Budget 2021: Companies to carry the tax burden for COVID-19 support to professional practices

The personal allowance and basic rate tax band will increase in line with inflation from 6 April 2021 but thereafter remain frozen at these levels until 5 April 2026. Income tax rates remain unchanged.

As previously announced, the income tax personal allowance and basic rate band will increase, in line with inflation, to £12,570 and £37,700 respectively from 6 April 2021. These thresholds will be fixed at these levels for the following four tax years.

The respective upper earnings limit and upper profits limit for Class 1 and Class 4 national insurance contributions will also increase in line with inflation and will remain aligned with the higher rate threshold of £50,270 until April 2026.

Income tax rates remain unchanged.

Our comment

The increase in the personal allowance and basic rate band in line with inflation is expected and is in line with previous announcements and will result in taxpayers experiencing a reduction in their income tax liabilities from 6 April 2021.

The level of individuals’ taxable income may well increase over the coming years, potentially significantly if the country experiences a period of high inflation. The fact that these bands are frozen will mean that more taxpayers may start exceeding their personal allowance, and others will start to become higher rate taxpayers.

When will it apply?

From 6 April 2021

The pension lifetime allowance of £1,073,100 has been frozen until 5 April 2026. Those with accumulated pension funds nearing or above £1million will find themselves reaching or breaching the lifetime allowance sooner than otherwise anticipated.

The lifetime allowance (LTA) is the value of a pension fund an individual is allowed to accrue before suffering additional tax charges when benefits are taken.

The current LTA of £1,073,100 was due to increase with inflation on 6 April 2021. This announcement sees the inflation linking removed until at least 2026.

This will increase the number of people who will be affected by lifetime allowance charges, whether in defined contribution pensions, like SIPPs and group schemes, or defined benefit schemes, such as the final salary schemes within the public sector.

Our comment

Many of those affected by this freeze will be of working age, currently accruing pension benefits. Even if they are not contributing, modest growth in a large pension fund can easily breach the lifetime allowance, potentially incurring substantially increased charges if taken as a lump sum.

Some individuals may still have the option to apply to protect higher amounts by applying for individual or fixed protection 2016.

Those affected by the new tapered annual allowance are often also impacted by the lifetime allowance and may need to consider the interplay between these two factors.

When will it apply?

From 6 April 2021

As well as releasing details of the expected fourth grant under the self-employment income support scheme (SEISS), the Chancellor has confirmed that a fifth grant will be available, extending support to the end of September. Eligibility for these grants will be based on data from 2019/20 tax returns, so they will be available to around 600,000 of the newly self-employed who were excluded from the previous support.

The fourth grant has been set as 80% of three months' worth of average trading profits, designed to provide support for February to April 2021. To be eligible, traders must have filed a self-assessment return for 2019/20 by 2 March.

The fifth grant will cover May to September, and is two-tier. For those traders whose turnover was reduced by 30% or more in the tax year ended 5 April 2021, it will be worth 80% of three months' worth of average trading profits. If the turnover reduction was under 30%, it will only be worth 30% of three months' worth of average trading profits.

All other eligibility criteria remain the same as for the previous grants, but based on the most recent data from 2019/20 tax returns, as they were due to be filed by 31 January 2021. This means that those self-employed who began to trade in 2019/20, or too late in 2018/19 to be eligible, may now be able to claim support.

Only those self-employed persons whose businesses have been adversely affected by the pandemic in the period in question will be eligible, provided that they are still trading or intending to resume. As with the previous grants, each grant will be paid as one lump sum with a separate application process. They will be taxable as trading profits.

Our comment

This will be welcome news to those self-employed who are newly eligible, estimated to be 600,000 traders, but after a year of no support many may no longer be trading, which prevents them from claiming the grants.

Other categories of taxpayers excluded from support, such as the self-employed with profits over £50,000, and those working through limited companies, will be disappointed that the extended support does not benefit them.

