The Budget announcement today was well considered and thoughtful, focused on encouraging investment and growth. Continued support was announced for individuals and businesses through the easing of lockdown measures. Thankfully the Chancellor has recognised that across the board tax increases would be counterproductive and stifle the economy.
However, some tax increases were inevitable and for individuals these will be indirectly felt through the freezing of various allowances. The personal allowance, thresholds for Income Tax and National Insurance Contributions, the Capital Gains Tax (CGT) annual exemption, the Inheritance Tax nil rate band and the lifetime allowance for pensions will be frozen until April 2026. This will create a ‘fiscal drag’ as the allowances fall behind the anticipated rate of inflation and will become less valuable to the individual and it is inevitable that the tax impact will be felt particularly by the middle-income earners. Conversely, following much speculation, there was no increase to CGT rates nor were there any changes to Business Asset Disposal (formerly Entrepreneurs’) Relief.
However, it was confirmed that various tax related consultation documents will be released on 23 March 2021 to allow for transparency and scrutiny. It may therefore be that tax changes are envisaged but that the Government will consult first.
For companies and businesses, however, more changes were announced today and the Chancellor balanced his announcements with a mixture of short term give-a-ways followed by longer term tax increases. A summary of the key measures is provided below.
Rate of Corporation Tax
The current flat rate of 19% will be increased to 25% from 1 April 2023 for companies with taxable profits over £250,000. The current 19% rate will be maintained for small companies with taxable profits below £50,000.
Companies with taxable profits between these two thresholds will pay tax at the main rate, reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate. The marginal relief fraction has not been announced but is expected to mirror that used in 2011/12 where the difference between the small company rate (20%) and main rate (26%) of Corporation Tax was also 6%.
While the 25% rate is still low compared to the rest of the G7, large companies will see their Corporation Tax bill increase by over 30% as a result of the hike. Compared to the originally planned cut to 17% which was subsequently withdrawn, 25% is therefore still likely to make business owners wince.
Companies may consider whether one-off transactions expected to generate material profit could be accelerated to benefit from the existing Corporation Tax rate.
It should also be noted that Diverted Profit Tax, which applies to large multinational enterprises with business activities in the UK, who enter into contrived arrangements to divert profits from the UK, will be increased from 25% to 31% from 1 April 2023.
Extended carry-back relief rules for trading losses
All businesses (incorporated and unincorporated) with trading losses arising in the two ‘COVID’ years will be able to carry these back to off-set taxable profits arising in the previous three years (extending this from a carry-back of only one year currently in place).
For companies, this extended relief will apply to trading losses arising in accounting periods ending between 1 April 2020 and 31 March 2022. For unincorporated businesses it will be the tax years 2020/21 and 2021/22.
The quantum of trading losses that can be carried back to the previous year remains unlimited. However, after carry back to the preceding year, a cap of £2m of unused trading losses will be available for carry back to the earlier two years. The cap of £2m applies to both of the accounting periods ending between 1 April 2020 and 31 March 2022, meaning up to £4m of losses may be available for extended loss carry back.
Where companies are part of a group, the £2m cap is spread across all group companies. However, provided no individual group company wishes to carry back trading losses exceeding £200,000 the £2m cap limit will not apply.
Extended loss carry back claims will need to be made in a return. However, if the claim is below £200,000 it may be made outside a return accelerating the timing of the repayment.
Similar rules apply to sole traders and trades operated through a partnership where trading losses arise in the 2020/21 and 2021/22 tax years, including the £2m cap except that for partnerships there is no equivalent limitation as for groups of companies.
While this will provide a welcome cash injection for some businesses, directors should consider whether to take advantage of the extended carry back and obtain tax relief at 19%, or carry the losses forward to future years where tax relief may be available at 25%.
Enhanced tax relief for capital expenditure
Companies that acquire new plant and machinery assets that qualify for capital allowances will be entitled to a tax deduction of either 50% or 130% for expenditure incurred between 1 April 2021 and 31 March 2023, with the 130% rate expected to apply to the majority of qualifying new assets.
Although not as generous as an increase to the ‘annual investment allowance’ might have been (which is a broader 100% tax deduction for all qualifying capital expenditure up to a current limit of £1m), the enhanced deductions will be welcomed by companies and decisions on such expenditure that may have been forecast over a say three to five year business plan should be reviewed in light of this change to maximise the tax relief across the whole expenditure.
