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Industry News Centre

Budget 2016: the impact on franchisors & franchisees

by Desirie Lea
Director
Morris & Co 

Dubbed as a ‘Budget to back business’, most in franchising will find that George Osborne’s Spring Budget yesterday was more good news (sweeteners?) than bad. Measures included changes to corporation tax and business rates, and the abolition of Class 2 National Insurance Contributions for the self-employed.

Here is an overview and commentary highlighting key areas that will affect those in franchising.

Corporation Tax

Companies will benefit from a further reduction in Corporation Tax to 17% from 1 April 2020. As already announced, from April 2017 the rate of Corporation Tax will fall to 19%.

For losses incurred on or after 1 April 2017, franchise businesses will be able to use carried forward losses against profits from other income streams or from other companies within a group.

Loans to Directors and Shareholders

If a close [privately owned] company loans money to any of its “participators” (directors and shareholders), a tax charge called Section 455 arises. Section 455 is designed to deter participators from taking loans from their companies; rather than a salary or dividends.

Franchisees may know this as an ‘overdrawn loan account’. The rate of Section 455 tax on loans made on or after 6 April 2016 will increase from 25% to 32.5%. This will mirror the higher rate of dividend tax and has been done to stop people taking money out as loans rather than dividends.

As announced in the 2015 Summer Budget, a dividend tax allowance will be introduced from 6 April 2016, which will mean that the first £5,000 of dividend income is not taxed. Dividend income in excess of this will be taxed at 7.5% where it falls in the basic rate band, 32.5% for the higher rate and 38.1% for the additional rate.

Income Tax

The Personal Allowance will increase to £11,000 in 2016/17 and to £11,500 in 2017/18.

Many franchisees will be taken out of higher rate tax, following confirmation of an increase in the higher rate threshold to £43,000 for 2016/17 and £45,000 for 2017/18.

Abolition of Class 2 National Insurance Contributions (NICs)

The Chancellor announced his intention to abolish Class 2 NICs for the self-employed from April 2018 and to reform Class 4 NICs to introduce a new benefit test.

Class 2 NICs are the contributions payable by self-employed franchise owners including partners in partnerships.

Class 2 NICs are £2.80 per week for 2016/17, so the self-employed could benefit by a saving of nearly £150 per year. 

Savings

The ISA allowance will increase to £20,000 for the 2017/18 tax year.

From April 2017, anyone aged 18 to 40 will be able to save up to £4,000 per year into a new ‘Lifetime ISA’.

The funds, including a 25% bonus provided by the government for every pound invested up to the age of 50, can either be used to buy a first home or to save for retirement, after the account has been open for 12 months. If funds are withdrawn before the savers 60th birthday, the government bonus will be lost and a 5% charge will be payable. After their 60th birthday, savers can withdraw all the savings, tax free.

This will form part of the ISA allowance which will increase to £20,000 for the 2017/18 tax year.

Capital Gains Tax

The big surprise from the Budget was that from 6 April 2016, the higher rate of Capital Gains Tax will be reduced from 28% to 20% and the basic rate from 18% to 10%. Gains on residential property which are not the individual’s main residence (e.g. second homes and buy to lets) remain at 28% and 18%. The annual exemption remains at £11,100 for 2016/17.

Gains on investments in newly issued shares in unlisted, trading companies purchased on or after 17 March 2016 will pay 10% Capital Gains Tax. The shares must be held for at least 3 years from 6 April 2016 and will be subject to a lifetime limit of £10 million of gains. This new ‘investors relief’ is an extension of the existing ‘entrepreneurs relief’ rules to encourage external investors to invest in the smaller, unlisted companies.

Further rules on ‘entrepreneurs relief’ were relaxed in respect of goodwill on incorporation, associated disposals and some joint ventures and partnerships.

Business Rates

The annual threshold for small business tax relief in England will be raised from £6,000 to a maximum of £15,000 from April 2017.

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) on commercial property or mixed use transactions of freehold and leasehold premium interests in England, Wales and Northern Ireland changes from 17 March 2016. The rates will apply to the value of property over each tax band, unlike the current system where it applies to the whole transaction value. The new rates and tax bands for non-residential property are as follows:

  • 0% – for the portion of the transaction value up to £150,000;
  • 2% – between £150,001 and £250,000; and
  • 5% – above £250,000

This change will bring down the cost of buying business premises.

This announcement follows significant changes to property tax announced in the last three Budgets, including the removal of tax relief on interest on buy to let mortgages for higher rate taxpayers and a SDLT levy at 3% for second homes and buy to let properties.

Soft Drinks Industry Levy

And let’s not forget the ‘sugar tax’ or the new soft drinks industry levy which is being introduced from April 2018. The levy will be paid by producers and importers of soft drinks that contain added sugar.

Desirie Lea is the director responsible for the Morris & Co franchise department, which provides accounting and tax solutions to franchisors and franchisees across the UK as well as regularly contributing to bfa events.

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