Autumn Budget implications for the Education sector - KPMG United Kingdom
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Autumn Budget 2018: Implications for the Education sector

Autumn Budget implications for the Education sector

KPMG assess the implications of the Autumn Budget 2018 for the Education sector

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The Chancellor made a number of announcements in respect of the education and skills agenda in his Budget statement this week. These included a continuing commitment to research and innovation in the UK and additional funding to provide support to help children get the care, education and support they need.

Further specific projects were announced, or reconfirmed, including:

  • package of reforms to strengthen the role of employers in the apprenticeship programme, so they can develop the skills they need to succeed;
  • an allocation of £100 million for the first phase of the National Retraining Scheme (NRS) (which was announced in the last Budget). This will include a new careers guidance service and state of the art courses combining online learning with traditional classroom teaching to develop key transferable skills;
  • funding totalling £20 million for a number of skills “pilots” to be run in Greater Manchester and surrounding areas, and
  • a further £38 million of capital funding to support implementation of the first three T levels in 2020 across 52 providers;
  • a further £5 million to support up to 10 local areas to develop proposals for new University Enterprise Zones, which will promote collaboration between universities and businesses, support start-ups and scale-ups, and disseminate management skills.

However, in terms of any announcements of reforms or changes in relation to tax or pensions, there was little of significant benefit to the Education sector, but the key issues are set out below.

Pensions

The Budget was, on the face of it, a quiet one for the pensions industry. However for organisations participating in public service pension schemes it is of more relevance.

The change in the discount rate used to value the Teachers’ Pension Scheme has been confirmed, which means that the employer contribution rates are due to increase by around 7% (5% in Scotland) from September 2019. For universities, FE colleges and independent schools in particular this is a very significant change as there will be no financial support provided by the Treasury (whilst at the other extreme, the NHS on the other hand is getting full support for 5 years). For a typical post-92 university in England, the additional cost will be around £3 million a year.

The possibility of a change in pensions tax relief was well trailed, but this didn’t come through on this occasion. Given that around 75% of the savings would have come from extending the Annual Allowance to more public servants, many of who work for the NHS, it may have been decided that this would have had too many unintended consequences. However, this is a change waiting to happen and in the meantime the Annual and Lifetime allowances continue to impact more members of public service pension schemes.

Other, more minor, mentions for pensions include: 

  • Lifetime Allowance – to rise in line with formula to £1,055,000 for tax year 2019/20;
  • Pensions dashboards – some additional funding and a consultation later this year on detailed design. It will be a challenge to include public service pension schemes in this exercise and this is something to be monitored;
  • Cold calling – the Government will proceed with regulations and guidance quickly;
  • DC charge cap – the Government to consult in 2019 on the function of the charge cap to ensure it does not unduly restrict use of performance fees;
  • Investment – the FCA is to consult by the end of 2018 on updating the permitted links framework to allow unit-linked pension funds to invest in an appropriate range of patient capital assets (including innovative companies and infrastructure), and
  • Self-employed – there will be a Government paper this Winter on its approach to boosting pensions saving

Corporation Tax

Corporation tax is not, of course, a significant issue across the Education sector, as a result of the availability of charitable exemptions.  However, there are some changes that may be relevant to certain entities within the sector.

Capital allowances are not usually claimed by many educational institutions but, to the extent that there are non-charitable institutions or subsidiaries with substantial capital assets, the announced changes could be important.  These include:

  • Introduction of a new 2% capital allowance in respect of expenditure on new non-residential structures and buildings, where all contracts for the physical construction works are entered into on or after 29 October 2018;
  • An increase in the Annual Investment Allowance to £1 million, from £200,000, for expenditure on qualifying plant and machinery in the period from 1 January 2019 to 31 December 2020;
  • A reduction to 6%, from 8%, of the special rate allowance (for integral features), from April 2019, and
  • The phasing out of the Enhanced Capital Allowances regime from April 2020.

Where non-charitable entities have significant capital losses, the proposed restriction from April 2020 of the offset of such losses to 50% of annual capital gains (to bring them in line with the treatment of income losses) may be an important consideration.

There are also changes to a number of specific charity tax measures, in particular:

  • an increase in the small trading/miscellaneous income level from £50,000 to £80,000 (for charities with total turnover in excess of £200,000);
  • a relaxation of certain administrative requirements in relation to the Retail Gift Aid scheme, and
  •  increase in the individual donation limit for the purposes of the Gift Aid Small Donations Scheme from £20 to £30, 

but it is not considered that these will have much impact on the Education Sector.

