UK: Business Taxation Changes In The UK

Last Updated: 5 August 2015
Article by Neil Arthur

Our Senior Director of Corporate Accounting Services examines the key UK Summer Budget announcements that affect businesses.

On one hand the Conservative government's much touted triple lock on rates of income tax, NI and VAT increases gives business some degree of certainty for the next four or five years. However as you will see, there are still a vast array of changes to take into account.

National Living Wage increase

A new National Living Wage (NLW) of a minimum £7.20 per hour is going to be mandatory for people over the age of 25 from April 2016 compared to the National Minimum Wage (NMW) which is due to rise by 20p to £6.70 per hour from 1 October 2015.

For many sectors the introduction of NLW will not make much of a difference however the leisure, hospitality, care and retail industries will feel quite an effect as a lot of employees are paid according to the NMW.

The higher NLW is going to significantly impact their costs as the proposed rise to £9 per hour by the year 2020 is a big increase in real terms, particularly if inflation remains low.

The NLW and NMW increases will result in pressure on staff numbers (outside of regulated industries) and consequently prices are likely to go up. One unknown is what effect the higher NLW will have on numbers of EU nationals coming to the UK for work. Many of these people are happy to work here earning the current NMW!

Corporation tax rate cut

The main rate of corporation tax is being cut to 18% by 2020, and it will reduce to 19% from 1 April 2017 as part of the phasing in process.

The quarterly corporation tax payment dates for companies are being brought forward – to the 3rd, 6th 9th and 12th months of the accounting period starting on or after 1 April 2017.

Although it applies only to companies with taxable profits of more than £20m, those who are part of a group see their profit figure reduced by the number of active companies in the group, including companies overseas, so this could affect even very small operations if they are subsidiaries of large groups.

Loan relationship and derivative contracts

The taxation rules relating to these contracts are likely to change from accounting periods starting on or after 1 January 2016. The intention is that in future, the accounting treatment will be used as the tax basis for most situations. This will mean that only those movements that go through the profit and loss account will be taxed.

Those movements that go through other statements in the financial accounts, such as the comprehensive income or changes in equity statements, will not be taxed.

Restriction on corporation tax relief for expenditure on business goodwill and amortisation in the case of acquisitions

Whereas previously tax relief was available for expenditure on goodwill or customer related intangible assets, after 8 July 2015 this will no longer be available. The major impact of this is when people are looking at acquisitions they will need to take into account the adverse effect on cash flows arising from the tax relief that is no longer available.

Fixed annual investment allowance for expenditure on plant and machinery 

With effect from 1 January 2016 the annual allowance will be set at £200,000 for the life of this parliament. This figure used to fluctuate virtually every year, so the set figure is a positive move as it does give certainty to businesses for making their investments over the next few years.

Employment taxation

  • The only really significant change introduced by the Summer Budget is the increase of the employment allowance from £2,000 to £3,000 as of April 2016, which will help small businesses.
  • Some of the more important measures are at the consultation stage, for example the employment intermediaries travel and subsistence expenses; this is where people are employed as contractors by companies through an intermediary (personal service company, agency arrangements, umbrella companies and so on). The aim is to try to stop cases where people are working from 'home' when in fact they are working from the same place every day, and still claiming their travelling expenses from home as a deduction. A consultation document will be published to discuss how this issue can be addressed. The sting in the tail is that the engager (company that's hiring the contractor) can be responsible for picking up any PAYE and NIC liability arising by default in applying the new legislation by the actual contractor. This may make companies very careful about employing people through this type of arrangement. There will no doubt be significant opposition by engagers and contractors to these changes.
  • Salary sacrifice arrangements are also under government scrutiny. These type of arrangements have been commonly used for making additional company contributions to employee pension schemes which are not subject to national insurance thereby benefitting both employer and employee.  The government has accepted this as a form of "legitimate" tax structuring; however they are going to examine whether it may be resulting in the loss of too much NI income.
  • The tax status of termination payments is also being reviewed as currently, payments of up to £30,000 are free of tax and NI.

Tax structuring

It does seem as though there is going to be a general "tightening up" of the system in terms of identifying companies that take advantage of tax structuring schemes that may or may not work, and large companies will be required to publish their tax strategy so that the public can see what their views are. I believe we will see most big groups in the UK steer away from going into these more esoteric structuring schemes that some may have entered into in the past. It's all part of the government's attack on tax structures which undoubtedly do result in the loss of quite a lot of revenue to the country.

Summary

When you examine it in its entirety, George Osborne's Summer Budget can be seen as quite revolutionary. The Chancellor has been bold, and there is undoubtedly going to be extra tax payable by both business and individuals in many cases.  It will be interesting to see how businesses will react to the introduction of NLW and its effect on employment which seems to be shifting part of the benefits bill from government to business. It will also be interesting to see whether inward investment into UK from overseas, from which the UK benefits hugely, will be affected by this change.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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