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The Chancellor of the Exchequer Philip Hammond made the UK’s last spring Budget announcement yesterday. In future, the annual Budget statements will be in the autumn, with most announced tax changes still taking effect from the following April.

Consistent with this transition to the new annual timetable, the Chancellor did in fact announce most of the tax changes due next month in his pre-Budget report last December. Yet there were some significant new announcements this time.

Small businesses

There were two announcements that in various ways bring higher tax changes for owners of small businesses.

For company shareholders, the annual dividend allowance (giving an exemption from income tax in addition to the main personal allowance rate, reflecting the fact that the company itself will have been subject to corporation tax) is to be cut from £5,000 to £2,000 from April next year.

The earnings related Class 4 charge of National Insurance contributions for the self-employed is to be increased, from 9% to 10% from April 2018 and then to 11% a year later. This will bring the rate closer to the 12% combined employer and employee rates for employed persons. The Chancellor is proceeding with earlier plans to end the flat rate Class 2 contribution for the self-employed, but all those earning at material levels will face a substantial net increase.

There is no change to earlier announcements on the UK corporation tax rate, which is moving towards the lowest level among major countries – though banks, including most equipment lessors, are subject to a higher rate. The main rate falls from 20% to 19% from next month, and is then due to fall to 17% from April 2020.


The Chancellor announced that some of the smallest unincorporated businesses will have increased options from next month to account for income tax on their business profit on the (generally simpler) basis of cash flow rather than conventional income and expenditure accounting rules. The maximum annual turnover limit for the use of this scheme will rise from the present £83,000 (the same as the VAT registration threshold) to £150,000.

For such businesses paying rentals as equipment lessees, there should normally be no practical difference as between the tax effects of the alternative tax accounting systems.

When it comes to the choice of financing methods for equipment, it seems that there will be little difference to the options through the latest change.

Cash flow accounting will generally accelerate tax expensing for outright purchases of equipment, compared with the alternative of a lease rental expense profile. However, all small businesses (incorporated or otherwise) already experience tax discrimination against the leasing option through the working of the annual investment allowance (AIA).

This provides a 100% Year 1 write-off for the first £200,000 of annual plant and machinery expenditure eligible for capital allowances, in place of the much less generous normal rates of annual writing down allowance.

The AIA cannot normally be claimed by either the lessee or the lessor where finance or operating leases (with no purchase option) are used. Thus the disincentive to lease becomes no worse for those micro-businesses opting for cash flow computations, for whom capital allowances of any kind will not arise.

Anti-avoidance moves

The Chancellor confirmed plans to proceed with the previously announced civil penalty regime for professional advisers promoting certain types of tax avoidance schemes that are subsequently ruled ineffective by the courts, from July this year. There is some concern that this regime will add to uncertainties about the complex UK tax code, and to some degree erode the competitive advantages that come from the relatively low corporate tax rate.

There were relatively few specific anti-avoidance announcements in corporation tax in this Budget. One new change, however, closes an avenue for turning capital losses into trading losses with consequent tax savings.

This concerns the case where anything previously accounted for as a capital asset is instead appropriated to the relevant taxpayer’s trading stock. Under Section 161(1) of the Taxation of Capital Gains Act 1992, such a transfer is treated as taking place at market value, which can give rise to a chargeable gain or an allowable loss. However, to date there has been an elective option under Section 161(3) of that Act to reduce the chargeable gain or allowable loss to zero, and rebase the transfer value accordingly for the computation of trading profit.

An immediate change, to be backdated to Budget day through a clause in the coming Finance Bill, will now permit this election only where the appropriation into trading stock at market value would give rise to a chargeable gain rather than an allowable loss. Any allowable loss will be crystallised when the appropriation takes place, and the loss will therefore remain within the rules for chargeable capital gains for the purposes of setting it off against taxable gains in the future.

This is a relatively small change, with an estimated annual net tax revenue effect of £15m. At first sight it seems unlikely to have any effect on typical asset finance business.

