The Chancellor of the Exchequer has delivered a budget which contained little in the way of major surprises given that a lot of it had already been trailed in the press.
Many of the announcements focussed on continuing to support individuals and businesses through the remaining stages of the COVID-19 crisis.
Rishi Sunak MP did say that he wanted to be honest about the Government’s desire to fix the public finances in the long term and we now know that this will in part take the form of future Corporation Tax rises. Private clients can breathe a sigh of relief with the promise of no income tax rises and no sign of the much anticipated increase to Capital Gains Tax rates.
Overall, in our opinion, nothing in this Budget demands immediate action ahead of the new financial year.
The key issues for our clients are summarised as follows:
Income Tax and National Insurance (NICs)
The Chancellor announced an increase in the Income Tax personal allowance for 2021-22 to £12,570 (from £12,500) but specified that the allowance will then be frozen until 2025-26. Likewise, the higher rate threshold will increase this coming year to £50,270 but then be frozen. The additional rate threshold continues to be unchanged at £150,000.
The NICs Primary Threshold/Lower Profits Limit will increase to £9,568 for 2021-22. The Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate Income Tax limit.
Capital Gains Tax rates
The much-anticipated CGT rate increase did not materialise, with the Chancellor simply announcing a freeze of the Annual Exempt Amount at its current £12,300 until 2025-26. There were no changes to Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief).
The Inheritance tax Nil Rate Band (£325,000) and Residence Nil Rate Band (£175,000) have been frozen until 2025-26.
The VAT registration threshold has been frozen (£85,000) until 2025-26.
The Pensions Lifetime Allowance (£1,073,100) has been frozen until 2025-26.
Corporate and business tax
Corporation Tax increases
The Chancellor has decided against an immediate increase in the current 19p rate of Corporation Tax.
However, this is just a deferral and the headline rate will increase to 25% in 2023. Businesses with profits of £50,000 or less (around 70% of actively trading companies) will continue to be taxed at 19%. A new tapered rate will also be introduced for profits above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate.
The small profits rate will not apply to closely held investment-holding companies which will pay tax at 25% regardless of profit levels. This will impact Family Investment Companies and similar.
The Government has been very keen in the past to point out that the current rate of UK Corporation Tax is low as compared to our OECD competitors. In fact, the rate will remain the lowest in the G7 even after these changes.
The Government has decided to increase the rate of Diverted Profit Tax from 25% to 31% so that it continues to operate as a disincentive to artificially moving UK profits offshore.
Extended loss carry back for businesses
Currently trading businesses (whether carried on by an individual, a partnership or a company) can only carry back any trading losses one year. This will temporarily be extended to three years subject to a cap. The manner in which relief is to be delivered depends on the way in which the business in question is organised:
- Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22.
- Companies that are members of a corporate group will be able to obtain relief for up to £200,000 of losses in each of 2020-21 and 2021-22 without any group limitations.
- Companies that are members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22, but subject to a £2 million cap across the group as a whole.
This legislation governing this change will be included in the forthcoming Finance Bill.
Capital Allowances: Super-deduction - a new first-year plant and machinery capital allowance
As part of the Chancellor’s push to increase currently frosty levels of business investment, from 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:
- 130% ‘super-deduction’ capital allowance on qualifying plant and machinery investments; and
- a 50% first-year allowance for qualifying special rate assets.
The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.
Capital Allowances: Annual Investment Allowance (AIA) Extension
The AIA is a 100% capital allowance for qualifying expenditure on plant and machinery up to a specified annual limit and was introduced back in 2008. The permanent limit of the annual amount was set at £200,000 from 1 January 2016. As announced late last year, a temporary £1m limit for the AIA will be extended by one year. This change will have effect from 1 January 2021 to 31 December 2021.
Changes to R&D Tax Reliefs
The Government has launched a wide-ranging consultation on the UK’s Research & Development Tax relief regime. Currently companies undertaking R&D can get relief via the Research and Development Expenditure Credit (or RDEC) an ‘above the line’ credit or via an additional tax relief for small and medium enterprises. This new consultation will explore the nature of private-sector R&D investment in the UK. Specifically, it will look at definitions, eligibility and the scope of the reliefs, to ensure they are up-to-date and competitive, and that they reflect how R&D activity is conducted nowadays.
Retail and hospitality: VAT and Business Rate
Two specific announcements today, which we thought might be worth a quick mention relate to the struggling tourism and hospitality sector. The Government will extend the temporarily reduced rate of 5% VAT for goods and services supplied by the tourism and hospitality sector until 30 September 2021. To help businesses manage the transition back to the standard 20% rate, a 12.5% rate will apply for the subsequent six months until 31 March 2022. The Government will continue to provide eligible retail, hospitality and leisure properties in England with 100% business rates relief from 1 April 2021 to 30 June 2021.
UK Withholding taxes
The Government will legislate in the next Finance Bill to repeal the domestic legislation that gives effect to the EU Interest and Royalties Directive. This legislation currently provides an exemption from withholding tax on intra-group interest and royalty payments between UK and EU companies. Repeal 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.
Stamp Duty Land Tax (SDLT)
The current SDLT “holiday” which treats the first £500,000 of a residential property purchase as subject to SDLT at 0% has been extended until 30 June 2021. Between 1 July 2021 and 30 September 2021, the 0% rate will apply to the first £250,000 and the 0% band with revert back to the pre-Covid level of £125,000 from 1 October 2021.
The Budget also confirmed that, as previously announced, an additional 2% SDLT will be payable by non-UK resident purchasers of UK residential property from 1 April 2021.
Freeports: tax incentives
“Freeports” are areas of the UK that are outside the country’s customs territory, meaning goods can be manufactured, imported and exported inside the zones without incurring tariffs. This Budget contained an announcement regarding the location of 8 English Freeports. Businesses within designated ‘tax sites’ in the Freeports will be able to benefit from a number of significant tax reliefs. We can provide you with further detail if you are interested.
Enterprise Management Incentives: call for evidence
The Enterprise Management Incentives (EMI) scheme is a tax-advantaged employee share scheme that was intended to create to bolster the attractiveness of share-based remuneration that Small and Medium Enterprises can offer to employees. The idea is that cash-constrained small employers can offer more attractive remuneration packages, helping them recruit and retain skilled employees. The Government is publishing a consultation alongside the Budget on whether and how to expand the current EMI scheme to ensure it offers effective support for high-growth companies seeking to recruit and retain key employees.
If you would like to discuss how the Budget may affect you, please contact us.