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A Budget for Business?

 

AFTER every Budget and Autumn Statement, I am asked by a wide variety of business people for my opinion on the budget in respect of the business sectors.

 

I believe that this is in response to the fact that while there is widespread media coverage on the budget itself, little attention is paid to the impacts for business owners.

 

In this article, I will duly offer my personal assessment on Wednesday’s budget, and therefore please bear this fact in mind; this is an opinion piece.

 

This is because I do not wish to provide you with a dry ‘fact by fact’ review – those are widely available in a multiplicity of digital and print publications.

 

Instead, I will offer my take on the budget for business people, focused on answering the question ‘what will this really mean for my business?’

 

 

 

Making Headlines

While the Chancellor most certainly will not have intended it to be so, the changes in taxation for the self-employed was the headline act of the budget.

 

Indeed, as even the BBC’s title headline read after the budget ‘Self Employed Hit by National Insurance Rise’.

 

But beyond the headlines, what are the changes announced by the Chancellor?

 

Let’s start with the four types of National Insurance, as they were before the budget and how the announced changes affect each type:

 

  • National Insurance Class 1 – this is a tax paid by employees at a rate of 12% on salaries over £8,000 per year, then dropping down to 2% for higher rate taxpayers on the remainder of their earnings (currently over £43,000 per year*). No changes have been made to this tax.

 

* This bracket is set to increase to £45,000 in the next financial year

 

  • National Insurance Class 2 – this is a tax paid by the self-employed who have low earnings (introduced so that they could still qualify for matters such as the old age pension) that was due to be abolished, and now confirmed to be removed from April 2018.

 

  • National Insurance Class 3 – this is a voluntary tax that can be paid by people, who have generally missed contributory years at some point, in order to boost benefit entitlements. No changes have been made to this tax.

 

  • National Insurance Class 4 – this is a tax paid by the self-employed on earnings (i.e. pre-tax profits) over £8,000 per annum. This is currently paid at a rate of 9%, but the Chancellor has increased this to 10% from April 2018 and 11% in April 2019. (And like Class 1, this is paid at a rate of 2% by higher rate taxpayers, which has not changed).

 

Why The Backlash?

All of this begs the question, what does this change mean and why has it caused such a backlash?

 

Put simply, it means that the self-employed with earnings over £16,000 per year are going to pay more tax. On paper, this breaks the very clear manifesto pledge in the Conservative manifesto of 2015, stating that National Insurance will not be increased (the Chancellor is now claiming that this only referred to Class 1 National Insurance, however I have since read the manifesto from cover to cover and on four occasions it simply states National Insurance, not ‘Class 1 only’ or anything else to this effect).

 

However, much of the disquiet owes more to the true nature of the attack – that of all the groups to target, it is the basic rate tax paying self-employed. Not only are these generally considered a hard-working group (and not the ‘fat cats’) but also are a group typically looked after by the Tories, as they are viewed as natural Conservative voters representing small c values.

 

The Chancellor’s defence, in addition to the non-existent small print about the manifesto pledge, is that as the number of people self-employed is growing and as they pay less National Insurance than employees, the tax base is being eroded.

 

What strikes me most about this riposte is his incredible naivety – both politically and economically.

 

 

Politically Naive

Politically speaking, notwithstanding the foolhardiness of breaking a manifesto pledge, self-employed people earnings less than £43,000 are politically popular; they are viewed as strivers who have taken it upon themselves to make their own way in life. This is especially true within the Tory party.

 

Politically, there is widespread discontent about ‘tax avoidance’ however this is regarding the large corporate bodies (legally) avoiding millions and in some cases billions each year in taxation.

 

The key point here is legally; the tax avoidance adopted by many household names is legal. As the government is responsible for law-making, the Chancellor could have addressed this in a budget by closing the loopholes that allow people to violate the spirit of the law, if not the letter.

 

Such an act would have been politically very popular (as is evidenced in the muted response to the reduction in the dividend tax relief, see below for more on this); doubly so given that it would steal the (just about only remaining) thunder of the Labour Party.

 

However, he elected not to do this but instead attacked a group who are themselves politically popular. It strikes so very visibly as ignoring the big tax avoiders (which, if recouped, would raise billions annually in avoided tax, not a few hundred million as the proposed change will raise) and instead picking on the ‘little guys’.

