Nigel Hastilow, Director, Enterprise, ICAEW, reacts to the Chancellor Philip Hammond’s Budget U-turn.
The immediate reaction to Chancellor Philip Hammond’s Budget was to wonder if the Government had it in for entrepreneurs. The embarrassing U-turn on National Insurance (NI) contributions for the self-employed suggests that, if there was ever any plan to penalise people who work for themselves, it may not have lasted very long.
Mr Hammond raised National Insurance contributions for the self-employed by two per cent and cut the tax free dividend rate for entrepreneurs from £5,000 to £2,000.
Both of these moves are apparently aimed at creating a ’fairer’ balance between regular employees and those who are self-employed. And the aim is to equalise the tax-take upwards because the Treasury believes entrepreneurs have been getting away with paying too little tax for too long.
The result, though, suggests a Government which is anti-enterprise even though Mr Hammond declared at the start of his Budget speech that Britain was open for business and his aim was to make it the best country in the world to start and grow a business.
His initial decisions belie that statement but the subsequent row, and his decision to stick to the Conservatives’ manifesto commitment not to raise NI, suggest he may now be back on track.
He did tinker about with business rate relief which should, in theory, cushion the impact of big rises faced by companies in high property-value areas like London and the South East.
But that is being achieved at the expense of other businesses in the rest of the country which are supposed to be enjoying a rate cut.
The economic background of the Budget is, however, more promising. Despite the continuing uncertainty caused by two years of Brexit negotiations, the Chancellor said growth forecasts for the next few years were around two per cent.
For many businesses, that is a far more important consideration than National Insurance increases. But he certainly left the impression that ’fairness’ just means raising taxes on small businesses.
This failed to take into account the risk-reward ratio. If ’fairness’ took into account the risk-reward ratio and the potential of small businesses to grow, creating jobs and wealth, Mr Hammond would not look on them merely as lucky tax-dodgers who are not doing their bit to boost HMRC’s income.
In the long term, taxes which stifle entrepreneurship are likely to be counter-productive for UK plc.
Elsewhere, the Budget does offer some limited good news. Small businesses and landlords under the VAT threshold will have an extra year to prepare for ‘making tax digital’ – the requirement by HMRC for every company with a turnover of more than £10,000 to file quarterly tax returns. This will now start in April 2019.
However, ‘making tax digital’ is still a worry for many companies. Not only does HMRC estimate it will cost every business between £280 and £3,000. The Federation of Small Businesses puts the cost at £2,770.
This will not be the end of the expense either. HMRC estimates small businesses are under-paying tax to the tune of between £700 million and £800 million a year and that this money will be recouped thanks to the new system.
The Chancellor’s decision to cut the tax-free dividend allowance from £5,000 to £2,000 from April 2018 reduces the differential between the self-employed and those working through a company. However it will limits the incentive for small businesses to set up a limited company and pay profits in excess of the proprietors’ Income Tax Personal Allowance as dividends.
From a tax perspective forming a limited company will probably require the business to be making at least £35,000/ £40,000 per year in profits to be tax-efficient and to cover the additional administrative costs. It is wise to have a discussion with an accountant before deciding which format best suits your business’s circumstances.