The Chancellor began his Budget speech by highlighting the improved state of the UK economy since he presented the Spring Budget. The Office of Budget Responsibility (OBR) now forecasts that the UK economy will return to pre-Covid levels by 2022 with annual growth set to hit 6.5% this year. This increasingly optimistic outlook for the UK economy is predicted to fund more public spending, rather than a substantial increase to major taxes.
Amongst the measures likely to prove popular is the cancellation of the fuel duty increase for the twelfth consecutive year and the introduction of a new lower rate of Air Passenger Duty from April 2023. Both were perhaps surprising on the eve of COP26. Tax relief is also to be introduced for draught beer to help pubs recover from the economic shock of the pandemic.
The Chancellor was clear that it would be "reckless" to abolish business rates in their entirety even if this would further help small businesses. He did, however, announce measures designed to reduce substantially the bill faced by retailers and others on the high street. There will be a temporary 50% cut in business rates for the hospitality sector, whilst certain improvements to a property will not cause a rate increase for 12 months. Further changes to make business rates fairer are planned for the future.
The deadline for paying capital gains tax on the disposal of UK property has been extended from 30 days to 60 days. Income tax paid on dividend income will increase but many will be relieved that this is only by a relatively modest 1.25%. There will also be reform to the basis period for business profits which could have significant financial implications.
Finally, a new residential property developer tax has been confirmed. This will apply from April 2022 at a rate of 4% and is to be used to replace unsafe cladding.
On balance, it appears to be a fairly benign Budget in the context of an enormous post-pandemic deficit, with plenty of spending promises, some good news for many businesses and no tax attack on the wealthy, despite rumours of capital gains tax increases, restrictions on inheritance tax reliefs and a Covid-related wealth tax.
Capital Gains Tax – extension of reporting and payment time limits
The existing 30 day time limit to report a disposal of property for capital gains tax purposes will be extended to 60 days from the date of the disposal. The extension also applies to the date any capital gains tax becomes payable. The proposal applies to disposals made by UK residents and non-residents alike although in the case of UK residents, it only applies to residential property. This new time limit will take effect immediately for disposals which complete on or after 27 October 2021.
Clarification is also provided for UK residents that where a gain has arisen in relation to mixed-use property, only the part of the gain relating to the residential property element must be reported on and paid within the 60 day time limit. The gain relating to the commercial element only needs to be reported on and paid under the normal (and more relaxed) capital gains tax rules for other assets.
The provision of this additional time will help individuals and trustees meet their post-completion compliance obligations. It will allow those disposing of complex property under short deadlines more time to procure accurate valuations to calculate gains, and may reduce the likelihood of needing to submit revised figures at a later date. 30 days was always considered by most professional advisers far too short a time period and even 60 days is tight. It is worth remembering that the filing obligation generally applies even where no tax is due, which surprises most taxpayers and many conveyancers.
Author: Marie McCallum
Tax on dividends
The dividend income tax rate will increase by 1.25% across the board. This UK-wide measure will take effect from 6 April 2022, meaning that:
- The ordinary rate will be 8.75%;
- The higher rate will be 33.75%;
- The additional rate will be 39.35%, with the trust dividend rate increasing to remain in line with this.
Despite these increases, the Chancellor has signalled his intention to cut taxes overall by the end of this Parliament, pledging to create “a society that rewards energy, ingenuity and inventiveness”. It remains to be seen whether these increases will be reversed.
It's worth noting that for non-domiciled UK residents taxed on the remittance basis, foreign dividends will continue to be subject to the higher non-savings income tax rates (up to 45%) instead of the dividend tax rates on any dividends remitted to the UK. This may be a relatively obscure technical point but it arguably demonstrates an extension of the levelling up agenda, not between "north and south", but between foreign and UK domiciled residents.
Author: Annie Bouch
A common theme of the Chancellor's statement was the opportunity to make changes to the tax regime that would have been precluded by the UK's membership of the EU and which will help make the UK an attractive place in which to do business. The Government has launched a consultation about whether to allow overseas incorporated companies to redomicile in the UK, and possibly for UK incorporated companies to redomicile in another country. The closing date for the consultation is 7 January 2022.
By way of background, some other countries permit a company set up in country A to cease to be subject to that country's laws and instead become subject to (or "reincorporate" under) the laws of country B. This is not currently possible under UK law and so "workarounds" have evolved. These include the overseas company's shares being acquired by a new UK company (so that the resulting "group" has a UK incorporated holding company) or the assets of the old company being transferred to the new UK company in order to "redomicile" the overseas company or its assets into a UK company.
The proposal raises tax issues. For example, a company incorporated in the UK is automatically tax resident in the UK. To be consistent with current UK tax law, does that mean a company that has redomiciled in the UK should also be automatically tax resident or whether, in addition, its central management and control needs to be in the UK? Another issue is whether upon redomiciliation into the UK, the acquisition cost or "base cost" of the redomiciled company's assets should be "stepped" up (or "stepped down") i.e. revalued at market value, so that only post-redomicile growth in the value of its shares or assets is subject to UK tax. Another concern is whether redomiciliation would open the door to manipulation of the tax regime, whether by the owners or by the company. For example, might this mean tax losses that were previously difficult to use (because the company was previously overseas) will now be available to shelter UK taxable profits?
There are also many non–tax issues to consider, such as the position of creditors in country A after the company re-domiciles to the UK, and whether directors being sued in country A could avoid litigation by re-incorporating the company in the UK. The answers may depend on whether there will be a distinction between companies with real economic substance in the UK, compared to mere "on paper" redomiciliation in the UK."