The unexpectedly generous extension of support to 30 September will be welcomed by all eligible. The fifth grant is however stated as covering a five month period, but based on a percentage of three months' worth of profits, so per month it is a lower percentage than the headline figure of 30% or 80%.

When will it apply?

Applications for the fourth grant will open in late April, and the fifth and final grant can be claimed from late July.

The Coronavirus Job Retention Scheme (CJRS) is being extended until 30 September 2021. This is to protect jobs as the COVID-19 restrictions are eased gradually over a prolonged period.

During the COVID-19 pandemic, the Government has provided support to businesses and protected jobs by providing grants covering a proportion of employees’ salaries.

The operation of the CJRS will not change for the months of May and June. Broadly, this means employers will receive a grant equal to 80% of furloughed employees’ remuneration for the hours they do not work. This allows employees to be furloughed flexibly, as business activity returns to normal.

The amount that can be claimed by businesses will be gradually reduced from July onwards. For the month of July, employers will only receive 70% of furloughed employees’ remuneration. For August and September, the figure will be reduced to 60%.

This reduction will be made up by increased employer contributions. For the month of July, the Government will introduce an employer contribution of 10% towards the pay for unworked hours, up to a monthly cap. For August and September this will be 20%.

Our comment

The CJRS has provided many employees with much-needed certainty over their income and meant that, as the economy reopens, employees’ jobs are still in place.

Extending the CJRS to September allows businesses to plan for employees’ return. The extended support will provide relief for many employers who plan to re-open gradually and who are still affected by the continued restrictions.

When will it apply?

The extension takes immediate effect.

The temporary income tax and Class 1 National Insurance contributions (NICs) exemption, for the reimbursement by employers of expenses incurred by employees in acquiring relevant home office equipment, will be extended until 5 April 2022.

This temporary measure was originally due to end on 5 April 2021 and was introduced to provide certainty that employees could receive reimbursement for relevant expenses free of income tax and NICs. The exemption will now apply until 5 April 2022.

For the exemption to apply, the reimbursement must be available to all employees on similar terms and the expenditure must have been on equipment acquired for the sole purpose of making it possible to work from home as a result of the COVID-19 pandemic. It also needs to have been tax exempt if the cost were incurred directly by the employer.

Home office equipment includes anything that is deemed necessary for the employee to work from home as a result of the COVID-19 pandemic. This includes the cost of a laptop, desk, office chair and other necessary computer accessories.

Our comment

The usual tax exemption only applies in circumstances where the employer provides equipment directly to their employees, with only insignificant private use.

This continued temporary relaxation of the rules is a welcome recognition that in many cases it has been more difficult for employers to provide equipment directly to their employees as a result of the COVID-19 pandemic.

When will it apply?

The existing provision will continue until 5 April 2022.

Businesses that used the VAT deferment arrangements can opt to spread the repayment over 11 instalments under the new payment scheme.

Businesses that deferred VAT payments that were due between 20 March and 30 June 2020 can choose to spread the payment over equal instalments up to an additional 11 months, rather than making the payment in full by 31 March 2021.

It was also announced that a penalty of 5% will apply for any amount that is still outstanding at 30 June 2021, unless the business has opted into the new payment scheme or alternative arrangements have been agreed with HMRC.

Our comment

While the measures will help businesses struggling to repay the deferred VAT in full, it is important that action is taken to pay the deferred VAT or opt into the new payment scheme as soon as possible. The 5% penalty for failure to take any action could be very costly and could wipe out any benefit gained by the deferment arrangements.

When will it apply?

Business can opt in from March 2021.

The main corporation tax rate for company profits over £250,000 will be 25%, with companies with profits under £50,000 continuing to be taxed at 19%. Profits in between these limits will be taxed at a tapered rate. A rise in corporation tax rates was widely expected, though this will not come into effect until the financial year starting 1 April 2023.

The main corporation tax rate will remain at 19% until 1 April 2023, when it will increase to 25% for companies with (non-ring fenced) profits over £250,000.

A new small profits rate of 19% will also come into effect on 1 April 2023 for companies with profits lower than £50,000. Companies with profits between £50,000 and £250,000 will be charged corporation tax at a tapered rate.

