The context to the Budget was the announcement that the total cost of the pandemic measures had topped £400bn. The question that begged was who is going to pay for it? Rishi Sunak largely dodged that question or kicked it down the road, perhaps until after the next election. Other than for companies (although even in that respect what the Chancellor takes with one hand he gives back with the other) there were no major changes to tax rates or policy and the triple lock remained locked.
The question that remains is whether there is a more substantial reform of taxation waiting in the wings for when the lockdown is over and the country is back to work. The discussion of public finances during the pandemic has appeared to result in an environment where the public and politicians are more susceptible to more radical changes in tax policy.
This was perhaps illustrated best by the 'Tax after Coronavirus' report of the Treasury Committee of the House of Commons released last week which noted: "the public finances are on an unsustainable long-term trajectory that has been exacerbated by the coronavirus pandemic." "As part of its recovery from the coronavirus pandemic, the UK has an opportunity for a comprehensive review and reform of the tax system." "The Government should treat stamp duty land tax as a priority for reform"; "we believe that there is a compelling case for the reform of capital taxes." and "the Government should also review the taxation of pensions and the tax relief applicable to pension payments". It also said "We would not recommend an annual wealth tax.", but that as a priority "we strongly believe that a major reform of the tax treatment of the self-employed and employees is long overdue".
On 23rd March ('Tax Day') the Treasury intends to publish a number of tax consultations that will set the scene for long term government policy and offer greater insight to future changes in rates and taxes. There is perhaps a once in a generation opportunity now for radical reform of the tax system. This Conservative government, no strangers to embracing epoch defining political decisions, may also be about to change the tax system more radically than any since the early days of Margaret Thatcher's administration.
Please join us for our seminar on Thursday 25 March at 11.00am with Professor Matthew Goodwin to look at that consultation and further into the future of the UK tax system.
For now though, the highlights of the Budget announcements were as follows:
Individuals
Income tax and national insurance contributions
The Personal Allowance will rise with CPI as planned to £12,570 from April 2021 and will remain at this level until April 2026. The income tax higher rate threshold will rise as planned to £50,270 from April 2021 and will remain at this level until April 2026. No change in rates, but this measure is projected to raise an additional £8 billion a year (or 2% of the costs of the pandemic) by 2026, with the Office for Budget Responsibility estimating that this will result in a further 1.3 million people being brought into paying income tax and further 1 million people becoming higher rate tax payers.
Capital gains
Although it was the subject of much speculation before the Budget, the Chancellor made no mention of capital gains tax in his speech. Whilst there were no changes to rates, the value of gains that a taxpayer can realise before paying Capital Gains Tax, the AEA, will be frozen at the present level until April 2026. It will remain at £12,300 for individuals, personal representatives and some types of trusts and £6,150 for most trusts. This will raise another £65 million (or 0.02% of the costs of the pandemic) by 2026.
One welcome technical change brought in is to amend the rules around claiming relief for a gift of business assets, which operates to defer the chargeable gain on disposal when a person gifts business assets or sells them at an undervalue until the point at which the recipient disposes of the assets. Currently, this relief is not available where the recipient company is controlled by a non-UK resident and is connected with the person making the disposal. Under the proposed amendment, this rule will also apply when the non-resident individual gifting the assets also controls the recipient company.
Inheritance tax
By now the Chancellor had a theme. The inheritance tax nil-rate bands will also remain at existing levels until April 2026. The nil-rate band (which has been fixed since 2009) will remain at £325,000 and the residence nil-rate band will remain at £175,000. Again, no change in rates and this measure is projected to raise an additional £985 million (or 0.25% of the costs of the pandemic) by 2026.
Pensions
As you might have anticipated by now, the Lifetime Allowance for pensions is also frozen at its current level of £1,073,100 until April 2026. The Lifetime Allowance was due to rise in line with CPI to £1,078,900 in 2021/22. This measure is projected to raise an additional £990 million (or 0.25% of the costs of the pandemic) by 2026.
