to contractors who work through an intermediary, such as a limited company or an agency. Any freelance, self-employed or sole trader simply invoicing the organisation directly for payment—and pays that into their own account—won’t be affected in the majority of cases.

However, workers who have created a limited company could be affected, even if this had innocent intentions, for example because you were forced to since the organisations you work for only hire contractors via limited companies, or because a limited company was more effective for VAT.

The best way to find whether IR35 might affect you is to check your employment status via HMRC’s own service or contact the IR35 helpline. The HMRC service asks a number of questions, such as who decides the contractor’s workload, or whether the contractor is directly managed by somebody within the organisation. Notably, some accountants offer guidance on correct management of IR35.

If you believe upon examination that you might be affected, the first port of call should be to speak to the organisations that you’re contracted to share your findings. If these are larger businesses you should remind them of their forthcoming IR35 obligations and find out what their course of action is likely to be. See below for details about what additional payments might be required.

IR35 for employers:

If your organisation utilises contractors then, unless it a larger business (that is, it has 50 or more employees, has an annual turnover of £10.2 million or more, and has a balance sheet value of £5.1 million or more), there is no immediate impact and responsibility for checking if IR35 applies remains with the contractor.

As above you can use HMRC’s service or helpline to try and determine what status contracted employees should have. Remember that IR35 affects contactors working through an intermediary, which might be their own company but could also an agency.

If you discover a contractor is determined to be an employee then you should notify them. After April 2020, larger companies will need to take action.

Making the correct tax/NI payments under IR35:

If a contractor is found to be an employee rather than a contractor then, under the new IR35 rules from April 2020, any larger organisation will need to deduct the tax and NI shortfall from what they pay the contractor’s intermediary, such as the limited company or the agency. They’re also required to notify HMRC.

Until that time, the contractor (or the intermediary) should calculate and pay the deemed employment payment if IR35 applies to them. Contractors might wish to consult an accountant for guidance.

Notably for a contractor, despite paying employee-level tax and NI, they will not receive employee benefits such as sick leave or statutory worker protections because they’re not an actual employee.

Therefore, a contractor might request the employer switch them to an employment contract—or consult with them to adjust their workload or working conditions so it no longer resembles that of an employee, so the additional tax and NI need no longer be paid.

However, IR35 is open to interpretation and ultimately HMRC has the final say.

Because of this, some have suggested that larger organisations might now simply avoid hiring contractors who operate through their own limited company in order to eradicate any risk of HMRC fining them.

(Remember that, although the organisation might contest the HMRC’s classification, and perhaps even win, this has significant financial and even reputational cost attached that companies might wish to avoid.)

Some critics of IR35 have even suggested that the scheme might mean an effective end to the contracting industry. Organisations could easily switch contractors to zero-hours contracts, for example.

A consultation document about IR35 and the private sector will be published by the government soon to provide more details about the reforms.

Autumn Budget 2018: Startups and entrepreneurs

Those who create new businesses can, when they come to sell or pass on that business, take advantage of Entrepreneurs’ Relief. This significantly reduces capital gains tax and, the theory is, will encourage entrepreneurs to keep creating new businesses.

As of 6 April 2019, the minimum period throughout which the qualifying conditions for the relief must be met rises to 24 months.

Currently it’s 12 months. Additionally, since 29 October 2018, in order to qualify the shareholder must be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief.

In the Autumn Budget it was also announced that the British Business Bank’s Start-Up Loans Programme will continue through to 2021 and will therefore continue providing loans (from £500 to £25,000), plus mentoring and support for startup businesses.

What does this mean for me?

It’s become tougher to claim Entrepreneurs’ Relief if you’re disposing of a business you’ve created. If you intend to do so, and if by April 2019 you have met the qualifying conditions for less than 24 months, you could be in for a wait until Entrepreneurs’ Relief applies again.

Therefore, the period until April 2019 could be a busy one for those selling (or buying) startup businesses.

As always, however, you should seek professional advice before commencing the sale of any kind of business. Speaking to an adviser sooner rather than later in this instance could make all the difference.

