A review for Independent Practitioner Today by Vanessa Sanders, partner, Stanbridge Associates specialist medical accountants.
To continue to cut the deficit of public borrowing but to increase public spending and investment in infrastructure seem policies at odds. The government has borrowed less this year than budgeted, its tax take was larger and the economy has continued to grow, albeit at a level well below that of our G7 colleagues, but Budget 2018 certainly brings some change which will not be welcome for doctors.
There has been a trend of manipulating the relief given to entrepreneurs when selling or closing their business, so HM Revenue and Customs has reacted by closing down many of the loopholes using legislation. One loophole involves ‘phoenixing’ from one company to another extracting funds at lower rates of tax subject to capital gains rather than income taxes.
HMRC’s current action continues the fight to ensure the relief is available only to genuine entrepreneurs. In addition to the two-year period post-sale or closure preventing any entrepreneur from engaging in the same or similar activities, the law has extended the period prior to sale or closure.
In order to qualify for the 10% rate of capital gains tax, three changes will come into effect:
- A new minimum two-year period of ownership required for sales or closures made on or after 6 April 2019 (previously 12 months).
- At least a 5% shareholding which is entitled to both distributable reserves and underlying net assets. This requirement is immediate from 29 October 2018.
- The definition of a personal company will also be tightened up, which may bring into focus consideration of reserves retained in the company rather than having been distributed across the trading periods of profitable companies.
Corporation Tax rates to remain at 19% for the financial year beginning 1 April 2019.
Employment Allowance reform
From 2020, legislation will restrict access to the £3,000 National Insurance Contribution’s (NIC) Employment Allowance to employers with employer NIC liabilities of under £100,000 in the previous tax year. Connected employers will have their contributions aggregated for this purpose. This is unlikely to affect most doctors running small businesses, but the restriction for employing domestic help including nannies, remains in place.
Annual Investment Allowance increased
The Annual Investment Allowance (AIA) is to be increased from the present £200,000 to £1m from 1 January 2019 to 31 December 2020. This is unlikely to affect many doctors, although in some circumstances, such as where large groups have been formed operating as limited liability partnerships (LLPs), there remain restrictions on claims for annual allowances, so take advice before investing.
The special rate of writing down allowance is to be reduced from 8% to 6% with effect from April 2019.
Many doctors taking up locum positions in hospitals will have felt the effect of reduced rates when the onus shifted from the personal services company to the employing agency for accounting for taxes on the worker. Whether or not doctors agree with the public sector changes, a system differentiating between public and private sector for the calculation of taxes is not acceptable.
These changes made to IR35 arrangements in the public sector are to be rolled out to the private sector with effect from April 2020, but some small firms will be exempt.
This is a complex area, as, in reality, there have been no changes to the legislation surrounding the tax, merely to whom is responsible for applying this legislation. This may mean some retrospective action is about to hit from HMRC on companies which have operated on the edges of this arena.
Tax relief for electric charge points to be extended
First year allowances available for electric charge point installation is to be extended for four years, until the end of the financial year 2023.
Research and Development (R&D)
The amount of repayable tax credit claimed under the R&D tax relief scheme for small to medium-size companies will be limited to three times the company’s total PAYE and NIC payments for the period. Loss not surrendered will be available to be carried forward and used against future profits.
Value added tax (VAT)
The VAT registration threshold will remain at £85,000 until 31 March 2022.
From 6 April 2020, the insolvency rules will alter to ensure HMRC become a preferential creditor on winding up. Taxes collected on behalf of employees and customers, which include employees’ PAYE and NIC and customers’ VAT, will be paid before any distribution to other creditors.
2% digital services tax
From April 2020, the major social media, search engine and online retailers will be subject to a 2% tax on revenues generated from UK consumers. Should an internationally recognised levy be introduced, it is likely the UK would fall in line and replace this 2% UK tax.
… there is some good news for individuals (although not all)
Personal tax allowance
Personal allowances for Income Tax will rise from £11,850 2019 to £12,500 for 2020 and 2021. These changes to personal tax allowances will apply to the whole of the UK. But the rates of Income Tax and tax bands apply to England, Wales and Northern Ireland only, as the Scottish Parliament now set its own Income Tax bandings.
Income Tax bands, rates and the dividend allowance
The Income Tax bands for 2020 have been increased:
- Basic rate band increased to £37,500 (2019: £34,500);
- Higher rate band £37,501 to £150,000 (2019: £34,501 to £150,000);
- Additional rate remains on income in excess of £150,000.
If you retain your personal allowance, this means that the higher rate threshold will not kick-in until income levels exceed £50,000 with effect from April 2019.
