Budget 2020

Budget 2020 – Key Points

Newly appointed Chancellor of the Exchequer, Rishi Sunak, has just delivered his first ever Budget to the House of Commons, in fact the first Budget since October 2018 and it’s packed with implications for small businesses. We have highlighted below what would affect our clients the most. We have not gone into detail about other points covered in the Budget regarding the economic outlook and spending plans for the government.

Also please note that there has been no change in the bandings or amounts in respect of income tax thresholds for the 2020/2021 tax year remain the same as those for the 2019/20 tax year. My blogpost, DIVIDEND FOR 2019/20 .

IR35 changes will go ahead

The planned changes to how IR35 operates, moving the compliance requirements from the contractor to the client for large and medium-sized private sector businesses who engage freelancers, will go ahead from 6th April 2020. I have written a separate blogpost about this called ‘New IR35 rules – some guidance’.

Entrepreneurs’ Relief is restricted rather than abolished

There were rumours that Entrepreneurs’ Relief, which reduces the rate of capital gains tax to 10% on the sale of all or part of a business, would be abolished altogether.

This, thankfully, did not happen. Instead, everyone will be able to claim Entrepreneurs’ Relief on a maximum of £1million worth of eligible gains during their lifetime, down from £10million, with the reduction applying from Budget Day, 11th March 2020.

Coronavirus

The Chancellor began speaking about coronavirus as this being the most pressing matter globally and nationally. He introduced various measures to help businesses survive the outbreak. Here are the key points for you.

  • For small businesses with staff, including those who work through their own limited companies, where a director or employee has to self-isolate or falls sick with coronavirus, the affected individual can be paid Statutory Sick Pay for up to two weeks and reclaim the cost in full from the government. This relief applies as long as the business had fewer than 250 employees on 28th February 2020. As Statutory Sick Pay cannot normally be reclaimed, this could bring a welcome cash boost, however small, to your clients. This relief cannot be claimed by sole traders and partners who do not have employees. The rules around claiming certain other state benefits have been relaxed for the duration of the coronavirus outbreak but as not all self-employed individuals claim benefits, this will not help everyone.
  • Small- and medium-sized businesses affected by coronavirus have the option to apply for a loan under the temporary Coronavirus Business Interruption Loan Scheme. Under this new scheme, banks and other lenders will be able to make loans to affected businesses of up to £1.2million per loan, with up to 80% of each loan backed by a free government guarantee.
  • Small businesses in the retail, hospitality and leisure industries will pay no business rates for 2020/21 and many will also be eligible for a £3,000 cash grant to help meet their costs.
  • HMRC’s Time to Pay service will be scaled up to give businesses affected by coronavirus more time to pay their taxes. HMRC will also waive late payment fines and interest where a business is unable to contact HMRC or pay their tax due to coronavirus. Both options are potentially welcome news.

Increase in Employment Allowance

The Employment Allowance will be increased from £3,000 to £4,000 from 6 April 2020. The Primary Threshold and Lower Profits Limit will also both be increased to £9,500, however the Secondary Threshold remains unchanged. This would not necessarily have a drastic impact if you are taking a low salary.

Corporation Tax rate holds steady

The rate at which limited companies pay Corporation Tax was originally planned to fall from 19% to 17% on 1st April, but these plans have been axed. The rate of Corporation Tax will now remain at 19%.

Pensions

The tapered annual allowance on pensions has gone up. This measure increases the income limits used in calculating the tapered annual allowance and decreases the minimum tapered annual allowance. Threshold income, which is broadly total income before tax (less employee/personal contributions), is increased from £110,000 to £200,000. Adjusted income, which is broadly total income before tax plus employer contributions, is increased from £150,000 to £240,000.

The minimum tapered annual allowance is decreased from £10,000 to £4,000. The measure will have effect for the tax year 2020/21 and will be effective for benefits accrued on or after 6 April 2020.

Proposals to offer greater pay in lieu of pensions for senior clinicians in the NHS pension scheme will not be taken forward. Those with adjusted income over £300,000 will see a reduction in their annual allowance and will pay more tax consequently. Likewise, those with adjusted income below £300,000 are likely to see a reduction in the tax they pay because they are either no longer impacted by the taper and are entitled to the full £40,000 annual allowance, or they are still impacted by the taper, but their tapered annual allowance has increased.

A small business-friendly Budget?

While the measures to support businesses through coronavirus will be welcome, there is little tangible support for those self-employed traders who do not have business premises and for whom self-isolation effectively represents a two-week business shutdown. It is also disappointing to see the IR35 changes go ahead in spite of the ongoing House of Lords review and the questions raised by many contractors and representative organisations.