 

 

Economically Naive

I believe that this move is economically naive because the government is largely responsible for the rise in self-employment, chiefly owing to (a) its failure to stimulate genuine growth in the economy and (b) its aggressive austerity programme that has led to government sector spending cuts, which results in job losses in both the government and private sectors which serve the government sector.

 

Simply better governmental stewardship of the economy would have avoided such a rise in self-employment.  This seems entirely lost on the Chancellor.

 

Moreover, it adopts a very short-sighted view of self-employment. The very nature of self-employment means that the early years are the hardest (indeed, by some counts, 80% go bust in the first year alone, such is the challenge), with many self-employed people working alone in the early stages of the burgeoning business.

 

However, as time goes by and crucially, as the economy picks up and grows at a decent pace (something it last did a decade ago), new businesses not only become more profitable and thus pay more tax, but they also employ people (or more people if an existing employer).

 

The net result of the above steps is increased tax revenue and net economic growth, both of which should be encouraged by the Treasury. However, tax too heavily in the early years and you stifle a small business meaning that it may never reach its full potential. Hence tax and employment rates attenuate unnecessarily.

 

More widely, perhaps the most basic function of taxation is to diminish something; you tax something that you want to discourage. Very simple examples are the high taxes on cigarettes and alcohol, or more recently, the sugar tax.

 

Hence if you further tax self-employment, you discourage it. Hence in very simple terms, one can only conclude that the government wishes to reduce self-employment. This would be an alien concept to the proud One Nation Conservatives of old.

 

 

Ethical Concerns

Further to what I perceive to be political and economic amateurism, I also think this change is ethically dubious. I have already observed the ethically questionable choice of attacking basic rate tax paying self-employed people while leaving tax avoiding ‘fat cats’ to rein free.

 

[Don’t mistake me; I have absolutely no problem with ‘fat cats’ or anybody else making eye-watering amounts of money, so long as they pay their full taxes due under both the letter and the spirit of the law. This is, under the current government regime, an effective tax rate of 52%. Hence so long as they pay this, the sky’s the limit. In fact, I quite encourage this!]

 

But it goes deeper than this. A significant proportion of the rise in self-employment came after the financial crash by people either struggling to find a job or losing their existing job. Others were young people only being offered zero hour contracts. Indeed we have a great many clients in these categories.

 

In response to this personal jobs crisis, these individuals did not give up and wait for the government to solve the problem (which is fortunate, given their total failure to do so); they went out and literally created their own job.

 

They could have responded by putting their hand out for state assistance; instead they ensured that they paved their own way.

 

This strikes me as miraculous and something to be celebrated; both in terms of ambition and outcome. In the face of adversity, they went out there and did it for themselves.

 

This should surely be welcomed by the government, and it confounds me that it isn’t.

 

 

Apples and Oranges

Another significant ethical dimension is the fact that self-employed people are not the same as employed people. Very obviously, if nobody adopted self-employment, literally no further jobs or tax revenue would be generated.

 

Hence it is not comparable; self-employed people took a very different decision, and have a different value, in economic terms.

 

Moreover, employees receive benefits that self-employed people do not. I do not merely mean job security and assured cash flow, but advantages that employees enjoy in law such as holiday pay, sick pay and maternity pay.

 

Hence the previous arrangement of a small tax relief in respect of National Insurance for the self-employed would seem fair compensation for this.

 

There is one final unfairness to which the government also appears blind. A large proportion of the rise in self-employment is quasi self-employment as large corporates force one-time regular employees to become self-employed.

 

The classic example of this is the corporate company delivery drivers, who are now self-employed.

 

The large employers do this for two key reasons (a) it provides flexibility as they do not need to guarantee full employment or employment benefits such as those listed above and (b) to avoid Employers’ National Insurance at 13.8%.

 

This does indeed erode the tax base, and it’s perfectly responsible to expect government to address this situation.

 

But this is a problem caused by the larger employers whereas the price is being paid by the low paid individual who is simply doing all they can to maintain employment in one form or another.

 

 

The Best of the Rest

Of course, while the National Insurance changes made all the headlines, there were some other changes announced in the budget. Here is a short round-up of these in a business context.

 

Not content with the tax increase for self-employed people, company directors and others in receipt of dividends also had a de facto tax increase.

