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March 3, 2021
UK issues 2021 Budget: Initial highlights
The Chancellor’s three-point plan
The challenge for the United Kingdom’s (UK) Chancellor in his 3 March 2021 Budget was to balance the need to provide continuing support and encourage investment, while at the same time starting to return to “sustainable” public finances. This was reflected by the extension of COVID-19 support, largely as anticipated, but with policies that seek to avoid unexpected consequences as the support winds down.
To assist the public finances, this support was accompanied by a 25% corporation tax rate (for larger companies) from 1 April 2023 (returning rates back to the level of 10 years ago) with an associated rise in the rate of diverted profits tax to 31% but with a commitment to reviewing the level of the bank surcharge rate. More unexpected was the repeal of the provisions which had introduced the European Union (EU) interest and royalties Directive. These are repealed with effect from 1 June 2021 (introducing a withholding tax on certain payments out of the UK where the treaty rates in question do not reduce the withholding to zero). There also was the freezing of a number of income tax allowances and thresholds, in some cases up to 2026.
To compensate for these tax ”rises” and encourage investment, there is a time-limited ”super-deduction” of up to 130% on new plant and machinery and the announcement of new consultations on research and development (R&D) reliefs and references to the expansion of the Enterprise Management Incentives (EMI) Scheme. For the next two years, there is also additional flexibility to allow a three-year carryback of up to £2 million of losses and a new small profits corporation tax rate so that only businesses with taxable profits of over £250,000 will pay the 25% rate.
The next few days will indicate how well the Chancellor has managed to satisfy the various different expectations and also provide the opportunity to assess the implications of his plans for the future.
As expected, the Coronavirus Job Retention Scheme (CJRS) which was due to end 30 April has been extended. The length of the extension is more generous than had been thought, with the scheme being extended to 30 September 2021. Employees will continue to receive 80% as under the current scheme. However, for employers, while the CJRS continues in its current form to 30 June 2021, from that point they will be expected to contribute to the cost of the hours their employees do not work (a return to an earlier version of the scheme). In this case, employers will be expected to pay 10% towards the costs of hours not worked in July (in addition to continuing to pay National Insurance contributions (NICs) and pension costs as they would at present) with the Government paying 70%. For August and September, this would rise to 20% for employers with 60% being paid by the Government.
A fourth Self Employment Income Support Scheme (SEISS) grant will be available to claim from April at the same rate as the third grant payable in January (80% of profits up to £7,500). A fifth grant will then be available in July but for that grant only businesses who have seen a reduction of 30% or more in turnover will be eligible for the 80% grant, capped as before at £7,500.
Businesses with less than a 30% reduction will only be able to claim a grant of 30%, capped at £2,850. In a notable change, claims for the fourth and fifth grant will now be able to take into account tax returns for 2019-20 submitted before midnight on 2 March 2021, extending the grants to some of the self-employed who were not previously eligible. However, the Chancellor did not extend any support to some of the other groups that claim to have been excluded, such as limited company directors.
The 100% business rates relief in England will be extended to 30 June 2021 with the following nine months then benefitting from a 66% discount (up to a maximum of £2 million).
There is an extension of the reduced 5% Value Added Tax (VAT) rate for the hospitality sector to 30 September 2021 and then the rate will rise to 12.5% for the six months to 31 March 2022. Only after that will the full rate of 20% apply.
The increased nil rate band for stamp duty land tax of £500,000 which was due to revert to £125,000 on 31 March will be extended to 30 June. The nil rate band will then be set at £250,000 before falling back to £125,000 from 1 October 2021. This will be accompanied by the introduction of a mortgage guarantee scheme to help people with small deposits (5%) get on the property ladder. The new scheme is not restricted to first-time buyers or new-build homes, but there will be a £600,000 limit.
The Chancellor also provided details of the £5b “restart grant” scheme to help struggling High Street shops and hospitality firms in England reopen after lockdown. The one-off grants range from £6,000 for non-essential retail to £18,000 for hospitality, leisure and personal care businesses and replace the current monthly grant system.
There will be a new UK-wide Recovery Loan Scheme from 6 April 2021 to make available loans between £25,001 and £10 million, and asset and invoice finance between £1,000 and £10 million, to businesses of all sizes. The Scheme will close at the end of this year.
