Autumn Budget 2018: Key highlights for professional services firms
30 October 2018
Did you welcome the Budget announcement with alacrity? As expected, the headlines offered little surprise to professional services firms. Particularly significant however for was the announced delay to the introduction of the off payroll labour rule. We discuss this in more detail below and highlight the other key changes for professional services firms to consider.
Off-payroll rules extended to the private sector
The Government are reforming the off-payroll working rules (known as IR35) to help taxpayers comply with the existing rules and to bring private-sector organisations in line with public sector bodies and agencies.
In April 2017, the Government changed the rules for public sector bodies engaging workers through Personal Service Companies (PSCs), which shifted the responsibility for establishing whether IR35 applied to the engagement from the worker and their PSC, to their engager. Consequently, if the engager thinks IR35 applies, it is required to deduct PAYE from the payment it makes to the PSC, and pay employer’s NIC on that payment. This change will be introduced from April 2020. Small organisations will be exempt, but no details of which organisations will qualify for this exemption have yet been released.
Any professional services firm that engages workers through PSCs, or any other off-payroll labour, should take the opportunity to review their position and examine their potential exposure. The rules for IR35 are complex and do not apply in every scenario; it is important to establish how this change may apply to your organisation, and factor in the potential impact for your workforce.
Summary of key highlights:
- An announcement of more post Brexit contingencies - an additional half a billion funding for a no-deal Brexit and confirmation that a no-deal Brexit would mean an upgrading of the Spring statement to a full fiscal event. With many professional services firms taking a similarly prudent approach, is it the right time to assess your firm’s approach?
- Pay growth is currently at 3.1% and with the OBR projecting sustained wage growth in each of the next 5 years, we might expect some pressure on the profitability of some professional services firms.
- There were further changes to the people agenda, including:
- Employer's NIC charge on termination payments is delayed until 6 April 2020
- Apprenticeship levy reform to increase the fund sharing limit with employers in their supply chain from 10% to 25%,
- From April 2020, the Government plans to make the Employment Allowance available only to employers with an employer’s NIC bill below £100,000.
- Significant funding for digital investment was announced. From a tax perspective, this is supported by an increase in the ability to claim 100% allowances for capital spend through an increase in the annual investment allowance to £1m. There was some tightening on the ability to claim full relief through PAYE credits for R&D enhanced expenditure together with reform of the amortisation rules as regards goodwill. A restriction on the ability to amortise goodwill for UK corporation tax purposes on the acquisition of a business was introduced, with effect from July 2015. The Budget confirms that tax relief will be available for the amortisation of goodwill on acquisition of businesses with eligible intellectual property with effect from 1 April 2019.
- The Chancellor stated he would continue to encourage entrepreneurs, or rather those looking to turn around a business sale with the capital gains tax benefits of Entrepreneur’s relief that reduces tax on disposal to 10%. There was however an increase in the minimum holding period to 2 years and the claimant to have a 5% interest in both the distributable profits and the net assets of the company. The £10m lifetime allowance, which many thought might be cut in half, remains. These measures may have a small impact for those looking to sell a professional services business, although overall it is a welcome retention of the relief for those with short-term expectations of realising the value of their business.
- Perhaps a surprising announcement in a Budget looking to balance the books was that both the personal income tax allowance and higher rate threshold would be increasing a year ahead of being promised. One might expect this to be a welcome acceleration for many.
As is commonplace now for Budget statements, there will be more measures to counter tax avoidance, evasion and unfair outcomes. These measures include diverted profits tax, anti-hybrids, the permanent establishment rules whose nuances may affect a few firms. For additional details on these changes and for more information on the above highlights, please see our full budget commentary.