What a difference a year makes. Today the Chancellor delivered his second Budget in a very different environment from last March, amidst the COVID-19 pandemic, an economy which shrank by 10% in 2020 (the biggest reduction in 300 years) and borrowing at its highest level outside of wartime. He drew a careful balance, announcing that it would "be irresponsible to withdraw support too soon and irresponsible to allow borrowing to rise unchecked". Two key proposals, the extension of furlough arrangements and the Stamp Duty Land Tax holiday, had been pre-announced. Generally he shied away from overt tax increases, preferring to raise money through a package of fiscal drag measures while accepting that his wish to achieve sustainable public finances will have to wait. The speculation that Capital Gains Tax rates would increase in line with Income Tax did not materialise, although he did announce that Corporation Tax rates will rise in 2023.
The new decade has brought a period of uncertainty for many of our clients. The pandemic restrictions have prohibited the free movement of people and disrupted normal business processes, while leaving the EU has triggered uncertainty for UK businesses operating globally. Fortunately today's Budget has provided continued financial support for many sectors and workers while not adding an additional burden of significant tax increases. Some of the key announcements are highlighted below.
Furlough scheme extended to end of September 2021
The Coronavirus Job Retention Scheme (the furlough scheme) is being extended to 30 September 2021. During the remaining lifetime of the scheme, furloughed employees will continue to receive 80% of their salary (capped at £2,500 per month) for hours not worked, but from 1 July 2021 employers will progressively bear more of the cost of the scheme. In July 2021, the Government grant reduces to 70%, with employers paying the other 10% in addition to employer National Insurance Contributions (NICs) and employer pension contributions. In August and September 2021 the Government grant reduces to 60%, with employers paying the other 20% in addition to employer NICs and employer pension contributions.
Author: Adam Turner
Real Estate: Stamp Duty Land Tax extension
As was widely trailed in the press, the Government has extended the temporary increase in the residential Stamp Duty Land Tax ("SDLT") Nil Rate Band to £500,000 in England and Northern Ireland until 30 June 2021. From 1 July 2021, the Nil Rate Band will reduce to £250,000 until 30 September 2021 before returning to its 'normal' level of £125,000 on 1 October 2021. Note that, in most cases, the date of completion of the property purchase is the key date (although it can be earlier if a contract is 'substantially performed' before this date).
This is good news for residential buyers, who now will not now face the 'cliff-edge' of 1 April 2021, the date when the SDLT holiday was originally meant to end. Many would have been unable to complete in time for reasons outside their control such as COVID-induced delays with local authority property searches and mortgage offers.
The extension is also good news for funds and property companies investing in the build to rent or private rented sector. While the value of claiming 'multiple dwellings relief' has been eroded for those caught by the 3% higher rate on additional dwellings (and from 1 April 2021, those who will be caught by the new 2% non-resident surcharge), the extension of the 'holiday' will benefit many buyers, particularly those investing in purpose-built student accommodation and private rented accommodation with mixed-use elements.
Author: Jonathan Legg
Corporation Tax: A helping hand (and later in the wallet)
The Chancellor announced a welcome opportunity for companies (and unincorporated businesses) that have suffered losses to carry back those losses to shelter profits made in the previous three years, rather than just the last year as is the current position. The maximum loss that can be carried back to each of these earlier years is £2m, so potentially saving up to £380,000 per year of corporation tax. Where the earlier year's tax has already been paid, the relevant amount may be refunded. The £2m annual limit is split between companies in a group. The losses in question are those arising between 1 April 2020 and 31 March 2022 (and for unincorporated business losses made in tax years 2020/21 and 2021/22).
Such generosity comes with a price tag as the headline rate of corporation tax, currently at 19%, will increase to 25% from 1 April 2023. Moreover, Diverted Profit Tax, currently charged at 25%, will be increased from the same date to 31% to maintain the differential.
