A surprising announcement today by the Chancellor was that he planned to reduce taxes by the end of this parliament. There has been huge speculation over recent weeks about increases to Capital Gains Tax (CGT) as well an overhaul of Inheritance Tax (IHT) and pensions taxation. However, this Chancellor seems to prefer to perform a political sleight of hand, preannouncing bad news so the Budget Speech itself can be all positive. Accordingly, the tone of the Budget today was optimistic and suggests that all the funding needed will come from strong future growth which is hoped will materialise, rather than from further tax increases.
Private Client Tax
Income tax allowances and thresholds
As already announced, allowances and thresholds will be frozen until April 2026. This will create fiscal drag meaning that more people will pay tax at higher rates as time passes.
The Health and Social Care Levy (announced in September) will cost individuals a further 1.25% on top of the existing rates of National Insurance with effect from April 2022 (with an extension to those over state pension age from April 2023). This means that for someone who earns £150,000 their take home pay will reduce from £90,661 in the current tax year to £88,947 after April next year.
Furthermore, the rate of tax applicable to dividend income will increase by 1.25% from April 2022 (producing a maximum rate of tax on dividends of 39.35%) by extending the Health and Social Care Levy to those who receive investment income. This has led to calls for the levy to be extended to other forms of income, such as property and pension, but to date no further announcements have been made.
Making Tax Digital (MTD) and Basis Period Reform
MTD for Income Tax was delayed again following pressure from the professional bodies. Sole traders and landlords with income over £10,000 will now be required to join MTD from 6 April 2024. General partnerships will be required to join from 6 April 2025.
As part of the move to MTD, it was proposed that the basis period rules would be simplified for self-employed individuals so that they are taxed on a ‘tax year basis’ rather than a ‘current year basis’ as is currently the case. The current year basis means that individuals and partners are taxed by reference to the accounting date which ends in the tax year. The proposal is for a profit or loss arising in a tax year to be taxed. While this might seem sensible, there may be good commercial reasons for accounts to be drawn up to a certain date.
It has been confirmed that the draft legislation, which was published on 20 July 2021, will be revised to reduce the impact of the transition. In addition, it has been confirmed that the transition to the new rules will come into force from 6 April 2024.
Capital Gains Tax payment on property disposals
It is pleasing to see that HMRC have responded to feedback and extended the reporting and payment deadline for UK property disposals from 30 days to 60 days. The extension to the deadline will apply both to UK residents as well as non-UK residents disposing of property which is not their main residence.
Reform of penalties for late submission and late payment of tax
A new penalty regime will come into effect on 6 April 2024 for taxpayers who are required to file under MTD and 6 April 2025 for all other taxpayers. The new late submission regime will be based on a penalty system depend on the frequency of submission. The late payment regime will be made up of two charges, the first will become payable 30 days after the payment due date and the second will be based on a daily penalty regime. Both can be commuted by agreeing a Time to Pay arrangement with HMRC.
The Budget was relatively quiet from a corporate tax perspective with increases to Corporation Tax rates previously announced and no doubt tougher times ahead for UK corporates.
Research and development
The biggest and unexpected blow was the Chancellor announcing that research and development (R&D) tax relief will be amended to refocus support towards innovation in the UK from April 2023. While the devil will be in the detail (to be released later this autumn) indications are that this will restrict R&D tax relief to expenditure incurred in the UK, and expenditure incurred outside the UK will be fully excluded from relief even if otherwise qualifying. This will be a blow to many businesses that necessarily rely on talent from outside the UK for their R&D activities.
However, the importance of R&D was recognised by the Chancellor and, helpfully, the UK’s R&D tax legislation will take a step forward and be updated to allow relief for data and cloud storage costs arising from R&D activities. This should allow claims to be made for increased R&D tax relief.
Both changes will take effect from April 2023 and further guidance will be announced by the Treasury. It would be hoped that the detailed information will be announced promptly to allow companies to understand the potential impacts and commence to plan accordingly.
Annual investment allowance
The Chancellor announced that the proposed expiry of the current £1 million annual investment allowance will be extended from 31 December 2021 to 31 March 2023 after which the limit is expected to fall to £200,000. While this will be welcomed by some of the larger businesses, and businesses that do not currently qualify for the 130% super-deduction, for the vast majority of companies in the UK, they will continue to claim the 130% super-deduction over the annual investment allowance. This is therefore unlikely to significantly incentivise companies to invest in fixed assets but represents an easy give-away from the Chancellor.
Based upon current expectations, both the current annual investment allowance limit and the availability of the super-deduction will end at the same time that the main UK Corporation Tax rate increases to 25% – delivering a potential blow to companies and signalling tougher times ahead.
UK residential property developers
Bad news was confirmed for UK residential property developers, as the Government will legislate in the Finance Act 2021-22 to introduce a new tax on company profits derived from UK residential property development. The tax will be charged at 4% on profits exceeding an annual allowance of £25 million and it is intended that this legislation will apply to profits arising from 1 April 2022. Where a company is a member of a group, the £25 million allowance can be allocated across group companies. With Corporation Tax on such profits also increasing from April 2023, this will represent a huge tax increase for these businesses. While set out as a temporary tax to help pay for building safety remediation, there is no indication on when the Residential Property Developer Tax will be abolished.
Changing place of incorporation
The Government has issued a consultation document on the possibility of introducing legislation which would allow non-UK incorporated companies to shift their place of incorporation, and not just tax residence, to the UK. If implemented, such legislation will bring the UK in line with many other countries, including European states such as Cyprus, Malta, Belgium and Luxembourg, and would be welcomed.
Online sales tax
The Government will continue to explore the possibilities for an online sales tax and, if introduced, the intention is that the revenue raised would be used to reduce business rates for retailers.
Cross-border group relief
In addition, the Government will legislate in the Finance Bill 2021-22 to abolish cross-border group relief from 27 October 2021. This was largely expected following Brexit and a further indication of the Government’s intentions to ensure that previous measures introduced due to the UK’s membership of the EU will be unwound overtime.
Sector orientated reliefs
Temporary increases in the headline rates for Theatre Tax Relief, Orchestra Tax Relief and Museums and Galleries Exhibition Tax Relief were announced and will no doubt be welcome for businesses operating in these sectors who were hit hard by the pandemic.
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