Insights

This was a highly unusual Budget for a lot of reasons. It was held on a Monday afternoon instead of the normal early lunchtime slot. It is the last official Budget before the UK leaves the EU. It was also much longer than Budgets have been in recent years and contrary to expectations, there were actually quite a lot of interesting new announcements.

What we expected to hear

Optimism was pretty high and the Chancellor increased his growth forecast for Q4 2018 from 1.3% to 1.6%. In March, the Budget deficit for 2018/19 was forecast at £37.1bn for this fiscal year, but this was cut to £25.5bn. There was almost no mention of Brexit. With no deal on the horizon still, there is very little to say, except that an extra £500m has been set aside in the event of the UK leaving without a deal in place. This brings the current total pot available for Brexit related bailouts to £2bn.

Plastics tax

Many of the policies announced were exactly as expected. We knew there would probably be a plastics tax and there was. All plastic packaging imports that contain less than 30% recycled plastic will face higher taxes in the future. The government is consulting over what to do about single use plastic cups and other ocean polluting materials.

Digital services tax

We also expected some form of digital services tax, either to support struggling high street retailers or as a way to ensure the tech giants could not continue to gain by circumventing the current tax system. We got the latter in what seems to be a popular policy. From 2020, the likes of Google, Facebook, Netflix, Apple and co will have to pay a new UK digital services tax of 2% on all revenues generated through service provision in the UK. A much fairer system for all, which is expected to raise over £400m in the coming year. That’s a reasonable proportion of the money needed to prop up the economy if there’s a no deal Brexit!

High street retailers (including public lavatories!) will get additional support, in the form of a substantial one third off business rates. This is available to all retail businesses with a rateable value of £51K or less over the next 2 years.  In addition, the government is providing a £675m fund to support the re-development of local high streets, which includes developments focusing on transforming empty properties into residential homes.

What were the surprises?

Capital allowances

The large Annual Investment Allowance (AIA) increase wasn’t expected at all. For a two-year period from 1 January 2019 to 31 December 2020, AIA will be increased from £200,000 to £1m. In the current age of automation, robotics and the Internet of Things, this is clearly good news for business owners. It’s offering them a big incentive to bring forward any investments in new technology they might have been planning, especially in industries where there are already skills shortages or that could be hit with resourcing issues post-Brexit.

Personal tax

Personal tax thresholds were further increased, representing a tax cut for 32m people. We were anticipating the increases to the personal allowance for basic and higher rate tax payers as promised in earlier Budgets, but we didn’t expect the changes to be brought forward to become effective from April 2019. That appears to be a real pre-Brexit sweetener, which the Chancellor says is possible because of better than expected OBR estimates for public finances. Now, from April 2019, the personal allowance will rise to £12,500 (currently £11,850) and the higher rate taxpayers’ threshold will become £50,000 (currently £46,351). This means an extra £130 for basic rate taxpayers and £730 a year for higher rate tax payers. Minimum wage levels will also rise from April 2019, by 4.9%, to £8.21 (currently £7.83).

Entrepreneurs' relief

There were rumours circulating that entrepreneurs’ relief would be cut to save money, but given the uncertainty surrounding Brexit, this would have been a very unpopular announcement. There have been some changes to the qualifying conditions however, which extend the qualifying minimum holding period from 12 months to 2 years; for disposals taking place from 6 April 2019 a qualifying asset will need to have been owned for at least two years to qualify for the relief. In addition, shareholders must be entitled to at 5% of the net profits, distributable profits and net assets of a company to be able to claim entrepreneurs’ relief, in addition to holding 5% of the ordinary share capital.  This means business owners looking to exit and take advantage of this relief will need to undertake tax planning much earlier than they did before, to ensure that holdings are optimally structured in the event of a sale.

More support for small business owners is available in the form of the apprenticeship levy, which is being cut from 10% to 5%, to make it easier and more financially viable for the smallest firms to take on apprentices.

Capital gains tax

Capital gains tax (CGT) on property continues to be a favourite target for the Chancellor; from April 2020, there will no longer be £40,000 lettings relief available for residential buy to let landlords, with the exception of cases where the owner and the tenant are in shared occupation. There will also be a reduction in the current 18 months final qualifying period for principal private residence (PPR) relief. Currently, landlords who sell a property that was formerly their PPR are exempted from CGT on gains arising in the final 18 months of ownership. This is being cut to 9 months from April 2020, which means landlords in this position should carefully consider the implications as soon as possible.

R&D tax credits

R&D tax credits will also remain as one of the UK’s key tax relief policies for business owners.  To prevent abuses, the former PAYE restriction is being re-introduced for small and medium-sized companies. This means that the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be limited to three times the company’s total PAYE and national insurance liability for that year, starting April 1, 2020.

Next steps

Some of the policies announced in this Budget will have implications in the medium term. If you would like to discuss any of these developments in detail, please contact us directly.