Finally, the £20-per-week uplift to Universal Credit is extended for six months to 30 September 2021 with a separate one-off payment being made to Working Tax Credit claimants.
The rate of corporation tax will increase to 25% from April 2023. The rise is not being enacted using the Provisional Collection of Taxes Act provisions and is not therefore substantively enacted as yet. Instead, legislation will be introduced in Finance Bill 2021 to set the rate of corporation tax at 19% for the year beginning 1 April 2022 and in the same Bill to set the main rate at 25% for the year beginning 1 April 2023. The rate of diverted profits tax will increase from 25% to 31% for the year beginning 1 April 2023. The level of bank surcharge (currently 8%) will be reviewed, to ensure banks do not pay too much tax following the corporation tax increase in 2023. There may be a potential accounts issue here if the review of the bank surcharge is not completed before the increased corporation tax rate for 2023 is brought in through Finance Bill 2021.
Businesses with profits of £50,000 or less will continue to be taxed at 19% with the return of a small profits rate. A taper for profits above £50,000 will be introduced so that only businesses with profits greater than £250,000 will be taxed at the full 25% rate.
Legislation in Finance Bill 2021 will 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. 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. Existing exemption notices will be revoked and from 1 June 2021 a company will not be able to have a reasonable belief that the payment was exempt from income tax. The repeal is protected by an anti-forestalling rule.
A new super-deduction will provide additional relief for expenditure on new plant and machinery. Investments in main-rate assets will qualify for a 130% super-deduction, while investments in assets qualifying for special rate relief will benefit from a 50% first-year allowance. The super-deduction will apply to contracts signed after 3 March 2021 and be available in respect of expenditure incurred from 1 April 2021 to 31 March 2023. Losses created can be carried forward.
There will be a temporary extension of the period over which businesses may carry back trading losses from one year to three years. This extension will apply to a maximum £2m of unused trading losses made in each of the tax years 2020 to 2021 and 2021 to 2022 for unincorporated businesses and to unused trading losses made by companies, after carryback to the preceding year, in relevant accounting periods ending between 1 April 2020 and 31 March 2021 and a separate maximum of £2m for periods ending between 1 April 2021 and 31 March 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 its companies. Further details on the group limit will be published in due course.
The Chancellor also announced the locations of eight chosen freeports in England - special economic zones with tax incentives to help stimulate regional growth. Incentives include an enhanced rate of 10% for Structures and Building Allowances.
As part of the Chancellor's focus on investment, he also made reference to the report from the ex-EU commissioner for financial services, Lord Jonathan Hill, which outlines ways to increase the attractiveness of the City of London (following on the Kalifa report on FinTech opportunities published on 26 February 2021).
A review of R&D tax reliefs will be taken forward which will incorporate a decision on relief for expenditure on data and cloud computing. The Government will go ahead (with some amendments) with the implementation of a cap on the payable tax credit in the Small and Medium Enterprise R&D scheme from 1 April 2021 at £20,000 plus three times the company’s total Pay As You Earn (PAYE) and NICs liability.
The related 51% group company test at section 279F to S269H CTA 2010 will be repealed and replaced by associated company rules. This will apply for determining whether a company is large or very large for quarterly instalment payment purposes or for determining whether a company may elect to use the small claims treatment for the Patent Box.
Finally, the Government will legislate to turn off certain parts of the anti-avoidance legislation affecting leases extended as a result of COVID-19. The easement in Finance Bill 2021 will restore eligibility to claim capital allowances. Another measure in Finance Bill 2021 will clarify that certain expenditure incurred by oil and gas companies on decommissioning plant and machinery prior to the approval of an abandonment program does qualify for decommissioning tax relief.
The Government has stood by its commitment to its ”Triple Lock” (its promise not to raise rates of income tax, NICs or VAT). The already announced inflationary increase in the personal allowance figures and higher rate threshold for 2021-22 will go ahead but after that both will be frozen at the levels of £12,570 and £37,700 until 2026 respectively.