 

The new dividend tax (only announced by George Osborne last year) included a £5,000 tax free bracket, which is now to be reduced to £2,000 from the start of the next tax year.

 

However, the personal tax-free allowance – as has been announced on several other occasions – will increase to £11,500 from April this year and will reach £12,500 by 2020.

 

 

The business sector, especially those in the retail arena, have been worried about the increase in business rates, and there was some minor assistance offered in this area.

 

This is chiefly via a £300 million hardship fund for those most affected, plus pubs with rateable value of less than £100,000 to get a one-year £1,000 discount on rates they would have paid.

 

Of course, these are mere temporary measures; from next year, those businesses affected will have to meet the full costs of the new business rates.

 

 

Other measures affecting businesses include the move to prevent companies converting capital losses into trading losses, however most of those affected in this area will likely exploit one of many routes to sidestep this change.

 

The introduction of the new, quarterly (as if yearly wasn’t enough!) digital tax return will be delayed by a year for those under the VAT threshold of £83,000.

 

And perhaps in view of a potential referendum in Scotland, there will be a review of North Sea Oil taxation.

 

 

In terms of the economy, this year’s growth forecasts have been increased from 1.4% to 2%, but is then forecasted to dip for the following few years.

 

Inflation is also forecasted to increase from 2.3% to 2.4% this year, but is then expected to dip alongside growth. Yet employment is forecasted to continue to increase.

 

 

Along with Brexit, debt and deficit seemed to be an afterthought for the Chancellor. This is probably designed to maintain his sanity, as government borrowing it still eye-wateringly bad.

 

Despite the austerity measures (remember, in 2010, the government said that they would have cleared the debt by 2015!), the national debt is now 86.6% of GDP and is only forecasted to be 79.8% by 2021-22.

 

To put this into context, we will be borrowing almost £52-billion this year, and are forecast to borrow £58-billion next year. It’s best not to think too hard about this, in order to avoid mental distress…

 

 

If your business operates or benefits from the education or health sectors, the budget may have good news for you.

 

For education, the Chancellor announced £320-million to fund 110 new free and grammar schools in addition to £216-million to upgrade existing schools, plus £300-million to fund scientific qualifications alongside the new T levels for technical further education.

 

For health, an extra £2-billion has been made available for social care; a further £325-million to fund the first NHS Sustainability and Transformation Plans implementation and a fund of £100-million for more GPs in A&E departments by next winter.

 

The much-discussed sugar tax will come into force at a rate of 24p per litre, although this only applies to some high sugar drinks and not all, despite much lobbying to correct this.

 

 

Finally, there is a range of further government spending (and some re-announcements) in select areas which may help niche businesses.

 

The devolved administrations will receive further funding; £350-million for Scotland, £200-million for Wales and £120-million for Northern Ireland.

 

Transport will benefit from £90-million for the North and £23-milion for the Midlands and an English wide fund of £690-million to address urban congestion. Relatedly, £270-million is to be made available for those pioneering robots and driverless vehicle technologies.

 

For telecoms, £200-million can be used for local broadband network developments and a further £16-million for 5G mobile technology innovation.

 

And women’s issues received a welcome boost with £20-million made available to tackle violence against women and girls, £5-milion to support women returning to work after a career break and a further £5-million to celebrate the centenary of women first getting the vote.

 

 

In Conclusion

In summary, what strikes me most about the budget was the Chancellor’s lack of ambition. While there were some financial measures (there always are) no great ambition was articulated; how did this budget answer the question ‘what is the government all about?’

 

The only fair response to this question must be ‘against the self-employed’.

 

The Chancellor clearly wanted his announcement on social care to be the headline act – but this was too little in every sense.

 

If the government was truly ambitious to tackle the social care issue, he would have needed to (1) provide much more funding than he did and (2) actually address the issue of separation between health (NHS responsibility) and social care (local authority responsibility). He did neither.

 

The take home message for business people (unless you are one of the lucky few in a niche category which can benefit from increased funding e.g. school builders) is in response to all your hard work and enterprise, you will be rewarded with an increased tax bill and a larger business rates bill.

 

It’s a good job, then, that the three most common traits found in self-employed business people is positivity, determination and innovation.

 

Hence you must harness these resources and use your natural positivity to look beyond the government’s attack on you, summon your determination to keep working as hard as you have been and channel your innovation to find new ways to win despite the government, not because of it.

 

 





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