Immigration
Following on from the Government's new immigration legislation on 1 January 2021, it has gone yet further in today's Budget to highlight new ways in which the UK can attract talent from overseas. For the first time, the Chancellor gave specifics as to likely new immigration categories, details of which will evolve during the course of this year.
Anti-avoidance
Even in a Budget delivered in the middle of lockdown, the Chancellor kept with tradition and announced a crackdown on tax avoidance. These new steps to tackle tax evasion and avoidance as part of the "government's action to repair the public finances" are forecast to raise a further £2.2 billion (or 0.5% of the costs of the pandemic) between now and 2026.
The bulk of which will arise from an increased emphasis on compliance and a £180m investment in HMRC in 2021/22 to be used for additional resources and new technology. The penalty regime for income tax and VAT self-assessment will be reformed to make it "fairer and more consistent", with a new points based system being used to determine when a penalty is applied and penalties being recast so that they are now proportionate to the amount of tax at stake and the lateness of any filing. These reforms are due to be introduced from April 2022 for VAT and from April 2023 for income tax self-assessment. Penalties levied under Follower Notices issued in respect of tax avoidance schemes are also set to be reduced from 50% of the tax at stake to 30% with a further 20% being levied, at the discretion of the tax tribunal, in cases where a recipient unreasonably continues litigation.
HMRC's information gathering powers will also be strengthened as they are to be given the power to serve a Financial Institution Notice on a bank or other financial institution obliging them to provide certain information reasonably required for checking the tax position of a known taxpayer without having to have the consent of the Tax Tribunal.
Finally, following the recent consultation on "Tackling Promoters of Tax Avoidance", the government response was published today and broadly supports the strengthening of HMRC's powers in respect of tackling promoters of tax avoidance schemes as was put forward in the original consultation paper. For those whom HMRC describes as a "few hardened promoters" who remain and continue to seek to sell mass market avoidance schemes, it is clear that life will be getting even more difficult as a result of these new measures.
Stamp duty land tax ('SDLT')
As anticipated, the Chancellor announced that he is extending the temporary increase in the SDLT nil rate band to £500,000 for purchases of residential property in England and Northern Ireland until 30 June 2021. This will then gradually be removed, with a nil rate band of £250,000 for the period from 1 July 2021 to 30 September 2021. Therefore, the standard nil rate band, of £125,000 will return from 1 October 2021.
This will be welcome news for many anxious homebuyers currently caught up in the conveyancing process who may have been concerned that they would miss the original 31 March deadline. It is notable that today's announcements stretch beyond the end of June which is when, according to the Prime Minister's recently-announced 'roadmap', all coronavirus-related restrictions should have come to an end. This should give the housing market a confidence boost and help maintain strong levels of activity throughout the spring and summer months.
At Budget 2020, the Chancellor confirmed the government's intention to introduce an SDLT surcharge on non-UK residents purchasing a residential property. Nothing was announced in today's Budget to delay or alter this intention. The SDLT surcharge will therefore come into effect from 1 April 2021. It will apply to transactions with an effective date (usually completion) on or after 1 April 2021 where (i) one or more purchasers is non-resident, (ii) the property being acquired is residential and (iii) the consideration is £40,000 or more. The SDLT surcharge will apply in addition to the 3% higher rate on the acquisition of second homes or acquisitions by companies. As a result, the top rate of SDLT will be a whopping 17%.
Companies
Corporation tax
The increase in the main rate of corporation tax from 19% to 25% was today's headline business tax announcement. Although no tax rise is good news, the increase will at least be a single step up to the new 25% rate, which will apply from 1 April 2023 to companies with profits of over £250,000. This may well be easier for companies to deal with rather than incremental rises over a number of years. As a consequence of the increase to the corporation tax rate, the Chancellor also announced the reintroduction of a small profits rate (staying at the current rate of 19%) for companies with profits of £50,000 or less. In line with the approach taken with the former rules, the small profits rate will not apply to close investment-holding companies.