Finally, there are a couple of proposals that will need to be monitored as they move towards implementation, for any impact that they may have on the sector, being:

  • The introduction of Digital Services Tax – information to date would indicate that this new 2% tax will be targeted at “tech giants” performing certain specific digital intermediation activities (e.g. search engines, social media platforms and online marketplaces), and then only in relation to companies with annual global turnover of at least £500m.  Exemptions for online sales of goods and services will be available, but it will be necessary to confirm that income from, for example, online distance learning will be exempt;
  • Proposed changes to the intangible fixed assets regime, including a reform of de-grouping charges – it will be necessary to consider how these may affect spin-out operations.  The changes to Entrepreneurs’ Relief that were announced, including an extension of the qualifying period, and the qualifying interest that needs to be held by the entrepreneur will, of course, need to be considered by any relevant academics holding, or intending to hold shares in those spin-out companies.

VAT

There were very few announcements on VAT included in the Budget.

As expected, the Budget confirmed earlier announcements that the exemption for education would be extended to include higher education providers who are registered with the Office for Students as approved providers with a cap on fees. This extends the possibility of exemption for university level education to ‘private providers’. There are currently only a small number of private providers shown on the register as approved (fee cap) which can be found here.The change will be effective from 1 August 2019, subject to the appropriate changes in legislation being enacted.

The Budget also confirmed that in certain circumstances, construction services will become subject to reverse charge VAT whereby the purchaser of the services accounts for VAT rather than the supplier. This will apply where a contractor buys in services which are then used in a further supply of construction services. It will for example apply where, as is common practice, a construction contractor sub-contracts elements of its work to other entities. The principal impact of this measure will be for universities operating design and build companies which do buy in construction services in order to make onward supplies of those same services. Subject to approval of the Finance Bill, the measure will be effective from 1 October 2019.

Employment taxes

Off-payroll working in the private sector 

As expected, the Chancellor has announced that the public sector rules on off-payroll workers will be extended to the private sector, although this will not take effect until April 2020.  This change will mean that all businesses (excluding small businesses - broadly where two out of the following three conditions are met: turnover not more than £10.2 million; balance sheet of not more than £5.1 million; and not more than 50 employees) will be covered.  

In line with the public sector rules, these changes will see responsibility for determining whether an engagement falls within the ‘IR35’ regime moving from the worker’s Personal Service Company (PSC) to the end user.  Where an employment relationship is deemed to exist, the end user of the services would be responsible for operating PAYE/NIC on payments made to those PSCs if it pays them directly. 

The public sector rules have already been applicable to most institutions in the Education Sector, and therefore these changes will not represent any significant change, but it may be seen as “levelling the playing field” between public and private sectors as far as hiring consultants is concerned.  

Short-Term Business Visitors (STBVs)

From April 2020, the UK workday limit for participants in special annual PAYE schemes applying to STBVs will increase from 30 to 60 days. These arrangements allow employers to submit a single payroll report after the end of each tax year, rather than monthly returns, in respect of STBVs who do not meet the requirements for inclusion in a ‘Short Term Business Visitors Agreement’, whereby an employer is relieved from applying PAYE. This change will allow more STBVs from overseas branches of UK companies, and from territories which do not have a double tax treaty with the UK, within the scope of the simplified compliance regime.

Additionally, the reporting and payment deadlines for the special PAYE regime will be extended from 19 April to 31 May following the end of the tax year. This aligns the reporting deadline for the special PAYE regime with that of Appendix 4 STBV arrangements. 

National Insurance Contributions (NIC) 

Employer’s NIC will apply to termination payments to the extent they exceed the £30,000 threshold from April 2020, rather than from April 2019 as was originally announced, and the Employment Allowance (£3,000 per year offset for employer’s NIC) will be targeted at smaller employers from April 2020.

Legislation will be introduced to impose the previously announced Class 1A (employer only) NIC charge on termination payments made after 6 April 2020 to the extent the £30,000 threshold is exceeded.  

The NIC Employment Allowance will be restricted to employers with a total employer’s NIC liability of less than £100,000 in the previous tax year from April 2020.

National Living Wage and National Minimum Wage update

 Following the recommendations of the independent Low Pay Commission, the National Living Wage will increase from £7.83 to £8.21 from April 2019.  In addition:

  • The rate for 21-24 year olds will increase from £7.38 to £7.70 per hour;
  • The rate for 18-20 year olds will increase from £5.90 to £6.15 per hour;
  • The rate for 16-17 year olds will increase from £4.20 to £4.35 per hour; and
  • The apprentice rate (for apprentices aged under 19 or in the first year of their apprenticeship) will increase from £3.70 to £3.90 per hour.

Personal Allowance & Higher-Rate Threshold

The Government has brought forward its manifesto pledge to raise the income tax Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by the end of this Parliament.  These increases will now take effect from April 2019. 

Employment status and the Taylor Review 

There was no announcement on the Government’s consultation on employment status that followed the Taylor Review.

If you would like to discuss any of these points please do not hesitate to contact your usual KPMG contact, or one of the following:

Corporate Tax: Sandra Cox (0161 246 4280) or Ian Short (0161 246 4201)

VAT: Siddiq Musa (0161 246 4265) or Kerry Sykes (01223 582093)

Employment tax: Caroline Laffey (0191 401 3849)

Pensions: Steve Simkins (0113 254 2975)

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