Given the continuing Covid-19 crisis, it was no real surprise that the chancellor chose to use the Spring Budget on 3 March 2021 to announce further support for jobs and businesses rather than announcing any immediate tax increases (even the expected corporation tax rise will not come into effect until 1 April 2023). It appears that the chancellor has left major tax rises and changes for the autumn Budget when the pandemic will hopefully be behind us. On 23 March ("Tax Day") the government will also publish a number of tax-related documents and consultations, that would traditionally have been published on Budget day, that may provide more detail of the direction of travel for other tax raising measures. (Many of these may be included in next year's bill, Finance Bill 2022).
Finance Bill 2021, which will be published next week, should confirm some of the measures that we expect to see included, following draft legislation published last July and November (see our previous Insight for further detail).
The biggest announcement in the Budget, which had been widely rumoured, was the 6% increase in the rate of corporation tax, to 25% (from 1 April 2023). The chancellor says that this increased rate will still leave the UK with the lowest corporation tax rate in the G7 (although the US Federal corporate income tax rate is currently 21%). Such a step has seemed more inevitable in recent weeks, with the government's continued commitment to maintain the "triple tax lock" (not to increase income tax, VAT or National Insurance), leaving the chancellor with few other options. Support for the increase may also have been bolstered by the proposals from President Biden to raise the headline rate in the US to 28%.
The chancellor also announced a new small profits rate of 19% from 1 April 2023 for businesses with profits of less than £50,000, with the introduction of marginal relief for profits between £50,000 and £250,000 (which thresholds are proportionately reduced for the number of associated companies and for short accounting periods). The introduction of marginal relief, whilst introducing some complexity into the system, means that only businesses with profits of more than £250,000 will be taxed at the full 25% corporation tax rate from April 2023. Interestingly, the small profits rate will not apply to close investment-holding companies, meaning that it will not be available to most family investment companies, which have become popular in recent years.
Additional measures have also been announced to give more flexibility for companies to utilise tax losses which have accrued during the pandemic. The government has announced that it will temporarily extend the period over which businesses may carry-back trading losses from one year to three years. The extension will apply to a maximum of £2m of unused trading losses made in each of the tax years 2020 to 2021 and 2021 to 2022. The £2m cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of £200,000 to apportion the cap between their companies.
The chancellor has announced a "super deduction" for companies that invest in innovation. For the next two years (between 1 April 2021 and 31 March 2023), companies investing in qualifying new plant and machinery will benefit from new first-year capital allowances. Under this measure, investments in main-rate assets will be relieved by a 130% super-deduction, whilst investments in assets qualifying for special rate relief will benefit from a 50% first-year allowance.
While the "super deduction" for investment in plant and machinery is welcome and aims to ensure that the UK remains a competitive location for cutting edge research, it will only be of use to profit-making companies and there is no targeted relief for green investment.
The government will also carry out a review of research and development tax reliefs and has published a consultation alongside the Budget. The review will consider all elements of the two R&D tax relief schemes, to make sure that the UK remains attractive to innovative companies, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.
It was somewhat surprising that very little was announced in the way of changes to Capital Gains Tax (CGT). There were rumours of an increase in the rate of CGT or restricting certain CGT exemptions and reliefs (such as Business Asset Disposal Relief – formerly Entrepreneurs' Relief), but this did not happen. Instead, the changes that were announced included an amendment (in Finance Bill 2021) to the anti-avoidance rule when claiming relief for gifts of business assets, to make sure it operates as intended. The annual exempt amount for CGT will also be frozen at its present level for the tax years until 2025 to 2026: £12,300 for individuals, personal representatives and some types of trusts and £6,150 for trustees of most settlements.
We had expected that the inheritance tax nil rate band may finally see an increase for inflation (having been frozen since 2009, while RPI has increased by 40% and house prices by 60%). However, it was announced that inheritance tax nil-rate bands will remain at existing levels until April 2026.
We were also expecting to see some tax announcements in relation to the government's green agenda but these did not appear – the focus has clearly been around government finances instead.
The government confirmed that it will introduce legislation in Finance Bill 2021 to repeal the provisions in Finance Acts 2019 and 2020 relating to Carbon Emissions Tax, which were not commenced. This follows the government’s announcement on 14 December 2020 that the UK Emissions Trading System, rather than the Carbon Emissions Tax, would be the UK’s carbon pricing policy from 1 January 2021. However, on Tax Day the government will publish its response to the Carbon Emissions Tax consultation which took place last summer and so it is possible that we may see more of the government's green agenda plans in a couple of weeks.
The chancellor announced the locations of the eight "Freeports", which are special economic zones with low taxes: East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames and Teesside.
The government will legislate for powers to create ‘tax sites’ in the Freeports. Businesses in these tax sites will be able to benefit from a number of tax reliefs (up until 30 September 2026) in relation to those sites, including: an enhanced 10% rate of Structures and Buildings Allowance for constructing or renovating non-residential structures and buildings; an enhanced capital allowance of 100%; and full relief from Stamp Duty Land Tax.
As one of the main aims of the government's assistance throughout the pandemic has been to protect jobs, it is unsurprising that the Coronavirus Job Retention Scheme (the CJRS), which was due to end on 30 April 2021, has been further extended until the end of September, with government assistance tapered from 1 July. Between the date of the Budget and 30 June, the government will continue to pay 80% of wages for furloughed workers up to £2,500 a month. From 1 July, the government will pay 70% of wages (with employers covering the remaining 10%) and from 1 August, the government will pay 60% of wages (with employers covering the remaining 20%).
The chancellor has also widened the scope of the self-employment income support scheme (SEISS) and support will continue with a fourth grant covering February to April and a fifth grant from May until September.
