There were three tax surprises in the Autumn Statement on 23 November 2016 which may need action within this tax year.
VAT flat rate scheme (FRS)
The FRS is used by numerous small businesses to simplify their VAT reporting, but many businesses also gain a cash advantage from using the scheme. The Government believes that some businesses have been abusing the FRS by using it as the law intended.
To counter this perceived abuse, ‘low-cost traders’ will be required to use an FRS percentage of 16.5% from 1 April 2017. This means they will have to pay VAT to HMRC calculated at 16.5% of their gross sales, rather than using the FRS percentage relevant to their trade sector (typically 12% to 14.5%).
A low-cost trader is one whose expenditure on goods (not services) is less than 2% of their gross turnover, or if more than 2% of turnover, the amount spent on goods is less than £1,000 per year. Any expenditure on capital items, motor expenses, or food or drink for consumption by the business is ignored when working out the 2% or £1,000 threshold.
This emphasis on goods will discriminate against businesses who incur VAT on services such as rent, software licences, IT support, digital journals, sub-contractors and telecoms. Businesses operating in the knowledge and service sectors may well lose the cash advantage of using the FRS.
Businesses who are trading under the VAT threshold of £83,000 may want to deregister from VAT with effect from 1 April 2017. Those trading over the VAT threshold may need to withdraw from the FRS from the same date, but will not be eligible to deregister from VAT.
Employee shareholder scheme (ESS)
The ESS was one of George Osborne’s big ideas in 2013. He was persuaded that employees would be more productive if they held shares in the company they worked for, and the employer could be encouraged to offer shares if the employees were allowed to surrender employment rights in return for shares.
Under the ESS, employees receive at least £2,000 worth of shares if they sign an employee shareholder agreement which explicitly removes a set of statutory employment rights, including redundancy pay. The shares are awarded free of tax and NIC, but the company can claim a tax deduction for the cost of supplying them.
When the taxpayer disposes of those ESS shares, the first £100,000 of gains are free of CGT. If the ESS shares were awarded under a shareholder agreement signed before 16 March 2016, the CGT exemption was restricted to £50,000 of ESS shares, as valued on acquisition. This effectively gave an unlimited CGT exemption on disposal.
Those income tax, NIC and CGT reliefs for the employee are removed for shares awarded under employee shareholder agreements entered into on or after 1 December 2016. However, the corporation tax deduction for the employer remains in place.
Once you reach the age of 55, you can access the savings built up in your money purchase (defined contribution) pension scheme. If you take any more than the tax-free lump sum, your future pension contributions are restricted to £10,000 per year.
This restricted allowance is called the money purchase annual allowance (MPAA). Its purpose is to discourage pensions recycling; i.e. drawing funds from a money purchase pension scheme, then placing those funds in another pension scheme, attracting additional tax relief. Unlike the normal annual allowance, any unused MPAA can’t be carried forward to be used in a future tax year.
In 2017/18 the MPAA will be set at £4,000. You need to consider this restriction when deciding whether to start drawing pension benefits in the future.
Rebecca Cave is co-author of Capital Gain Tax Reliefs for SMEs and Entrepreneurs, Tax Planning, Core Tax Annual: Capital Gains Tax and Bloomsbury’s Tax Rates and Tables, all published by Bloomsbury Professional.