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Click here for our budget summary of the key tax data in the Budget of 16th March 2016.

Chancellor George Osborne delivered the Budget yesterday afternoon, the last before the EU referendum vote in June.

There were quite a few big announcements, most notably the changes to the headline rates of capital gains tax. However, some predicted changes, such as the limitation of incorporation relief for property rental business, have not come to fruition. For those with property portfolio’s held personally then an extremely beneficial tax planning opportunity still exists.

The needs of smaller businesses were a significant feature of the Chancellor’s budget including:-

  • Business rates – The threshold for claiming small business rate relief is to increase from £6,000 to £15,000, from April 2017.  It is estimated that 600,000 small firms will not have to pay business rates, and a further 250,000 will pay reduced rates.
  • Corporation tax – The main rate is going to be reduced to 17% (20% at present) with effect from 1 April 2020.
  •  Capital gains tax – The tax rate on the sale of equity in businesses will be reduced from April 2016 – the top rate from 28% to 20% and the basic rate, from 18% to 10%. Please note these lower rates won’t relate to Residential property sales.
  •  Fuel dutyThis is not going to be changed. Given that an increase was widely expected, this is a plus!
  • Stamp Duty Land Tax (SDLT) – The rate for non-residential (Commercial) freehold and leasehold transactions will only be payable on the portion of the consideration which falls within each band with immediate effect.

However, a couple of significant changes to note for business owners are the below increases.

Dividends

Tax is payable on dividends over £5,000 at the following rates:

7.5% on dividend income within the basic rate band

32.5% on dividend income within the higher rate band

38.1% on dividend income within the additional rate band

Directors overdrawn loan account tax increase

Rate of tax charged on loans to participators increases. From 6 April 2016 the rate of tax charged on loans (s.455 tax) to participators (currently 25%) will increase to 32.5%.

This article provides a round-up of the payroll changes that OMBs will need to be concerned with. There are four key changes affecting payroll from 6 April 2016.

Removal of the £8,500 higher paid employee rule

Currently, only directors and higher paid employees pay tax on benefits such as cars and medical insurance; employees earning less than £8,500 per annum are not taxed on such benefits. Historically, couples have been able to take advantage of this by employing the wife in the business in return for a small salary of say £5,000. As neither a director nor higher paid employee, she could then be given a company car tax-free – providing the benefit calculation does not put her above the £8,500.

From 6 April 2016, with the exception of ministers of religion, all employees will pay tax on all benefits and there is a new exemption for live in carers. Board and lodging provided on a reasonable scale at the home of the person they care for, will not be a taxable benefit.

  • Currently, many employers have a dispensation in place for business expenses that are reimbursed to employees. Where no such dispensation exists, employers must report reimbursed expenses on the employees’ P11Ds and employees must record these amounts as benefits on their self-assessment returns, making a claim on the return for the allowable cost element.

From 6 April 2016 dispensations are scrapped and a new statutory exemption is introduced for reimbursed business expenses. These amounts will not be reportable on the P11D nor by employees on their self-assessment returns.

The exemption applies to expenses that would attract a deduction under current legislation but it does not apply to salary sacrifice arrangements.

For the exemption to apply, there are two qualifying conditions that need to be satisfied:

  1. Payer must operate a system to check that the employee is incurring and paying for the expenses
  2. Neither the payer nor anyone operating the system knows or could reasonably know or suspect that expenses were not incurred or not deductible

Employers can apply to HMRC to reimburse expenses at a flat rate. Once approved, these flat rate amounts would also qualify for the reimbursed business expenses exemption.

Once the flat amounts are agreed, HMRC will issue an approval notice which will specify the:

  • rate at which the expenses are to be paid or reimbursed
  • date from which this takes effect (earliest date is the date of the notice)
  • date of expiry (no more than 5 years after the date of commencement)
  • type of expenses to which the approval notice applies.

HMRC will have the power to revoke these approval notices if an officer considers there is reason to do so and the revocation can be backdated to the date of approval.

  • From April 2016, there is a new system of voluntary payrolling of benefits that will allow employers to report and account for tax on certain benefits and expenses via the RTI system rather than on Forms P9D or P11D. Cars, fuel, healthcare and gym subscriptions can all be included but beneficial loans, living accommodation and vouchers cannot be payrolled.

Employers who want to register for 2016/17 should do so via their government gateway by 5 April 2016.

Once registered, HMRC will identify the employees who are affected and will issue revised tax codes which exclude the payrolled benefits.

Once the tax year has started you must continue to payroll the benefit or expense you’ve registered for the whole tax year or for as long as you provide it.

How it works

This new system enables you to collect the tax due on benefits and expenses by adding a notional value to your payroll run.

Before making the first relevant payment to an employee in a tax year, you need to calculate the cash equivalent of the annual benefit (say a company car benefit of £3,000). You then need to determine the number of payments to be made to the employee in the tax year and divide the cash equivalent by the total number of payments to be made. So if paid monthly, divide the £3,000 car benefit by 12 to arrive at a notional value of £250 per month. This notional value is included in the monthly payroll for tax calculation purposes. The individual should not see any difference to their monthly tax as previously their coding reflected the car benefit.

All payrolled benefits are reported in your Full Payment Submission so no P11D or P46(Car) is needed but you do still need to complete Class 1A form P11D(b).

  • Currently employers can agree with HMRC that some benefits are trivial and need not be reported. However this can be burdensome for the employer and HMRC and is disproportionate to the tax and NIC that would be due.

From 6 April 2016 a statutory exemption is being introduced for trivial benefits. To qualify as a trivial benefit the following conditions must apply:

  • The trivial benefit must not be cash or a cash-voucher (s.75 ITEPA 2003)
  • The cost of providing the trivial benefit must not exceed £50
  • The trivial benefit cannot be provided by way of a contractual obligation or salary sacrifice arrangement
  • The trivial benefit must be given for a non-work reason e.g. birthday or social event

For close companies there is a £300 annual cap for directors and other office holders and family members but when those family members are also employees, they will get their own £300 annual cap