By Simon Vincent, Senior Tax Accountant at Hive Business
Chancellor of the Exchequer Philip Hammond delivered his Budget this week — here’s what practice owners and dentists should know.
IR35 — self-employed or employee?
IR35 defines who is self-employed and who is an employee and, crucially, whose job it is to check. Hammond wants larger businesses to make the call from 2020.
The tax burden attached to turning contractors (and dental associates) into employees is massive. That’s why IR35 is an irresistible goldmine for HMRC. Not only do employees pay more tax, the employer pays HMRC for employing them.
Even though tax receipts are churning in at a rate that has astonished the Treasury (the Office for Budget Responsibility OBR underestimated takings for 2018-19 by £13bn), it wants more.
We noted a year ago that its stance on IR35 was already looking aggressive. Obviously for a dental group with 40 or 50 practices and scores of associates, the potential tax liability is going to look scary very quickly.
HMRC knows, thanks to the Nudge Unit, that people usually take the least risky option when faced with uncertainty.
So it’s conceivable that meeker corporates will cave. Will they accept lower margins? Or, to meet their higher tax bills, will they cut pay or staff, or both? Perhaps that would make it easier for smaller dental businesses to compete, with better paid associates and fuller teams.
Bear in mind though that dentistry as an industry has a general dispensation for associates regarding self-employed status, so the question really is how will that stand up to HMRC’s assault?
£50k higher rate threshold
The higher rate income tax threshold is going up from £45k for 2019-20. Many people are saying this is fantastic news. We accept it is mildly good. Watch out though, there is some wiggle room because it’s contingent on a Brexit deal.
2% Digital Services Tax
It’s not clear how this will be implemented but it will no doubt be complex and messy. It’s possible businesses like mail order ortho, online training courses and apps that offer virtual dental check-ups could be hit, but they would have to be very big — there is an exemption for businesses with revenue up to £25m.
Residential property sales — pay HMRC before your tax return
Effective from April 6 2020, residential sales will require a payment on account before you submit your tax return, so a one-part system becomes a two-part system. It’s not clear who will practically be responsible for administering this — will it be given to conveyancing solicitors to handle like Stamp Duty? Will there be a cost attached to the extra paperwork? Presumably. Will the HMRC system repeatedly get it wrong at your cost? Probably.
More bad news for landlords
We think of our homes as tax free. They’re not, they simply attract Principal Private Residence (PPR) tax relief. The moment you convert your main home to, say, a buy to let asset, you lose this and HMRC sets the clock ticking. It used to give you three years’ grace, then it was 18 months. Now it’s nine months. With property prices now stagnating, maybe you should reconsider whether to keep your old flat?
A restriction on ‘rent a room’ relief (attacking AirBnB-style arrangements) will not be pursued, but PPR is being consulted on, and ‘consultations’ often mean “we’ll pretend we’re listening but really we want to soften the bad news when it’s pushed through later”. Expect the complete loss of the valuable Lettings Relief to go along with it.
Insolvency — HMRC gets paid first
There are regulations that say who gets paid what is owed when a business is insolvent. HMRC is now going to go to the top if the list, making it a preferential creditor, harming other businesses and taking money out of the private sector.
Entrepreneur’s Relief — ownership period doubled
If you sell your business the default tax rate is 20%, but if you sell a business that qualifies for Entrepreneur’s Relief it’s 10%. Now you must have owned it for two years. Watch out, this may be a first step to increasing taxes on business sales.
Unless there are other details released covertly later on, there are no other major points to worry about in this Budget. Neither the VAT threshold or pensions were mentioned, a welcome relief (a VAT reduction would have caused consternation, especially for those supplying facial aesthetics). Give us a call if you have any questions on 01872 300232 or email us at [email protected].