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New tax regime, business rates and pension costs hit small firms

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Spring has arrived but with it comes the new tax year and, for many small businesses, the stress of new reporting requirements and higher costs.

Business owners are being hit with a triple whammy of Making Tax Digital, higher pension costs and, in some cases, higher business rates, as the full impact of the 2017 revaluation kicks in for thousands.


With the minimum wage and national living wage also rising and corporation tax remaining at 19% for now, it means belt-tightening at a time when business confidence is at a low.

Making Tax Digital

The key change for VAT-registered businesses with a taxable turnover above £85,000 will be complying with HMRC's long-awaited Making Tax Digital (MTD) initiative.

FSB figures suggest that it will cost small firms £564 each on average, just to buy the software needed to meet the requirements. 

And that's without taking into account the extra time and effort many will require to make the switch to recording and uploading transactions digitally.

Hopefully the move will ultimately save small businesses time and money. But it means higher costs now for those who were using paper-based accountancy or who had bought an in-house system which is now not compatible with MTD. 

The FSB has been highlighting to government the challenges MTD poses for its members and has won some concessions - notably pushing it back for businesses with a turnover of less than £85,000. FSB has also been urging software companies to provide low-cost options.

HRMC has said it will take a light touch approach to penalties in the first year, if it is clear businesses are doing their best to comply. You can make sure you are up to date on what it means for your business, with our Making Tax Digital Hub 

Business rates

Next on the list of 2019/20 tax changes that may hit your wallet are business rate hikes, as the third year of revaluation in England and Wales begins.

Up to 500,000 firms in England and Wales are due to lose transitional caps on rising business rate bills, which have meant changes based on the 2017 revaluation have been phased in. Many will face a 20% hike to their bills, as well as an inflation-linked increase.

For small High Street firms in England with a rateable value below £51,000 there is some good news. They are eligible for a one-third discount on rates bills for the next two years, part of a bid to help the struggling High Street which was announced in the Budget. The chancellor says it will help up to 90% of independent shops, pubs, restaurants and cafes.


But overall, business rates are expected to generate £25bn for councils in England this year - an increase of £206m from 2018/19. 

The FSB has campaigned on unfair business rates and has secured some reforms, including doubling small business rates relief and the high street discount but further reform is needed on the tax which hits small businesses before they've even made their first pound in turnover. 

In Scotland, businesses outside full relief will see increases to their rates bills. However, firms looking to invest in their property can now benefit from a new tax break thanks to FSB campaigning. And more small Scottish businesses than ever before get help from the Small Business Bonus scheme.

While businesses in Northern Ireland will see increases in their rates bills, FSB ensured that any increase in the regional rate was limited to inflation, at the last NI budget. FSB also successfully lobbied for the Small Business Rate Relief to be continued, the removal of which would have seen rates double for the smallest businesses.
 
The continued absence of an Northern Ireland Executive prevents progress being made on enhancing rates relief, to give businesses the extra support they deserve.

Businesses in Wales have seen rises in their rates bills as in England. However, FSB has successfully lobbied for the extension of rates relief culminating in a recent announcement of a new package of reliefs for Wales.
 
The Wales  High Streets Relief Scheme is being extended and expanded in 2019-20, providing an extra £23.6 million of support for Welsh retail and high street businesses. The scheme will go further than in previous years, providing retailers with up to £2,500 towards their non-domestic bills for properties with a rateable value of up to £50,000. Beyond this, FSB’s ‘Future of Welsh Towns’ agenda is providing a new conversation on support required for small businesses within Welsh towns to help them thrive. 
 
Welsh Government has additionally announced 100% relief for childcare providers in Wales to help the sector grow and create space for job creation. 


Auto-enrolment Pensions

Another change which will hit more than a million small business employers is increase in the minimum contribution to auto-enrolment pensions which rises to 3%. Last year it doubled from 1% to 2%. 

The FSB is calling on the government to rule out any further increases to the employers' rate, which particularly hits those small businesses in labour-intensive industries including childcare, construction and retail.

As employees will see less take-home pay as their share of contributions also increases, the FSB says the danger is that more choose to opt out rather than pay more in, potentially undermining the whole system.

Other changes

Small business owners, like everyone else, will see changes to income tax bands. These include a rise in tax-free personal allowances from £11,850 to £12,500 the higher rate threshold from £46,350 to £50,000 and changes to National Insurance contributions and thresholds. In Scotland, income tax rates and bands are different but the tax-free personal allowance is the same.

On capital gains, there is a slight increase in the threshold above which you pay it from £11,700 to £12,000. And on Entrepreneur's Relief, which reduces the amount of capital gains tax you pay when selling your business or its assets, the minimum qualifying period is being extended from 12 months to two years.

Non-tax changes include a rise in the National Living Wage for those over 25, from £7.83 to £8.21 an hour, as well as increases to the various rates of the national minimum wage for younger workers. It is expected to mean a pay rise for two million UK workers - and extra costs for small businesses who were not already paying about the minimum rate.

But there is some good news for small businesses. The remit of the Financial Ombudsman Service, which settles disputes between financial businesses and their customers, is being extended so that those with an annual turnover of less than £6.5m, a balance sheet of under £5m, or fewer than 50 employees can use it.

The FCA says it means an extra 210,000 small firms will be eligible for the service from 1 April, making it easier for them to get compensation from financial services firms. The £150,000 limit on compensation payments has also been increased to £350,000. 


The government's own figures suggest there were 27,000 fewer businesses in the UK in 2018 compared with 2017 and FSB figures suggest that small firms have faced an average cost increase of £60,000 between 2011 and 2017, due to policy interventions.

Of the latest tax changes, FSB national chairman Mike Cherry said: "Overall this is a package of changes that increases the costs of running a small business. For the first time since 2010, we saw a contraction in the size of the UK business community last year.

"All ministers and policymakers need to take note and avoid bringing in new measures that would exacerbate this loss in 2019."