Spring Budget 2021- Tax rises for all, particularly business
Along with the “R rate”, “furlough” and “lockdown”, a new term may well come to be associated with the Covid-19 pandemic and the Government’s response to it.
“Fiscal drag”: the practice of raising tax receipts by freezing allowances and relying on inflation to drag taxpayers into higher tax brackets.
Income tax changes – but nothing on CGT
“I want to be clear with all Members that this policy does remove the incremental benefit created had thresholds continued to increase with inflation”
Income tax rates for individuals remain unchanged and the personal allowance and tax rate thresholds will increase in line with this inflation for 2021/22. However, they will then be frozen for the following 4 years. The Government expects this to increase income tax revenues from £193.6bn in 2019-20 to £248.2bn in 2025-26. The same treatment will apply for NICs.
One particular nettle was not grasped: what to do about CGT. The office for Tax Simplification reported in November 2020 that CGT rates distort behaviour and recommended reducing the difference between tax rates on capital and income. This has been ignored, at least for now – we may find out more about the Government’s thinking on CGT in its Tax Day on 23 March.
Corporation tax up to 25%
It was widely forecast but still quite a shock: the rate of corporation tax will jump from 19% to 25%. The rise is deferred until 1 April 2023 but will then be immediate not gradual as some had predicted. This increase will raise significant amounts of tax - the Government expects corporation tax receipts to rise from £48.4bn in 2019-20 to £85.3bn in 2025-26. Some points to note:
• Companies will be well-advised to maximise profits in 2022 at the expense of subsequent years – indeed Government figures predict this, with this policy expected to increase corporation tax receipts by over £2bn in 2022.
• International groups will want to review decisions on basing profit-making activities in the UK as compared with other jurisdictions before April 2023.
• Companies with profits of less than £250,000 will pay a lower rate, tapering down to 19% for companies with profits of £50,000 or less. This is similar to the rules which applied before the main rate of corporation tax was reduced to 20% a few years ago. As applied then, expect rules to apply which aggregate profits of associated companies for these purposes.
• Small owner-managed businesses operating through companies may find that corporate structures are now less attractive than partnerships, especially given the changes which have happened in the dividend tax regime since corporation tax rates were last at this level.
Other changes for UK businesses
“To balance the need to raise revenue with the objective of having an internationally competitive tax system, the rate of corporation tax will increase from April 2023 to 25% on profits over £250,000”
“Under the existing rules, a construction firm buying £10m of new equipment could reduce their taxable income, in the year they invest, by just £2.6m. With the Super Deduction, they can now reduce it by £13 million.”
The Government wants business to invest to build profits, and is willing to support that investment through enhanced tax reliefs:
– a “super-deduction” of 130% for investment in most plant and machinery between April 2021 and March 2023 (a deduction of 50% will be available for certain long-life assets); and
– an increase in the annual investment allowance to £1million of expenditure for 2021.
• Businesses which make losses in 2020-21 and 2021-22 will be able to claim repayment of taxes paid in previous years by carrying back losses for up to 3 years, 2 more than at present (though for the 2 additional years, the amount of losses so carried back is capped at £2 million). This could help substantially with cashflow.
• Claimants of R&D tax credits should note that claims for SME tax credits will be capped from 1 April 2021 at £20,000 plus 3 x their PAYE and NICs bill – this is apparently to prevent avoidance.
• Following Brexit, the Government has removed rules allowing UK businesses to pay interest and royalties to affiliated companies in the EU without withholding taxes in reliance on EU rules. Those businesses doing so will now have to rely on the UK’s extensive network of double tax treaties and make specific claims for relief under those treaties.
• Eight freeports were announced around England, with more to come in Scotland, Wales and Northern Ireland. Businesses which base themselves in a freeport will benefit from generous capital allowances and relief from SDLT on property acquisitions.
… and the SDLT Holiday?
As predicted, the so-called SDLT holiday on purchases of residential properties (under which the first £500,000 of purchase price is not subject to SDLT) was extended from 31 March to 31 June. The resulting cliff-edge was supposedly softened by reducing the tax-free amount to £250,000 until 30 September. However, given that this reduces the tax benefit from £15,000 to just £2,500, most purchasers will still want to complete their transactions by 30 June.
About the author
Charles Goddard is a tax solicitor with over 20 years' experience of advising on the corporate tax aspects of a wide range of corporate and financial transactions. His clients range from multinational blue-chip institutions to private individuals.
Find out more about Charles and our corporate tax advice and consultancy services for business.
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