Business rates

The Chancellor announced some transitional changes to the business rating system (i.e. the UK version of commercial property tax) in England. From next month a periodic revaluation of all business properties in England will bring a considerable change in the incidence of this tax. While the majority of businesses will face lower charges, those in certain areas (particularly London and Bristol) will face sharp increases.

Business rates are a substantial burden for many UK businesses, including much of the equipment lessee base, although the leasing of plant and machinery will make little difference to the cost. The tax is principally assessed on the value of structures. Fixture plant is included, although equipment of that kind does not usually lend itself to equipment lease contracts.

Several steps were announced to mitigate the increases for those affected in the coming year. The most important of these is a £100m grant to local authorities, to distribute discretionary relief in their areas. For the future, the Chancellor announced proposal for more frequent business rating revaluations, which should lead to rather fewer sharp changes in the incidence of tax on each occasion (and could bring England more into line with Scotland).

Digital sales

Perhaps more significant for the future, arising from these announcements on business rates, the Chancellor foreshadowed a possible new future tax in the UK on digital sales of goods and services. He said:  “In the medium term we have to find a better way of taxing the digital part of the economy – the part that does not use bricks and mortar.”

Arguably it is inherent in the principle of a property tax that business activities that are not heavy users of real estate, because goods are distributed or services provided through digital channels, will have a relative advantage. However, the authorities may not see it that way when commercial developments lead to the erosion of a tax base. Any new general tax on digital sales could sit awkwardly with the existing VAT system, and would raise a number of issues for all business sectors.

Vehicle tax

The Chancellor took no further immediate steps towards higher vehicle excise duty (VED) for diesel vehicles.

Some such changes had been widely expected, and remain a possibility for future years, following heightened environmental concerns on engine emissions. From next month all car and light van VED rates will rise in line with the retail price index. For heavy goods vehicles, both the VED and road user levy (RUL) will be frozen this year at previously announced levels.

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Fleet industry reaction has been critical.

BVRLA chief executive Gerry Keaney (pictured above) said: “This Budget was the perfect opportunity to create a fairer, simpler tax system that incentivises the uptake of ultra-low emission vehicles. Yet we are now left with company car tax and VED regimes that do little to support the Government’s green agenda or tackle the growing air quality crisis.”

“At the moment, a 20% taxpayer choosing between a pure electric BMW i3 and a hybrid Mitsubishi Outlander – both of which have similar P11D values and sit in the same tax band – will pay the same company car tax over the next three years. The current regime provides no incentive to choose a pure electric vehicle until 2020. The BVRLA’s call for the Government to bring the introduction of the new 2% rate forward from 2020 to 2017 would encourage drivers to choose cleaner cars now.”

On VED Keaney added: “The Chancellor chose not to defer the introduction of new Vehicle Excise Duty rates which come into force next month. As a result, the car hire industry will see its first year VED bill rise by almost 400% in 2017. Firms will also be unable to claim back £1.67 million every year in legitimate refunds.

“Car rental companies operate the newest fleet on UK roads, and the average rental car is just eight months old. The sector purchases around 324,000 cars each year, but this number is now likely to fall as our members lengthen their operating cycles in an attempt to reduce the cost impact of the new VED regime.”

HM Treasury’s Budget documentation announced that the Government will continue to explore “the appropriate tax treatment for diesel vehicles”, and will engage with stakeholders ahead of making any tax changes at the next autumn Budget.

The economic background

The UK fiscal position is continuing its slow recovery from the catastrophe of the 2008 credit crunch, when substantial parts of the tax base in financial services were heavily eroded. The public deficit as a ratio of gross domestic product (GDP), which was close to 10% from 2009, is expected to be down to 2.6% this year and 2.9% in the financial year starting next month. The government now plans for it to fall gradually to 0.7% by 2020/21.

Accumulated national debt in relation to GDP, having more than doubled since 2008, is now expected to peak at nearly 89% this year, falling gradually to just under 80% by 2022.

Following a generally positive economic performance in recent months, the fiscal forecasts for the coming year are slightly better than in the last official forecast in December. However, they remain less favourable than the forecasts before the Brexit vote last June, when the government had been hoping to eliminate the deficit much earlier.