The Budget will take place on 3 March 2021, having been postponed from last November. With the country still firmly in the grip of the Covid-19 pandemic, the chancellor will have to balance the need for further spending to help businesses survive against the mounting deficit caused by the crisis.
We highlight some of the key tax issues we expect to be announced in the Spring Budget, along with measures that we expect to be included in the Finance Bill 2021.
There has been much speculation that the rates of Capital Gains Tax (CGT) could be increased. Our prediction, as we discuss in this insight, is that a CGT rate increase is likely but it is questionable whether this budget is the time to be raising the rate.
Aside from the possible rate change, the chancellor has other options available to him should he wish to increase CGT revenues. These include scrapping or limiting some of the CGT exemptions and reliefs (such as Business Asset Disposal Relief – formerly Entrepreneurs' Relief). However, the chancellor will be mindful that encouraging investment in business and supporting entrepreneurial activity will be crucial for the recovery of the economy and to ensure the UK's competitiveness on the international stage.
Although there are suggestions that the chancellor has rejected the idea of a wealth tax, it is possible that he may look at changes to inheritance tax. Private client lawyers are excited to see whether the inheritance tax nil rate band will finally see an increase for inflation (having been frozen since 2009, while RPI has increased by 40% and house prices by 60%). The latest freeze, announced in 2017, promised a return to normal service from April 2021.
Business Property Relief has been little mentioned in recent times but remains very generous and was raised by the Office of Tax Simplification in its second report (in 2019) on inheritance tax. We still await a government response and it is possible that the chancellor might choose this as his opportunity to cut the relief down.
The UK's corporation tax rate of 19% is the lowest in the G7 countries, leading many to call for an increase in the rate. Even a single point rate rise would raise around £3.4bn for the Treasury, so with the current UK deficit we can expect the chancellor to at least be considering a rate increase. However, he will have to weigh this against the need to support businesses through the pandemic so that the economy can grow when the country comes out the other side.
We expect the government to take forward its proposal to introduce a limit to prevent the abuse of Research and Development (R&D) tax relief for small and medium sized enterprises (SMEs). The changes will limit the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total PAYE and NICs liability for the period. This change has been widely trailed (its implementation already having been delayed). Draft legislation was published last November and we expect the cap will have effect for accounting periods beginning on or after 1 April 2021.
The Finance Bill is also expected to include some technical changes to the corporate interest restriction and the hybrid rules, draft legislation for these changes having been published in July and November last year.
Last November, the government set out a ten point plan for a "green industrial revolution" covering clean energy, transport, nature and innovative technologies. The blueprint will help the UK meet its commitment to achieve net zero carbon dioxide emissions by 2050. The government has already made some tax announcements – such as the extension until 2025 of the 100% first-year capital allowances for electric vehicles (which would have ended on 31 March 2021). With the COP26 climate change summit taking place in Glasgow in November this year, it would be no surprise if the chancellor announced new or improved tax reliefs for R&D or otherwise in relation to technologies which promote the government's green agenda.
We can also expect the Finance Bill to include legislation to introduce the new plastic packaging tax (which will take effect from the following year, 1 April 2022). This follows a consultation on the policy design which closed last August. The rate of tax will be £200 per tonne of plastic packaging which does not contain at least 30% recycled plastic. The levy is intended to encourage the use of recycled rather than new plastic within packaging and will apply to plastic packaging which has been manufactured in, or imported into, the UK.
Over the past year, the government has tried to protect jobs during the pandemic with the introduction of the Coronavirus Job Retention Scheme (the CJRS). It is possible that due to the ongoing Covid-19 crisis, the CJRS – which was expected to end on 30 April 2021 – will be further extended into the summer.
For tax-advantaged enterprise management incentive (EMI) schemes, changes have already been made to ensure that an EMI option holder being placed on furlough under the CJRS will not trigger a 'disqualifying event' such as to change the tax status of their options. Further amendments are to be made (in the Finance Bill 2021) to formally confirm that new EMI options may be granted to employees who are on furlough or working reduced hours due to the coronavirus emergency. These changes will apply for a limited period (from 19 March 2020 until 5 April 2021), although we anticipate that this period will be extended (particularly if the CJRS is extended).
The chancellor commented at the beginning of the pandemic that it was harder to justify the "inconsistent contributions" between employment status. Aligning the NICs rate between the employed and self-employed would break the Conservative Party's manifesto promise of the triple tax lock (not to increase income tax, VAT or National Insurance). However, the chancellor could announce further reviews or consultations to examine the mismatches between employment and self-employment status.
Real estate taxes
We expect the Finance Bill will include the legislation (published in draft last July) to introduce a 2% Stamp Duty Land Tax (SDLT) surcharge on purchases of residential property by non-residents. The increase will apply to transactions with an effective date on or after 1 April 2021. This measure, which has been widely trailed, is designed to curb inflated prices and to increase housing supply.
We also expect the Finance Bill to include some changes to the Construction Industry Scheme to tackle abuse of the rules (some draft legislation having been published in November). These changes are expected to take effect from 6 April 2021 although the detailed rules, which will be contained in regulations, have not yet been published. There has been some lobbying that the change should be pushed back by a year to give businesses more time to prepare.
The SDLT holiday for residential property which was put in place last July to stimulate momentum in the property market due to the pandemic is due to end on 31 March 2021. Recent data has shown that since the temporary relief was introduced, transactions have increased. Whilst the government stated on 10 December that it does not plan to extend this relief, recent press coverage of delays in the conveyancing process for buyers may result in a change of heart and a short extension.
It is possible that 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, may be extended.
We might also see the outcome of the call for evidence launched last July on the business rates system. 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). Whilst this may need further consideration, the chancellor may make some announcement as the government had originally proposed to set out preliminary conclusions to the call for evidence last autumn.
Although HMRC has deferred proposals for requiring large businesses to notify HMRC of uncertain tax positions until April 2022 (they were meant to take effect from April 2021), we expect the Finance Bill to include other anti-avoidance type measures. Draft legislation published last July provided for two such measures. One of these requires financial institutions to provide information to HMRC when requested about a specific taxpayer, without the need for approval from the independent tribunal. The other targets the promoters and enablers of tax avoidance schemes.
We also expect the Finance Bill to include legislation (which will have an effect on applications made from the following year, April 2022) to introduce a tax registration check linked to licence renewal processes for some public sector licences (such as taxi and mini cabs). This would make it more difficult to operate in the 'hidden economy', helping to level the playing field for compliant businesses.
We may also see some announcement regarding the direction of travel for the UK's Mandatory Disclosure Rules. Following the reduced scope of DAC6 in the UK from 1 January 2021 (as we discuss in this Insight), HMRC said it will 'in the coming year' consult on and implement the OECD’s Mandatory Disclosure Rules as soon as practicable, to replace DAC6.
In line with the possible extension of other coronavirus support measures, we could see the extension of 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.
Osborne Clarke comment
Given the massive deficit the Treasury faces due to the Covid-19 crisis (around £400bn in 2020/21) it is difficult to predict whether the chancellor will press ahead with tax rises to reduce that deficit or will instead seek to steady the ship, support jobs and extend the government's help for struggling businesses. As we expect the government to continue with its policy of having an Autumn Budget (which is then, in normal years, following by a Spring Statement) it is possible that tax rises and substantive tax measures will be postponed until a point when the end of the pandemic is more clearly in sight.
For further information on any of these measures please get in touch with one of the contacts below.