Marginal relief provisions will be introduced for companies whose profits fall between £50,000 and £250,000. These companies will pay tax at the main rate of 25% but will be able to claim an amount of marginal relief to bridge the gap between the lower and upper limits, providing a gradual increase in their effective corporation tax rate.
In terms of practical application, the Budget documents note that the lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. Further, the current rules which determine whether a company is large or very large for quarterly installment payment purposes or for determining whether a company may elect to use the treatment of the small claims for the Patent Box regime will be replaced by new associated company rules.
In conjunction with this increase, the diverted profits tax rate will also be increased from 25% to 31% from 1 April 2023 and the government will review the bank surcharge (which is currently set at 8%) to ensure that the increase in the main corporation tax rate to 25% would not make the UK's taxation of banks uncompetitive.
Whether this 6% rise in the corporation tax rate will impact the pro-business and pro-investment message that the government had been trying to encourage and if multinational companies will start to look to other jurisdictions is now to be seen.
This will raise £47 billion by 2026, or 12% of the pandemic costs.
Carry back of trading losses
The Chancellor followed his corporation tax increase with the announcement that the period for which trading losses could be carried back against previous profits would be temporarily extended from one year to three years. This may be in place of a form of a windfall tax, which would have been relatively complex to implement. Rather, assistance is given to those that have found themselves in a loss making position in recent years (and, in particular, during the pandemic), by generating cash repayments of corporation tax paid in the prior two years. The extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by individuals and unincorporated businesses in tax years 2020-2021 and 2021-2022.
The amount of trading losses that can be carried back and set against profits of the preceding year remains unlimited. After carry-back to the preceding year, trading losses can now be carried back a further two years to be offset against total profits of the earlier accounting period (carried back against the most recent year first before earlier years). The amount of trading losses that can be carried back will be capped for each of those two years at a maximum of £2,000,000.
It should perhaps be noted that for companies that are part of a group the £2,000,000 limit will be subject to a group-level limit (for each relevant period), requiring groups with companies that have the capacity to carry back losses in excess of a de minimis of £200,000 to apportion the cap between group companies. By contrast, income tax payers will not be subject to a partnership-level limit.
This is not intended to impact the availability of other current loss reliefs and any unrelieved loss should remain available to carry forward and offset against future profits. It should perhaps also be noted that this rule does not extend to relief under group relief rules, and so the time limit in this regard remains two years from the end of the relevant accounting period.
Reliefs
Research and development relief ('R&D')
Following a prior consultation on what constituted qualifying expenditure for R&D relief (which noted that there appears to be a strong case to extend qualifying expenditure to include data and cloud computing costs), the government will be carrying out a review of R&D tax reliefs more widely, with a consultation published alongside the Budget. This review will consider all elements of the two R&D tax relief schemes, with the objective of ensuring that the UK remains a competitive location for cutting edge research and that the reliefs continue to be fit for purpose.
By way of a reminder, as published in November 2020, for accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a company can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and National Insurance contributions liability, in order to deter abuse.
Enterprise management incentives ('EMI')
As announced on 21 July 2020, the government will legislate in Finance Bill 2021 to extend the time-limited exception that ensures that employees who are furloughed or working reduced hours as a result of the impact of coronavirus continue to meet the working time requirements for EMI schemes. The change will apply to existing participants of EMI schemes and will also allow employers to issue new EMI options to employees who do not meet the working time requirements as a result of Covid-19. These changes will therefore have effect from 19 March 2020 until 5 April 2022.
Alongside this, the government is publishing a call for evidence on whether and how more UK companies should be able to access EMI to help them recruit and retain employees, and whether the scheme should be extended to include more companies.
Social investment tax relief ('SITR')
As helpfully primed in Prime Minister's Questions, the government has announced that it will legislate in Finance Bill 2021 to extend the availability of the Income Tax relief and Capital Gains Tax hold-over relief for investors in qualifying social enterprises until April 2023 (it was otherwise supposed to come to an end in April this year). This will be good news to investors in this space and will help social enterprises seeking growth investment to access the patient capital they require.
