The lowdown on tax changes in the 2020 budget

Caroline Harwood outlines the employment-related tax announcements made by chancellor Rishi Sunak last week

The chancellor stressed the need for a "thriving private sector" to weather the storm of coronavirus. The impact of well-structured share-based incentives on private company performance should not be underestimated and there has been concern about the future of the most popular tax-advantaged share plan, the Enterprise Management Incentive (EMI) plan. 

The EMI is supported by both employers and employees in qualifying businesses. However, it is dependent on EU state aid approval and so its future is uncertain from 31 December 2020, when the transitional period ends. The government will review the EMI scheme to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and examine whether more companies should be able to access the scheme. 

In the meantime, other tax-advantaged plans, namely the Company Share Option Plan and SAYE/Sharesave and the Share Incentive Plan are unaffected.

Off-payroll workers

While the chancellor confirmed in the budget that the reformed IR35 regime would be implemented on 6 April 2020, the government has now, in response to the Covid-19 situation, announced that the reforms extending to the off-payroll working rules in the private sector will be deferred until 6 April 2021. 

It will be necessary for organisations to communicate with those consultants who they have already sent a status determination statement to, telling them what this change might mean for them.

While the immediate pressure is off, this does mean we should not expect the rules to be applied with a ‘soft touch’ in 12 months’ time. Once the immediate issues presented by coronavirus have lessened, businesses should use the additional time to make sure they have a robust process in place for the new rules and be prepared for strict adherence to the new legislation.

HMRC had mobilised and trained large numbers of staff to deal with IR35 compliance. It is likely these individuals will still be focusing on employment status for tax in the next year. The current rules already require businesses to assess the employment status for tax of individuals they engage directly as freelance off-payroll workers. Therefore, it may be advisable to focus on the employment status of this group of workers over the next few months and be prepared for greater scrutiny from HMRC.

National Living Wage 

The chancellor has announced plans to increase the National Living Wage to an amount equal to two-thirds of median earnings and to extend it to workers aged 21 and over by 2024. However, this comes subject to the caveat that it will only happen if economic conditions allow, which will provide some comfort to small low-margin businesses reliant on a low-cost labour base.

National Insurance breaks

A number of changes to National Insurance (NI) were announced but they will not have a substantial impact on most businesses. The increase in the employment allowance from £3,000 to £4,000 will be welcome, but will have limited application given that it will be restricted from 6 April 2020 to organisations with an NI bill of not more than £100,000 in the previous tax year. 

There will also be an increase in the National Insurance Contributions (NICs) primary threshold and lower profits limit, to £9,500 from 6 April 2020, saving the typical employee around £104 and a typical self-employed person around £78 in 2020-21. 

There will be a NICs holiday for employers of veterans in their first year of civilian employment. There will be a phased introduction of the provisions, with a full digital service available to employers from April 2022 and transitional arrangements effectively introducing the relief from April 2021. The impact will make a veteran’s salary NIC-exempt up to the upper earnings limit for the first year of civilian employment. The government will consult on the design of this relief.

Company cars

In the 2017 autumn budget, the government introduced measures which stated that, for the purpose of calculating company car tax and related charges, the CO2 emission figure produced under Worldwide harmonised Light Vehicle Test Procedure will be used for all new cars registered from 6 April 2020. This was accompanied by the announcement that the New European Driving Cycle figures should be used to calculate company car benefits where more than one emission figure is recorded, until April 2020. 

The effect will be a small reduction in the taxable benefits for most drivers with company cars registered from 6 April 2020. However, this will be clawed back with rates returning to previously planned levels over the following two years, increasing by 1 per cent in 2021-22 and 1 per cent in 2022-23. Rates will then be frozen for one year until 2024-25. So this represents a small short-term benefit for company car drivers.

As expected, from 6 April 2020, fuel benefit charges and the van benefit charge will increase in line with the consumer prices index.

However, those driving zero-emission vehicles will not suffer taxable benefit on their cars in 2020/21.   Given that employees can still exchange taxed salaries for a tax-free zero-emission vehicle, this presents an opportunity for companies to offer environmentally-friendly vehicles in a very cost-effective manner.

Health and wellbeing

The tax relief on counselling services provided to employees has been extended to include related medical treatment, such as cognitive behavioural therapy, when provided to an employee as part of an employer’s welfare counselling services. The changes will take effect from April 2020. 

Construction Industry Scheme abuse 

Those affected by the Construction Industry Scheme CIS should be aware that new legislation is to be introduced to prevent non-compliant businesses from using the CIS to claim tax refunds to which they are not entitled. A consultation will be published to introduce options on how to promote supply chain due diligence. Those affected should read the consultation and make representations where appropriate.

Caroline Harwood is a partner and head of share plans and employment tax at Crowe UK