The Chancellor announced the freezing of the pensions Lifetime Allowance at £1,073,100, the inheritance tax thresholds and the annual allowance for capital gains at £12,300. He did, however, announce the extension of Social Investment Tax Relief (SITR) to April 2023.
There are no general rises in either employer or employee National Insurance rates. The NIC Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate threshold at £50,270 for the years to April 2026.
As part of the focus on investment and attracting talent, a call for evidence has been launched seeking views and evidence on whether and how the EMI scheme should be expanded.
The Chancellor also announced the extension of the apprenticeship hiring incentive in England to September 2021 and an increase in the payment to £3,000. There are also funds for a new “flexi-job” apprenticeship program in England, that will enable apprentices to work with a number of employers in one sector.
The Chancellor has confirmed a "fast-track" visa scheme to help start-up and rapidly growing tech firms source talent from overseas. The new scheme removes the need for a "third-party endorsement" or a sponsor organization.
Small and medium-sized employers in the UK will continue to be able to reclaim up to two weeks of eligible Statutory Sick Pay costs per employee from the Government.
The easements to business rates and the stamp duty land tax nil rate band are covered in the section on COVID-19 support.
The Chancellor has followed previous Chancellors in deciding the time has still not come for a rise in Fuel Duty. In addition, the Chancellor froze duties on beer, wine, cider and spirits. The VAT threshold will be also be frozen for a further two years from April 2022.
The Government will legislate in Finance Bill 2021 to remove the entitlement to use red diesel and rebated biofuels from April 2022. A few sectors will retain their entitlement to use red diesel beyond April 2022.
Legislation in Finance Bill 2021 will repeal the provisions in Finance Acts 2019 and 2020 relating to Carbon Emissions Tax, which were not brought into effect. This follows the Government’s announcement in December that the UK Emissions Trading System rather than the Carbon Emissions Tax would be the UK’s carbon pricing policy from 1 January 2021. The Government’s response to the consultation will be published on 23 March 2021.
The Government will introduce a new power in Finance Bill 2021 which will enable regulations to be made to implement Organisation for Economic Co-operation and Development (OECD) rules that will require digital platforms to send information about the income of their sellers to both HM Revenue & Customs (HMRC) and to the seller themselves. A consultation will take place in Summer 2021.
The Government has also reconfirmed it will consult later this year on draft regulations to implement the OECD’s Mandatory Disclosure Rules.
Finance Bill 2021 will introduce a new penalty regime for VAT and income tax Self Assessment (ITSA). The reforms will come into effect for VAT taxpayers from periods starting on or after 1 April 2022. For taxpayers in ITSA, they will apply from accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA); and for all other ITSA taxpayers, from accounting periods beginning on or after 6 April 2024.
The Government has also committed to a review of tax administration for large businesses, including the degree to which it provides businesses with early certainty where appropriate, ensures the efficient resolution of disputes in accordance with the law, and promotes a collaborative and constructive approach to compliance with the law. Discussions will be initiated with businesses, advisers and stakeholders over the coming months.
The timetable ahead
The Budget on 3 March was the first step in the Chancellor’s roadmap for tax after Coronavirus. As well as the core tax and spending announcements, the Government's Build Back Better plan was published, along with the independent UK Listing Review which makes recommendations to reform the UK Listing rules to encourage growth and boost investment.
Next up will be the publication on 11 March of the Finance Bill providing the detail on tax measures to be implemented now.
That will be followed on 23 March by the publication of details on what the future is likely to hold in the form of a series of tax consultations and calls for evidence that would traditionally have been published alongside the Budget. Several of the consultations to be published will be an important part of the Government's 10-year tax administration strategy. This focuses on Making Tax Digital, real-time information, making tax payments on a more-timely basis and a new framework to make tax administration and compliance simpler for HMRC and taxpayers alike. We will also see a summary of responses to the call for evidence on the future of business rates. None of the announcements on 23 March will require legislation in the next Finance Bill.
Over the Summer, we may see the responses to some of the tax consultations and calls for evidence that closed just before the March Budget, leading up to an Autumn Budget. It seems that it will be for that Budget to consider any wider tax reform issues, such as capital gains tax and the taxation of the self-employed.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United Kingdom), Manchester