New IR35 rules

New IR35 rules – some guidance

Well the budget did not deliver for many of us and the new IR35 rules will be coming in from 6 April 2020. We have outlined some points about the new legislation below. If you have any questions, please give us a call or an email to arrange a call with Ron or Roshan.

The new off-payrolling regime in brief

Where a contractor’s personal service company (PSC) receives payments for work done by the contractor (you) from a non-small private sector client, the client must from 6 April 2020 determine whether or not the contractor would have been an employee if they had been hired directly, i.e. not via the contractor’s PSC. If the client determines that they would, then the contractor will be considered a deemed employee and the fees payable to the PSC will be subject to PAYE (with any VAT and expenses paid gross to the PSC).

What are your choices?

Generally, PSCs are (in many cases) automatically deemed to be inside of IR35 and thus being told that if they wish to continue contracting then they must go via an umbrella company. It is either this or the contract would cease from before 6 April 2020 and the contractor would have to go and find another contract (an outside of IR35 contract). From what we understand and have been told there are few outside IR35 contracts available in the market presently. Most of our clients have taken the umbrella contract as they effectively have no other choice and sometimes it is better the devil you know than the devil you don’t!

Having said that, many commentators are saying that slowly the market will respond to these changes and there will be outside of IR35 contracts available in the future (but no one will be able to tell you when). With that in mind, many of our clients are retaining their limited companies with the intention of getting an outside of IR35 contract in the future.

Some of our clients with large sums of money in their company bank accounts have even foregone taking an umbrella contract and are doing ‘nothing’ while the market responds to these changes. They are the lucky few!

Finally, some have taken permanent roles and we are in the process of closing their companies for them (see ‘Closing down the Company’ for more details).

What does contracting via umbrella company mean?

  • If going via an umbrella, then this would mean that your PSC would no longer be invoicing your client and you would become an employee of the umbrella company. The umbrella company would hold the contract for you to work for your end client.   
  • You would cease to take a salary and dividend from your PSC. (see ‘What about my company?’)
  • Once signed up with an umbrella company and becoming an employee of the umbrella you would send your timesheets to them.
  • The umbrella company would raise invoices to your client and receive funds for the work you have performed.
  • The funds received (excluding VAT) by the umbrella company less their fee and Employers National Insurance (roughly 12% of the funds received) is then processed as a gross salary with applicable deductions for Holiday Pay, PAYE (income tax) and Employees National Insurance.
  • The net pay is then paid to you each month and the applicable taxes paid to HMRC by the umbrella company.   

What about my limited company?

As already mentioned, some of our clients are retaining their limited company with a view that the market will respond to these changes and there will eventually be outside of IR35 contracts available.

We can effectively put your company in a ‘dormant’ state and reduce our fees accordingly. If you would like more information about this then please email Ron or Roshan on [email protected] or [email protected] to arrange a call.

Closing the company

In some instances, clients are choosing to close down their limited company. There are some options available here and it really depends on the funds left in the company as to how to close it down.

The starting point for closing is to produce a final set of accounts for the Company. This should be to the end of the month that the last invoice payment from contracting is received.

At the same time as doing this we would need to close the PAYE and VAT schemes and reconcile these to ensure that there are no further liabilities.

Once the final set of accounts have been approved by you and submitted to both Companies House then we will be able to close the company.

There are two methods of closing the company (Solvent Liquidation or Dissolution) and the method employed would depend on the level of funds left in the company. Ron or Roshan would be able to go into more detail on this over the phone or in a meeting but here are some details below.

Solvent Liquidation

If the PSC has over £25,000 of assets, then a solvent liquidation is a tax efficient option of closing the PSC. Any assets of the PSC (including residual cash) will be distributed to the shareholder(s) as a capital distribution meaning that a lower rate of tax can be obtained which currently stands at 20%. In addition, the shareholder(s) may qualify for entrepreneur’s relief which would lower that rate to 10% at current rates. A significant tax saving!

Dissolution

If the PSC has assets of less that £25,000 then a dissolution and strike off of the PSC may be an option of dealing with it in a simple and cost-effective manner. 

Autumn Statement

The Autumn Statement will be delivered by the Chancellor on 3rd December 2014. The Chancellor uses the Autumn Statement to update the public on government plans for the economy. However, with a general election next year, this Statement will be more focussed on delivering messages from the Conservative Party manifesto.
Any important updates will be written about on our website.