Capital allowances
To encourage business investment, the Chancellor somewhat excitedly announced that the UK's normal capital allowances system for business investment in qualifying new plant and machinery will temporarily be enhanced by a new "super-deduction" first year entitlement. This is intended to stimulate business investment. Therefore, from 1 April 2021 until 31 March 2023 companies investing in certain types of new main rate business assets will be entitled to an immediate 130% tax allowance (and so reduce their taxable profits by more than the total cost of the assets invested in), whilst investments in assets qualifying for special rate relief will be eligible for a new 50% initial allowance, which also significantly exceeds the UK's general headline rates for capital allowances of 18% and 6% respectively. It should perhaps be noted though that it is not intended that these enhanced allowances will apply to expenditure incurred on contracts entered into prior to 3 March 2021 and apportionment will be required if an accounting period straddles 1 April 2023. The devil is also in the detail here, as there will be particular rules that will apply in the event any assets in respect of which these allowances have been claimed are disposed of, with any receipts being treated as taxable profits rather than soaked up by the relevant pools.
Alongside this, as previously announced in November 2020, the 'temporary' £1,000,000 limit for the annual investment allowance will be extended by one year, with legislation being introduced in Finance Bill 2021 to implement this.
This measure will cost £24bn by 2026.
VAT
After some conjecture as to whether the VAT rate would go up (albeit to have done so would have been contrary to the Conservative Party manifesto at the 2019 election), the main VAT rate remains unchanged and the VAT registration and deregistration thresholds (currently set at £85,000 and £83,000 respectively) will not change for a further period of two years from 1 April 2022. Further, the temporary reduction in the headline VAT rate to 5% for goods and services supplied by the tourism and hospitality sector will now be maintained until 30 September 2021 and a 12.5% rate will then apply for the period ending on 31 March 2022.
Freeports
The UK Government had already indicated a firm intention to create a new "Freeports" system as part of its overall post-Brexit economic strategy and the eight chosen Freeport sites for England have now been announced. Commercial operations at these sites will potentially begin in late 2021. At least 10 such sites are expected across the United Kingdom and similar arrangements are intended to be implemented at certain sites in Scotland, Wales and Northern Ireland, but this is still subject to on-going discussions with the devolved administrations in those countries.
The general significance of Freeports is that parts of such facilities will be designated as 'tax sites' where special tax privileges will be available to encourage investment in the Freeports. Such privileges will include a complete SDLT exemption on the acquisition of land or buildings, subject to certain requirements regarding control over a 3 year period and the use of the land being met; an enhanced rate of capital allowances for buildings and structures used for qualifying purposes, so that the capital costs of construction or renovation will be written off over 10 years (rather than 33 years, as under the usual provisions of that kind); and an immediate 100% capital allowances relief in respect of the costs of most capital equipment purchased for use at these designated tax sites. These various privileges will generally need to be first claimed by 30 September 2026. There will also be a possibility for full relief from business rates for up to five years and (subject to Parliamentary approval) a measure of relief in respect of employer National Insurance contributions from April 2022 until at least April 2026 (but with a possible extension for up to a further five years).
Repeal of interest and royalties directive
Perhaps unsurprisingly following Brexit, but with seemingly little fanfare, with effect from 1 June 2021, companies based in EU countries will no longer be eligible for any UK tax exemption in relation to UK-source payments of interest or royalties where such exemption is based specifically upon the EU's Interest and Royalties Directive. This Directive remained applicable in the UK after the end of the Brexit transitional period because the Directive had been directly embedded in UK domestic tax law but the UK version of the Directive will now be repealed. This means that any relief from UK withholding taxes applicable to cross-border payments of interest or royalties will now only be available under the UK's double tax treaty network or under general provisions of UK domestic tax law (for example, in relation to so-called "short" interest).
