Tax & admin · 20 April 2016

What opportunities and compliance does 2016 have in store for small business tax?

This year will herald a number of major developments in the small business tax space
This year will herald a number of major developments in the small business tax space

With small business tax getting so much attention in George Osborne’s Budget 2016 speech, here are three developments that small company owners need to know about for the coming year.

R&D advance assurance

For businesses out there actively engaged with new and exciting technologies, the new R&D Advance Assurance policy is one to take note of and utilise. First introduced in November 2015, it effectively means that, once a business is deemed compliant by HM Revenue & Customs (HMRC), it won’t have to deal with enquires from the body for R&D claims made in the first three accounting periods.

R&D tax credits, which have been in place since 2000, serve as an important money-saving avenue for small businesses seeking to “achieve an advance in overall knowledge or capacity in a field of science or technology through the resolution of scientific or technological uncertainty”.

Latest government statistics indicate that more than 15,000 SMEs claimed the tax relief in 2013: a 19 per cent increase on the previous year.

The relief often comes with a tonne of paperwork – HMRC wanting business owners to constantly prove the technology advancement is being met. For a company to comply for R&D Advance Assurance, it mustn’t: have claimed R&D tax relief before; be turning over more than £2m or have more than 50 staff.

This was all introduced after a consultation looking to make accessibility to the relief easier for small companies – as well as awareness of the credits, design of the rules and knowledge of claims processes.

Dividend changes

In what was one of the more left-field announcements to be made in chancellor George Osborne’s Budget speech in July 2015, dividend changes reduced some of the incentives to drawing dividends over salary.

From 6 April 2016 the Dividend Tax Credit will be replaced by a new Dividend Allowance in the form of a zero per cent tax rate on the first £5,000 of dividend income per year. Going forward, business owners will be liable for tax payments on any dividends received over the £5,000 allowance at the following rates:

  • 7.5 per cent on dividend income within the basic rate band
  • 32.5 per cent on dividend income within the higher rate band
  • 38.1 per cent on dividend income within the additional rate band

Under the old rules, when a shareholder draws dividends from his business, they are paid net and have a notional ten per cent tax credit. Non-tax payers and basic rate tax payers have no further tax to pay. Higher rate tax payers pay an additional 25 per cent and 30.56 per cent on the net dividend received.

The government has come out and said that the policy is aimed at taking away the incentive for people to establish a company and make payments as dividends rather than as wages – all with the intention of reducing a tax bill.

Auto-enrolment

Probably the most well-known out of all of these three small business tax changes, 2016 is the year that the majority of smaller businesses become auto-enrolment eligible. So far it has been bigger business slowly staged in, with the ultimate goal seeing every business enrolling staff in a work-place pension.

Coming out of the back of the Pensions Act 2008, every employer in the UK will soon be required to put certain staff into a pension scheme – and then contribute towards it.

“Staging dates”, the point at which businesses of a certain size had to prove compliance, began in October 2012 with companies employing more than 120,000 people. In mid-2015, the scheme moved into the less than 50 employee business space, at which point it was split out into PAYE reference numbers.

Business owners need to start planning 12 months before an auto-enrolment staging date – the later it is left the fewer options will be available.

The Pensions Regulator is requiring information to show a business is meeting auto-enrolment duties. This involves completing a “declaration of compliance” using the organisation’s online service within five months from a staging date.

An employer’s declaration is a legal duty. If it is not completed within five months of a staging date the business could be fined.

Picking the right pension scheme is one of the most important steps a business owner will go through when it comes to auto-enrolment. Again, the later work begins on compliance the fewer options there will be with choices such as a pensions scheme.

The small business tax space has undergone profound change in recent years, and will be evolving with those developments for years to come. Company owners need to gain an understanding of how each impacts their enterprise, especially if it involves fines for non-compliance.

If you want to know more about what the last Budget speech revealed, check out our handy 500-word summary article.

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ABOUT THE EXPERT

Bivek Sharma has been a partner with KPMG for over ten years, specialising in accounting, tax and software. He started the Small Business Accounting division over two years ago with a goal to transform accounting services for small businesses. The team works with a huge variety of industry sectors and companies including coffee shops, technology companies, manufacturers, pubs, restaurants and retailers.

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