Autumn Statement 2023 - More Drip Than Waterfall
This was very much about 'making work pay' and aiming to improve productivity. Important though national insurance tax reductions are to help sole traders and partnerships, they do nothing to help those caught by frozen thresholds or running small limited companies.
Sole traders and partners
With Class 2 national insurance abolished and Class 4 national insurance reduced by 1% from April 2024 but dividend tax unchanged, more businesses may decide to remain as sole traders rather than incorporate or even prefer to disincorporate.
When you add in that the cash basis will become the default way to measure tax profits from April 2024 (for any size sole trader) together with the previously known companies house reforms requiring more company information to be made public, the government clearly wants small businesses to stay as sole traders unless they're large enough to embrace being a limited company in full.
To back this up, the cash basis for measuring tax profits from April 2024 will allow losses to be offset in the same way they are for the accruals basis (the one that accountants with use) and there won't be an interest deduction cap of £500 with all trading interest becoming tax deductible.
The cash basis may have been improved to also ease the introduction of Making Tax Digital - MTD - which will benefit from some simplifications from April 2026 (with over £50k turnover or rents) and from April 2027 (over £30k) where the quarterly submissions will now be cumulative and there won't be an end of period statement (EOPS). MTD won't yet be required for partnerships or jointly owned property.
NB For sole traders and partners with profits under £6,725, or tax losses, who want or need a state pension credit year, can still voluntarily pay Class 2 £3.45 a week, so Class 2 will still exist for many.
With dividend tax at 8.75% between £12,570 and £50,270 but employee national insurance at 10% from January 2024, this differential is narrowed further, making it more likely than before that an owner-director should take a salary instead of a dividend. If you continue to take dividends, your income tax return will need to show your own company dividends separately from any others and your percentage share ownership, presumably to help HMRC track these back to your company.
If you continue to embrace being a limited company, investing to save the higher corporation tax, but need funding to do so, you might benefit from an external EIS investor who will continue to benefit from tax breaks until 2035, which should encourage more investors to enter the small business scene.
If, despite it being harder, you remain eligible for research and development tax credits, the R&D work you'll need to do if you're loss-making to maximise your cashback at 14.5% will fall from 40% to 30% from April 2024, meaning that you're not expected to spend as much on R&D. Perhaps the 40% threshold was probably too high for many!
Limited companies - 100% tax relief on new assets - 'Full expensing'
Much is said about full expensing but it has no value for most small limited companies who already benefit from 100% tax relief, called AIA, on most fixed asset spend of up to £1m per year. Full expensing only applies to new assets purchased by limited companies whereas AIA applies to sole traders and partners and second hand assets.
And don't forget the same Chancellor increased corporation tax from 19% to 25%/26.5% meaning many companies won't be better off overall.
After all the media interviews I was expecting a waterfall of tax improvements for small businesses, but we've ended up with a dripping tap.