For those starting a business the Start-Up Loans programme’s fixed 6% interest rate remains a good source of investment.

Autumn Budget 2018: High-street retailers

There’s good news if your retail property has a rateable value below £51,000, which the government says is 90% of all high-street retailers — as of April 2019 your rates bill will be cut by one third for 2019-20 and 2020-21.

Additionally, £675 million will be invested in a Future High Streets Fund, which will invest in initiatives such as centre infrastructure to increase the accessibility of high-street shops.

It also includes investment in heritage buildings to bring them back into use and investment in local commerce leadership, among other things.

The National Productivity Investment Fund (NPIF) will be boosted from £31 billion to £37 billion, and extended for a year to 2023-24. The NPIF is intended to invest in key infrastructure, including housing, transport and digital links such as fibre internet for rural areas.

Finally, the government has reduced to zero the business rates on public lavatories.

What does this mean for me?

A rates reduction, albeit temporarily, will ease the burden for smaller high-street retailers. Wise businesses will use the savings to invest in the future of the business in order to better prepare for the time when the rates reduction ends.

This could be the perfect time to invest in creating or expanding an online outlet, for example, so your business is present in both the online and offline worlds.

It’s hard to predict what forms the Future High Streets Fund or NPIF investments will take but it could mean local funding becomes available to assist with business expansion or relocation. Therefore, you should monitor information from local sources, such as the council or Chambers of Commerce.

You might choose to participate in any local commerce or council business groups in order to explain your company’s needs when it comes to issues such as investment in improving high-street accessibility—and ensure you’re at the front of the queue when any aid becomes available.

Finally, if you’ve ever wanted to invest in a business to make money when people spend a penny, there is a terrific tax-friendly opportunity — although it’s not clear how long the 100% rates relief will last for.

Autumn Budget 2018: Online retailers

A big headline in the media from the Autumn Budget 2018 was the Digital Services Tax (DST) of 2% as of April 2020 that applies to “certain digital businesses” that derive value from UK users.

Included in the list of those targeted are “online marketplaces”, in addition to search engines and social media platforms.

What does this mean for me?

If you’re an online retailer, you might be concerned about the DST but, in reality, it means nothing unless your business makes more than £500 million per annum. And even then, there’s a £25 million per annum allowance.

It’s possible online retailers such as Amazon or eBay may increase the fees they charge retailers, which could put a squeeze on your profit margins.

Autumn Budget 2018: Manufacturing and industry — Capital allowances

The Annual Investment Allowance (AIA) is a form of capital allowance that allows organisations to offset the cost of certain plant and machinery investments (excluding cars) against their tax bill. As of January 2019 the allowance expands up to £1 million, with a £200,000 minimum threshold, but only for two years until 31 December 2020.

Notably, AIA is available in addition to the standard capital allowance main and special rate pools.

The government also announced the Capital Allowances Special Rate for qualifying plant and machinery assets is being reduced from 8% to 6% as of April 2019, and the Enhanced Capital Allowance (ECA) will end by April 2020 for technologies on the Energy Technology List and the Water Technology List.

Instead, an Industrial Energy Transformation Fund will be created, providing £315 million of investment to help high-energy usage businesses cut their bills.

What does this mean for me?

Due to the AIA increase, this is a good time for businesses to invest in new plant and machinery. If you have plans to make purchases in the coming years, you might bring those forward to fit in the two-year time frame as of January 2019. Similarly, if you make use of ECA, you should do so before April 2019.

But capital allowance schemes can be complex. In fact, the government says it is removing ECA simply because of its complexity.

You should speak to your accountant if you have one to see if the allowances above affect you and to learn what measures should be taken.

Don’t forget that you might still be subject to tax if you sell what you purchase under the AIA (or any capital allowance scheme), so AIA should really be used for longer rather than shorter-term investments where depreciation will decrease the amount you will eventually have to pay upon disposal of the asset.

Autumn Budget 2018: Manufacturing and industry — Plastics levy

The government announced that, as of April 2022 and subject to a consultation process, it will apply a tax to the production and import of plastic packaging that doesn’t contain at least 30% recycled plastic.