The government will also invest over £100 million in a Taxpayer Protection Taskforce of 1,265 HMRC staff to combat fraud within Covid-19 support packages, including the CJRS and SEISS. This represents one of the largest responses to a fraud risk by HMRC.
As previously announced, the government will legislate in Finance Bill 2021 to extend the time-limited exception that ensures that employees who are furloughed or working reduced hours because of coronavirus continue to meet the working time requirements for EMI schemes. The change will apply to existing participants of EMI scheme. It also allows employers to issue new EMI options to employees who do not meet the working time requirement as a result of Covid-19. This measure will have effect until 5 April 2022.
The government also published a call for evidence seeking views on how the EMI scheme is operating and whether it should be expanded. To read more on these measures, see our Insight here.
As the chancellor had his hands tied as a result of the triple tax lock, it was not surprising that income tax rates were not increased. The chancellor announced that the Personal Allowance will increase to £12,570 and the basic rate limit to £37,700 for 2021 to 2022. The higher rate threshold (the Personal Allowance added to the basic rate limit) will increase to £50,270 for 2021 to 2022. However, these rates will be frozen until 2026, meaning that more people are likely to fall into the higher tax bracket as inflation raises wages over time.
Real estate taxes
As anticipated, the 2% Stamp Duty Land Tax (SDLT) surcharge on purchases of residential property by non-residents will come into force for transactions with an effective date on or after 1 April 2021. The changes to the Construction Industry Scheme to tackle abuse of the rules will also take effect from 6 April 2021, despite some lobbying for the change to be pushed back by a year to give businesses more time to prepare.
The temporary increase in the SDLT nil rate band for residential property (up to £500,000), which was put in place last July to stimulate momentum in the property market, was due to end on 31 March 2021. Despite the government previously stating that it did not plan to extend this relief, this has been extended to 30 June 2021. To smooth the transition from 1 July 2021 until 30 September 2021, the nil rate band will be £250,000, which will return to the standard amount of £125,000 from 1 October 2021.
As expected the business rates holiday for those sectors particularly affected by the pandemic (retail, hospitality and leisure properties), which was due to end at the end of March 2021, has been extended until 30 June. For the remaining nine months of the financial year, business rates will still be discounted by two thirds, up to a value of £2m for closed businesses, with a lower cap for those who have been able to stay open.
The chancellor announced a few days before the Budget that the expected outcome of the call for evidence launched last July on the business rates system, will be postponed until the autumn. One of the alternatives to business rates raised in that call for evidence was the introduction of an online sales tax on companies (which would run alongside the current digital sales tax), so we may hear further details about proposals later in the year.
In line with the other extension of other coronavirus support measures, the temporary reduced rate of 5% VAT for hospitality, holiday accommodation and attractions, which was introduced last July and was due to end on 31 March 2021, has been extended until 30 September. This will be followed by an interim rate of 12.5% for a further six months from 1 October 2021 to 31 March 2022. The standard rate of 20% will return from 1 April 2022.
The VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2022.
The government announced that legislation will be included in Finance Bill 2021 to repeal the domestic legislation that gives effect to the EU Interest and Royalties Directive (IRD). The IRD currently provides an exemption from withholding tax on intra-group interest and royalty payments between UK and EU companies. Following the end of the Brexit transition period, the UK no longer has an obligation to provide relief and the repeal of the legislation will mean that from 1 June 2021 withholding taxes will apply to payments of annual interest and royalties made to EU companies, subject to the terms of the relevant double taxation agreement.
The government also reconfirmed that it will consult later this year on draft regulations to implement the OECD’s Mandatory Disclosure Rules, which facilitate global exchange of information on certain cross-border tax arrangements, in order to combat offshore tax evasion. HMRC anticipate that these rules will come into force in 2022 and will replace DAC6, the scope of which was narrowed in the UK at the beginning of this year (for further detail see our Insight here).
The government has confirmed that it will take forward long-standing proposals to reform the penalty regimes for VAT and Income Tax Self- Assessment to make them fairer and more consistent. The new late submission regime will be points-based, and a financial penalty will only be issued when the relevant threshold is reached. The government will also introduce a new approach to interest charges and repayment interest to align VAT with other tax regimes. The reforms will be phased in over two years, starting for VAT taxpayers from periods on or after 1 April 2022.
The government is also reducing the penalties that may be charged to taxpayers receiving Follower Notices as a result of using tax avoidance schemes, from 50% to 30% of the tax under dispute. A further penalty of 20% will be charged if the Tax Tribunal decides that the recipient’s continued litigation against HMRC is unreasonable. A summary of responses to the consultation has been published alongside the Budget.
The government has announced that it will consult on the implementation of OECD rules that will require digital platforms to send information about the income of services providers using their platforms to both HMRC and to the taxpayer. This will help taxpayers in the sharing and gig economies to get their tax right, and help HMRC to detect and tackle non-compliance.
Osborne Clarke comment
Following the chancellor's confirmation in his speech that that for the duration of the pandemic he would continue to do whatever it takes to protect jobs and livelihoods across the UK, it is no surprise that the Spring Budget was used more as support package for the UK rather than a revenue-raising exercise. Even the corporation tax rise that was announced will not take effect for two years and the impact of the relatively high increase has been softened by the introduction of a new small profits rate and marginal relief, meaning that that only 10% of all companies are expected to pay the full higher rate. The chancellor now has breathing space to consider how to tackle the huge deficit caused by the pandemic. It is likely that we will see further detail on how he proposes to do this on Tax Day, paving the way for inevitable rises in the autumn Budget.
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