Introducing more complexity into the corporation tax regime, companies earning profits of £50,000 or less from 1 April 2023 will continue to benefit from the 19% rate via a "small profits" rate which will be tapered away as profits exceed £50,000. By the time profits reach £250,000, the full 25% rate will be paid. To stop "fragmentation schemes" these £50,000 and £250,000 thresholds will be split between companies in a group. A consequence of the increase to 25% is that reliefs such as interest and other finance costs will become more valuable. Correspondingly, receipts such as balancing charges on plant and machinery from 1 April 2023 will attract more tax.
A new time-limited incentive for companies to invest is provided by a "super-deduction" for capital expenditure incurred between 1 April 2021 and 31 March 2023. During this period, investment in assets that would have ordinarily attracted allowances at 18% will now benefit from a rate of tax deduction of effectively 130% of the expenditure. For investment in assets (often longer-lasting assets) that normally attract capital allowances at the 6% rate, the rate of deduction is effectively 50%. There are restrictions where assets are "purchased" under HP contracts, for already contracted expenditure, for second-hand assets and for assets acquired from connected parties. In addition, where assets benefitting from the enhanced deductions are sold, proceeds will not go to reduce the balance in the relevant "pool" but relief will clawed back separately, and at a higher rate where the assets in question benefitted from the 130% super-deduction.
Companies that currently rely on the EU Interest and Royalty Directive to pay interest and royalties to associated companies based in the EU without deduction of UK withholding tax should note that with effect from 1 July 2021 the relevant UK legislation will be repealed. For payments made on or after that date, UK withholding tax may apply unless there is a double tax treaty between the UK and the country in which the recipient is based that permits a zero or lower rate of withholding tax and appropriate steps to benefit from the treaty have been taken.
Author: Gary Richards
Capital Gains Tax, hold-over relief and social investment relief – a mixed blessing
Despite much speculation before the Budget, no increase in Capital Gains Tax ("CGT") rates was announced. Nor was Business Assets Disposal Relief (formerly Entrepreneurs Relief) restricted, abolished or replaced following the huge cut in the lifetime allowance last year from £10m to £1m.
CGT hold-over relief is usually available where a person makes a gift of business assets. Where a claim is made, the CGT that would otherwise be payable is postponed until the recipient of the gift later disposes of the asset. An anti-avoidance provision currently denies hold-over relief where the recipient is a company which is controlled by a non-resident individual and that individual is connected to the donor. This is to ensure that business assets cannot be gifted out of the UK and CGT avoided for all time.
The Government has today announced a technical amendment to this anti-avoidance rule. While the draft legislation has not yet been published, the Government's aim is to ensure that hold-over relief is denied where the donor is also the person who controls the non-resident company. Under the current rules there is an argument that a transferor cannot be connected with themselves. If that is correct, the existing anti-avoidance rule would not apply where an individual makes a gift to a foreign company of which they are the sole shareholder. The change will rule out this argument.
The Government has also announced that Social Investment Tax Relief (SITR) will be extended. The relief is currently scheduled to sunset at the end of the existing tax year. It will now continue until at least April 2023. SITR is a generous relief and venture capital scheme designed to encourage investment in social enterprises. Investors must buy new shares in the enterprise or make a loan to it, and there cannot be arrangements in place for the repayment of the debt or sale of the shares within three years of the investment. Where the relief applies it can reduce the investor's income tax liability by offering 30% income tax relief. It also provides CGT exemption if their investment is sold at a gain after three years. In addition, if the investor made gains on other assets, they can roll-over those gains into the social investment and thereby defer tax on those gains until they dispose of the new investment.
Author: Christopher Eames
Fiscal drag: rates maintained
The Chancellor upheld the Government’s 2019 election manifesto pledge not to increase Income Tax, National Insurance or VAT during the course of this Parliament, with no changes announced to the main personal tax rates.
However, he heralded the return of ‘fiscal drag’ by freezing current thresholds applying to Income Tax, Inheritance Tax, the Pensions Lifetime Allowance and VAT:
- Income Tax: as planned, the personal allowance will rise to £12,570 from April 2021, but will then be fixed until April 2026. The higher rate threshold will rise to £50,270 as planned, and then be fixed for the same period. The 0% savings starting tax rate remains at £5,000 in 2021/22.