It has also promised to reform the Packaging Producer Responsibility System, which aims to increase a manufacturer’s responsibility for the packaging waste they create — including plastic.

Manufacturers will be incentivised to create packaging that’s easier to recycle, and penalised for using hard-to-recycle materials such as black plastics.

What does this mean for me?

This is yet more incentive from the government for businesses to use recycled and recyclable materials for packaging.

To avoid the plastics levy, you should start to redesign packaging and source materials now to conform with the new rules — although notably the government says this tax is “subject to consultation,” so you should monitor the situation closely.

Autumn Budget 2018: Apprenticeships for small businesses

The government announced a host of new measures to enhance the existing government-sponsored apprentice scheme but, from the perspective of small businesses, they can be reduced to one key point: employers will now be required to co-invest only 5% towards the cost of training an apprentice, rather than 10% as before.

The government will continue to pick up the rest. However, the total government input is limited to £240 million.

What does this mean for me?

Many businesses both large and small are already making use of apprentices via the government’s scheme because, outside of providing opportunities to untrained workers, it is financially very attractive.

Apprentices need be paid at least the apprentice National Minimum Wage hourly rate for the first year (currently £3.70, rising to £3.90 in April 2019), with those under 19 continuing to earn at least the apprentice minimum wage rate for subsequent years and those over that age earning the government’s minimum hourly wage.

Bigger businesses with a wage bill of £3 million or more pay a levy to fund the apprentice scheme but this doesn’t apply to smaller businesses whose wage bills fall below that amount. Yet smaller businesses can still take advantage of the scheme.

With the required co-investment input into each apprentice’s training reduced to just 5%, apprenticeships are therefore even more financially attractive for small businesses, although there will still be an administrative overhead of teaming with a training provider and implementing the approved apprenticeship standard or framework.

Additionally, it’s also worth noting that the government announced that it is providing funding for the Institute for Apprenticeships and National Apprenticeship Service to increase the types of apprenticeships available.

If you have attempted to introduce apprentices but found your business was ineligible, it might be worth trying again once the new measures are in place.

Autumn Budget 2018: Wages for small businesses

The government mandated that the National Living Wage is increasing as of April 2019, along with the National Minimum Wage and apprentice hourly wages. The increases are as follows:

• National Living Wage (for those aged 25 and over): £8.21 (up 4.85% compared to the current £7.83)
• National Minimum Wage for those aged 21-24: £7.70 (up 4.34% compared to the current £7.38)
• National Minimum Wage for those aged 18-20: £6.15 (up 4.24% compared to the current £5.90)
• National Minimum Wage for those under 18: £4.35 (up 3.57% compared to the current £4.20)
• Apprentice National Minimum Wage: £3.90 (up 5.41% compared to the current £3.70)

What does this mean for me?

If your business employs individuals and pays them the National Minimum Wage, National Living Wage or National Minimum Wage for apprentices, then those employees should receive pay rises as of April 2019. If you don’t comply, you risk being fined by HMRC, as well as being named and shamed.

Autumn Budget 2018: Transport for small businesses

Fuel duty is frozen once again. Although vehicle excise duty (VED, or road tax) for cars, vans and motorcycles will increase in line with inflation as of April 2019, the Heavy Goods Vehicle VED is frozen for 2019-20.

The government says it will soon publish the results of consultation about VED for vans. They mention somewhat ominously that we can look forward to “environmental incentives” from April 2021.

What does this mean for me?

Hauliers or those needing to transport goods via HGVs will welcome the duty and VED freeze but business transport is clearly an area of government interest from an environmental perspective.

As always, whether to use in-house logistics or outsource to a third party should be examined in light of the new and forthcoming VED rates.

Final thoughts on the Autumn Budget 2018

Although contractors will need to closely inspect the IR35 rules, for other types of small business, there are some welcome incentives in this year’s budget.

As always, close scrutiny of the details may well pay dividends in terms of lower tax bills and increased funding opportunities.