FreeAgent's Chief Accountant, Emily Coltman FCA, takes a look at today's Budget and what it entails.
The Chancellor, George Osborne, promised in today's Budget that the annual tax return is set to be abolished, with information being uploaded automatically, tax collection "radically simplified", and online portals to manage tax.
What isn't clear yet, either from his speech, or from the full Budget report, or from the government white paper "Making Tax Easier", is just how this will happen.
Tax returns do include information that HMRC already has, such as salaries for directors of limited companies, but they also include a great deal of information that's not visible to HMRC until the tax return is filed, such as sole traders' income and expenditure, rental income from let properties, and sales that give rise to capital gains tax. How will this information be collected? Will sole traders be compelled to report their income and expenditure to HMRC in a system similar to RTI? Will all institutions have to share their customers' financial information with HMRC?
This is all still "to be announced" or "to be consulted upon", though the "Making Tax Easier" white paper mentions the possibility that by 2020, small businesses will be able to link their accounting software to government systems to share financial information. It also says that "taxpayers will still be responsible for ensuring their tax bills are right and telling HMRC about information that is not reported by other means".
Payment of income tax and NIC
Additionally, the government plans to implement "a new payment process to enable tax and NICs to be collected through digital accounts, instead of Self Assessment". This could spell the end of twice-yearly payments and the attendant payments on account, which cause cash flow difficulties for many small business owners. The "Making Tax Easier" white paper mentions a "pay-as-you-go" option for tax, though again the detailed mechanics of this are not yet explained.
Is this change for the good?
Abolition of the tax return would be a massive change for both small business owners and their accountants, but whether that change is positive or otherwise, I reserve my judgement until I have seen how this will work in practice. RTI payroll reporting has been far from trouble-free, so I have my doubts as to how well a similar system would work for collecting other data.
Class 2 National Insurance to be abolished
Class 2 National Insurance, the flat-rate National Insurance which entitles the self-employed and partners to certain State benefits, is also to be abolished in the next Parliament. The contributory element will be replaced by a reform to Class 4 National Insurance. The mechanics of this reform haven't yet been decided; there's going to be another consultation on that.
This simplification is welcome, as having two kinds of National Insurance to pay is confusing for partners and the self-employed.
The Annual Investment Allowance
The Annual Investment Allowance (AIA), an allowance that gives 100% tax relief on the cost of many items of new equipment that a business might buy, is due to fall to Â£25,000 from 2016. Although the Chancellor did not promise to keep AIA at its current level of Â£500,000, he did say that a drop to Â£25,000 was "not acceptable" and that the revised level, to be announced in the Autumn Statement, would be "much more generous".
Restriction of travel and subsistence relief
The government has been investigating the possibility of restricting the availability of tax relief on "home-to-work" journeys for individuals operating through agencies. The Chancellor mentioned this in passing in his speech, promising to "protect the genuinely self-employed", and the full report did not detail the proposed changes, which are due to take place in April 2016. Instead, the report said further consultation was needed, but mentioned that the measure would affect both umbrella companies and personal service companies. So this is another case of "watch this space".
So, as we might expect from a Budget that pre-dates a General Election by less than two months, there are a great many promises here of simplification and radical change in the future, and very little in the way of definite and immediate changes for small business owners. Watch this space!
Emily Coltman is Chief Accountant at FreeAgent
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