This enhanced relief is a huge tax giveaway to businesses who can afford to accelerate capital expenditure, which is most likely to be businesses who have done well and been cash generative during these times. Interestingly therefore, the Chancellor has done the exact opposite to what was expected by many, which was to impose a windfall tax on those businesses.
There will be complications, however, when the assets are later disposed of, with proceeds being treated as a taxable balancing charge, so businesses will need to keep track of what expenditure they have claimed the enhanced relief on.
Furthermore, where 130% relief has been claimed and the disposal takes place before 1 April 2023, or during an accounting period that straddles this period, the disposal value will be increased by a factor of 1.3 tapering down to 1 if the disposal takes place after 31 March 2024. This will prevent businesses from acquiring assets to claim the enhanced relief and then selling them with a view of netting a profit.
A consultation is being launched to explore the scope for expanding or improving the existing Enterprise Management Incentive (EMI) share option regime. EMI share options are an important part of earlier stage, high-growth potential companies to attract and retain employees, offering generous tax relief at both the company and employee level. The EMI rules contain detailed and numerous qualifying criteria though, often presenting a barrier to a lot of companies that might otherwise benefit from using EMI share options. This can lead to such companies experiencing challenges with recruitment and retention. It is hoped that all of the current restrictions/limits within the current EMI rules are reviewed to open up the possibility of using EMI options to more companies.
A similar consultation will cover R&D tax relief for companies. This is closely aligned to some of the other economic stimulus announced to further boost UK science and innovation activity and this consultation aims to address whether the current R&D tax incentives need to be revised. Similarly to EMI share options, R&D tax relief is subject to detailed qualifying criteria that can restrict the availability, so a review of such criteria is again very welcome.
Customs and duties
The Chancellor’s long-term financial planning to attempt to reduce borrowing and debt will no doubt be helped by the UK being able to keep any Customs Duty it collects from businesses importing goods into the UK. The UK collected £3.3 billion in 2019/20 on behalf of the EU. This money will now go directly to the UK Exchequer together with any additional duty that the UK will collect on certain goods imported into the UK which are not covered by the Free Trade Agreement with the EU.
Announcing the UK Freeports initiative located in eight new locations may help solve the Distribution Hub issues created by the recent Trade Co-operation Agreement (TCA) and the huge adverse consequences that the application of tighter Rules of Origin within that agreement caused British business when exporting. Freeports should help the UK to maintain its role as a distribution and manufacturing hub for companies wanting to access EU markets.
The reduced 5% VAT rate for the hospitality and catering sector is to be extended until 30 September 2021. In addition to this, an interim VAT rate of 12.5% will apply for a further six months to 31 March 2022. This is welcome but perhaps surprising, especially as most of the sector is expected to be fully open well before this date. These VAT rate cuts will help businesses in two ways. It will provide financial support if they decide to keep prices the same and retain additional revenue created by the VAT reduction. Alternatively, it allows businesses to pass on some or all of the VAT reduction to their customers by reducing their prices, in order to stimulate consumer spending. Provided the business charges the customer the correct amount of VAT, it is entirely their choice on whether they reduce their headline prices or not.
There is a three-month extension to the time businesses need to start paying back the VAT they may have deferred in 2020. You can now choose which month you want to start to making payments from 11 monthly instalments starting in March 2021 down to eight monthly instalments starting in June 2021. However, whichever month you choose to start making payments the total amount of deferred VAT should be fully paid before March 2022.
The Stamp Duty Land Tax (SDLT) holiday will be extended for three months until 30 June 2021 and a further (less generous) SDLT holiday will then apply for an additional three months: i.e., for residential property transactions completing between 1 July 2021 and 30 September 2021.
The Government confirmed its intention to give Stamp Duty reliefs for property purchases in designated freeport sites and residential property transactions for housing co-operatives, and to impose a two per cent surcharge on dwelling purchases made by non-residents on or after 1 April 2021.
The top rate of SDLT, which applies to purchases of ‘additional’ dwellings in England and Northern Ireland by non-resident individuals and to purchases of dwellings in England and Northern Ireland by non-resident companies, will become 17 per cent.
The SDLT rates for purchases of non-residential property in England and Northern Ireland are unchanged. Stamp duty in Scotland and Wales is devolved, so nothing announced today will affect the tax treatment of land transactions in those regions.
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