Author: Gary Richards
Residential Property Developer Tax
Following the Government's announcement in February 2021 that a new Residential Property Developer Tax (RPDT) would be introduced from April 2022 to help fund the cost of cladding remediation in the residential property sector, the Chancellor confirmed that the rate of tax will be 4% of profits, to be reported and collected as part of the corporation tax regime. As anticipated in the consultation documents, the RPDT will apply to companies or groups within the scope of the tax which generate annual profits in excess of £25 million. Draft legislation was published by the Government in September and was subject to a technical consultation ending on 15 October. The final legislation will be published in the Finance Bill 2022.
Broadly, businesses within the scope of the RPDT are developers carrying out in-scope residential property development activities, holding an interest in the land that forms part of their trading stock, and which have made corporation tax trading profits from those development activities.
Since the draft legislation was published, various industry representatives lobbied for clarification on the scope of the tax, in particular on whether profits from the build to rent (BTR) sector and from private investors in affordable housing would be in scope. The Government has since confirmed that profits from BTR activity will not be subject to the RPDT, but in its response to the consultation it has stated that only not-for-profit registered providers of affordable housing would be exempted from the scope of the RPDT. Also outside the scope of the tax are developers of purpose built student accommodation (PBSA), care homes and temporary communal housing.
HMRC guidance with further detail on the application of the definitions included within the draft legislation, is expected in due course.
Today's announcements are largely in line with what the sector had expected, thanks in no small part to the continued involvement of industry representatives in the various consultations issued by the Government. Although the inclusion of for-profit affordable housing providers within the scope of the RPDT will be unwelcome news for some, it is not surprising given the Government's approach to align the RPDT with the corporation tax regime. The RPDT is expected to generate revenues of between £200 million and £250 million per year over the next five years, with a cost to HMRC of up to £8.65 million to update the existing corporation tax regime to administer the new tax.
Author: Jade Duggan
The Government is introducing several reforms to the business rate system in an attempt to "make the existing system fairer". These include:
- Freezing the "multiplier" (i.e. the tax rate) for 2022 to 2023 for all businesses. This is estimated to save businesses in England £4.6 billion over the next five years.
- A 50% temporary relief on business rates for eligible retail, hospitality and leisure sectors up to a cash cap of £110,000 per business for 2022 to 2023. The discount makes up to 400,000 properties eligible, including pubs, music venues, cinemas, restaurants, hotels, theatres and gyms. The relief will operate on top of the multiplier freeze.
- Moving to three-yearly revaluations of business rates starting from 2023, down from the current period of every five years.
- Introducing a 100% improvement relief to support investments in property improvements, providing 12 months' relief from higher bills for occupiers where improvements increase the rateable value. In addition, the Government is bringing in investment relief for green technologies, including exemptions for items such as solar panels and wind turbines. It is expected that together these investment reliefs will provide £750 million of support for businesses over the next five years.
The loud calls for rates reform – to enable high street businesses to compete more fairly with online businesses – may temporarily be silenced by these measures, but it is likely these changes won't go far enough for industry representatives and lobby groups. Further business rates reform may be inevitable, particularly if improved public finances give the Chancellor more fiscal headroom.
Author: Jade Duggan
Asset Holding Company
The Chancellor has been keen for the UK to be the location of choice for funds, and has launched the "Asset Holding Company," or AHC consultations. While little new information was released today, the Budget Documents confirm that the new regime will take effect from 1 April 2022.
While some key details remain to be clarified, the broad outline is clear. In essence, unlisted companies in which at least 70% of the economic interests and voting rights are held by widely held regulated funds or regulated institutional investors will benefit from certain exemptions and simplifications. The model is quite similar to the UK REIT regime whereby an eligible company electing into the new AHC regime will be treated as disposing and reacquiring its assets so that the exemptions and reliefs only apply to returns arising or realised while it remains within the regime.
All – or at least substantially all - of the company's activities need to be investment activities, but not all of its investment activities will benefit from the AHC exemptions. For example, profits attributable to direct or indirect investment in UK real estate or intangible assets (and any sort of trading activities) will be outside the AHC regime and so taxable in the usual way in the AHC. As a general rule, although profits, for example on shares and locally taxed overseas real estate, in an AHC will be taxed on normal corporation tax principles, selective switching off of certain rules such as the "late paid interest" and "distribution" rules, should enable most financial returns to AHCs to be extracted so that they are taxable at investor rather than AHC level. UK withholding tax should not apply on interest-related pay outs from AHCs.
Certain UK tax rules will be amended to avoid inappropriate tax charges on AHC investors. For example, where shares in an AHC are repurchased, these will be treated as capital receipts rather than distributions liable to income tax and, depending on the mix of UK and overseas investments within an AHC, a corresponding proportion of returns to investors taking advantage of the remittance basis can be treated as being derived from overseas assets.
These changes may help tilt the playing field in favour of the UK, but whether they can match similar regimes in other common overseas jurisdictions remains to be seen.
Author: Gary Richards
Basis period reform for partners and the self-employed
The government intends to reform the basis periods used where the profits of a business are taxed in the hands of an individual, such as a partner or a self-employed trader. Under the current system, there can be overlapping basis periods, resulting in profits being taxed twice and then 'overlap relief' claimed. Instead, basis periods will now be aligned with the tax year, so a business' profit for the tax year will be its profit which arose during that tax year, rather than the profits which arose in its accounting period, which ended during that tax year.
This will be a big change for partnerships and many other businesses, particularly those whose accounting period ends shortly after the tax year ends, commonly on 30 April. This has allowed them effectively to defer tax payments by almost a year - this cash flow advantage will now end. It should, at least, make partners' and self-employed traders' tax reporting simpler, and their tax liabilities will reflect the profits actually earned during the relevant tax year. Some businesses may choose to align their accounting periods with the tax year to simplify their own reporting.
Author: Hannah Dart