There are no changes to the rates of income taxes applied to dividend income, which remain at:
- First £2,000 at 0%;
- Basic rate taxpayers taxed at 7.5%;
- Higher rate taxpayers at 32.5%;
- Additional rate taxpayers at 38.1%
This increases the scope for family-owned companies to benefit.
Individual Savings Accounts (ISAs)
ISA limits remain at £20,000 for 2020, but for Junior ISAs and the Child Trust Fund, the limits will increase to £4,368.
As anticipated, the life-time limit on pension savings increases in line with inflation to £1,055,000 for the 2020 tax year.
There have been no changes to the claw-back via the pension tax charges, although it would appear that the NHS pension schemes will now accept voluntary Scheme Pays requests for excesses more than the £10,000 annual allowance.
This is an enormous help in terms of cash flow for doctors enjoying significant growth on their retirement plans only to be thwarted by the pain of having to find extra tax of up to £13,500 annually in addition to their initial contributions via salaries to fund it.
A note of caution should be injected, however, as any deduction applied to a pension savings’ pot will bite into the amount of pension provided at the date of retirement. Advice should be sought before any action is taken.
For those whose offspring are in higher education, there are ways of helping them with ownership in your family company. However, for those requiring loans, the thresholds and rates for student loan repayments for 2019 for England and Wales have been confirmed as follows:
Plan 1: £18,935, 9%
Plan 2: £25,725, 9%
Postgraduate loans: £21,000, 6%
… But changes to property laws are not all good news
Stamp Duty Land Tax (SDLT)
For first-time buyers in England, there is a relief from stamp duty on the first £300,000 of homes purchased up to a market value of £500,000. The Chancellor announced an extension to this exemption introduced in last year’s Budget, so that those buying shared-ownership properties may now also apply to take advantage of this scheme.
The remainder of the value over £300,000 will be charged at 5%. Relief is not extended to further shares purchased and will not apply to purchases of property valued at over £500,000. No SDLT will be chargeable on the associated lease for the rented part.
This tax break is retrospective, meaning any first-time buyers who have paid stamp duty after 22 November 2017 can claim a rebate. This is likely to benefit only a few; possibly those having to live in cities in the South with richer parents. Hence, it may be that doctors are going to be rewarded for putting their hands in their pockets to help their children step onto the property ladder.
Be wary of allowing young people to own homes without restrictions. This is a complex area and advice should be taken to ensure any arrangements put in place achieve what is the desired outcome.
Principle private residence (PPR)
In years gone by, there were some periods for which there were exemptions from calculating capital gains when you sold your PPR if you had not lived in it for a few years:
1 Final period of ownership
This was initially exempt for the last 36 months of ownership – which was very valuable when you had two homes, as you could decide which was more pertinent in financial terms to call your home. Of course, you have to hold evidence that the property was used as your PPR, but this was a valuable exemption.
However, MPs (probably not all of them, but there are always a few who spoil it for the rest!) put paid to the length by manipulating which residence they termed a home and the exemption came under public scrutiny.
The time was reduced to 18 months for the final period of ownership. Now this will reduce again with effect from April 2020 to nine months.
There is no change to the 36 months available for those who are disabled or in care homes.
2 Lettings relief
There is to be a new restriction to lettings relief . This relief is used by people who rent out their home for a period, perhaps because they are forced to work away for an extended period like many doctors who take a sabbatical overseas for a year; or when they move, it has been difficult to find a buyer.
Usually there is a relief of up to £40,000 of capital gain per owner, which is deducted when calculating any gain upon sale. This was a very valuable relief on properties where doctors have moved on from a smaller property but retained it to let out.
From April 2020, lettings relief will only be available where the owner and tenants are in shared occupation. Hence, any doctors holding on to second properties in which they once lived should consider whether now is the time to cash in on any potential gains. A word of warning, however. If your spouse did not live in the property, be careful if you have transferred ownership to access their capital gains annual allowances and/or lower rates of tax – do the maths!
Payment of taxes
Changes will apply for the dates of making payments of capital gains taxes arising on sales of UK properties with from April 2019 for non-UK residents and April 2020 for UK residents. Payments on account will now be due.
Hence, the cash flow of those selling second homes will be impacted by this new requirement to make swift payments on account of any capital gains tax following completion. The tax rules for gains made by non-residents will also be tightened up and will apply equally to non-resident companies.
Finally, if all of that is too much and you need an alcoholic beverage …
There are to be no increases on the duty charged on beers, cider or spirits with the exception of high-strength ciders, which, together with wine, will suffer duty increased in line with inflation from 1 February 2019.