- Inheritance Tax: the nil-rate band will continue at £325,000 until April 2026. The residence nil-rate band will also continue at £175,000, with no change to the £2 million taper threshold.
- Pensions Lifetime Allowance: this will be kept at its current level of £1,073,100 until April 2026.
- VAT: the (de)registration threshold will be frozen at £85,000 until April 2024.
While these frozen bands and allowances will have limited impact in a low inflationary climate, the effects will be felt as inflation rises. The vast majority of people will end up paying more in personal taxation, with many new higher-rate taxpayers created. It is unclear as to whether the Government thinks the public won't notice such stealth taxes. The Inheritance Tax nil rate band in particular has been kept at £325,000 since 2009, bringing many more families into the Inheritance Tax net. This pattern will only increase.
Author: Annie Bouch
Freeports and tax reliefs
As part of the Government's drive for "an investment led recovery", they announced the creation of eight new English Freeports based in East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames and Teesside. They also announced that they will legislate to create 'tax sites' within Freeports. Businesses in these 'tax sites' will benefit from a number of tax reliefs, including: enhanced capital and structures and building allowances; full relief from SDLT on property purchases for a "qualifying commercial purpose"; full business rates relief for certain businesses; and employer national insurance contributions relief in respect of eligible employees.
The creation of these new Freeports and 'tax sites' will bring welcome investment, trade and jobs to regenerate these areas, and also help to position the UK to make the most of global opportunities after Brexit.
Author: Isabella Adams
Updates to Enterprise Management Incentive schemes
- Call for evidence - The Government has announced a call for evidence to understand whether the Enterprise Management Incentive ("EMI") scheme should be extended to include more companies. This follows on the back of the Government's announcement at last year's Budget that it would review the EMI scheme to ensure that it continues to provide appropriate support for high-growth companies to recruit and retain the best talent so they can scale up effectively. The Government will welcome responses from businesses, representative organisations and employees, to be received by 26 May 2021.
- Working time requirements - There has been an extension of the exception to the working time requirements to ensure that, from 19 March 2020 until 5 April 2022, individuals who are furloughed or have their working hours reduced below the current statutory working time requirement for EMI as a result of COVID-19 will retain access to the scheme's tax advantages. This will apply to existing participants of EMI schemes and where new EMI options are being granted.
Author: Sakhee Ganatra
Value Added Tax
The Chancellor announced that the standard rate of VAT will remain at 20%. It was also announced that there would be no changes to the VAT registration threshold (currently £85,000) until 2024 at the earliest. That said, there were some noteworthy announcements, in particular:
- Extension of reduced rate for tourism and hospitality sector – the temporary reduced rate of 5% VAT for goods and services supplied by the tourism and hospitality sector will be extended until 30 September 2021. Interestingly, the Government then proposes to increase the rate in stages, with a 12.5% rate from 1 October 2021 until 31 March 2022 before reverting to the full 20% rate on 1 April 2022.
- VAT Deferral New Payment Scheme – the Chancellor confirmed that businesses that had opted to defer VAT on VAT returns from 20 March 2020 to the end of June 2020 can now pay that deferred VAT in up to 11 equal payments from March 2021. When initially rolled out, it was envisaged that the deferred VAT would be due by 31 March 2021 in a single lump sum. This is a very welcome announcement for thousands of businesses still requiring help with cash flow as the economy slowly recovers from the pandemic.
- VAT penalty regime – the Government will reform the penalty regime for VAT in an attempt to make it "fairer and more consistent". The reforms are intended to introduce a new late submission regime which will be points-based. The idea is that a penalty will be imposed depending on the number of points that apply to the taxpayer, the amount of tax owed and the time elapsed since the tax became due. Unfortunately, the Government has not provided clarity on what will constitute a "point" but, given the reforms will come into effect on or after 1 April 2022, we should expect to hear more on this soon.
Author: Moustapha Hammoud