These profit limits will be proportionately reduced for short accounting periods or where a company has one or more associated companies.

In addition, close investment holding companies will become liable to corporation tax at 25% from 1 April 2023 regardless of their profits.

Our comment

Many tax practitioners will remember the previous small profits and main rate corporation tax rates. The Budget brings us back to this, only with lower upper profit levels than before. The Treasury announced that they expect only 10% of companies to pay tax at the higher rate.

Associated companies, and not 51% group companies, will reduce the upper and lower rates. This will make both profit limit bands smaller for companies under common control and corporate groups, bringing more companies within the tapered or higher rate of tax.

We expect businesses to give more consideration to group structuring, the payment of dividends compared to bonuses, and the use of group relief when looking to reduce taxable profits to access the 19% rate.

Once this change has been substantively enacted under the Finance Bill 2021, businesses will need to ensure their deferred tax calculations reflect the change in tax rate.

When will it apply?

From 1 April 2023

A 130% super-deduction for expenditure on new, qualifying plant and machinery will be introduced for two years from 1 April 2021. A first year allowance of 50% will also be available for expenditure which ordinarily qualifies for special rate relief.

A temporary 130% super-deduction will be introduced for two years for companies that incur qualifying plant and machinery expenditure from 1 April 2021. A first year allowance of 50% will also be available for expenditure on items that would usually attract the special rate of relief of 6%. These reliefs will not be available for expenditure in connection with contracts entered into prior to 3 March 2021.

The super-deduction will provide companies with a deduction that exceeds the cost of the qualifying asset. Not all expenditure will qualify. Used and second-hand assets will be excluded and the general first year allowances exclusions will apply.

Companies will also be required to recognise disposal proceeds as balancing charges, where the super-deduction has been claimed.

Our comment

The introduction of these reliefs is welcome and demonstrates the Government’s commitment to encouraging investment. The additional tax deductions, when applied with the enhanced trading loss carry back provisions, could generate substantial tax savings and tax repayments for companies to reinvest.

While the introduction of these reliefs is a positive move, they only apply to companies. The reliefs exclude sole traders, partnerships and LLPs who will need to rely on the extended £1 million Annual Investment Allowance and will not benefit from enhanced deductions above this amount.

It is also unfortunate that the general exclusions that apply to first year allowances have not been amended. The leasing exclusion is particularly wide and is likely to result in commercial landlords being restricted from claiming the enhanced deductions without further modification.

Understanding the interaction between these temporary reliefs and existing reliefs, such as the Annual Investment Allowance, and Research and Development allowances, is going to be important to ensure companies make the best use of the allowances available to them.

While there may be an additional compliance burden for companies in understanding what expenditure qualifies, and the impact of these reliefs on future disposals, these reliefs will be welcomed by many companies and will incentivise spending in the short term.

When will it apply?

From 1 April 2021 for two years.

To help businesses weather the economic impact of COVID-19, the corporation tax and income tax trading loss carry back rules will be temporarily extended. The amendment will allow relief to be carried back to the previous three years rather than the usual one year.

What it means for companies

The Government has announced an extension to the carry back of trading losses for corporation tax made in accounting periods that end between 1 April 2020 and 31 March 2022.

In addition to the usual one-year carry back against total profits, the losses may be carried back a further two years against profits of the same trade. Losses are carried back against later years in preference to earlier years.

There is a £2m cap for trading losses being carried back more than one year. Losses carried back one year are unlimited, as before. A separate £2m cap applies for each period of 12 months within the duration of the extension. For example, a company with a 31 March year end will have one £2m cap for its 2021 year end and a second £2m cap for its 2022 year end.

If the amount of the claim is not (and could not be) more than £200,000, the claim can be made outside of the tax return. In calculating if the £200,000 threshold is exceeded, the company must consider all capital allowances or any other claim or reliefs available to it.

The £2m cap applies to groups of companies, unless all group companies’ claims are individually below the threshold, so loss-making groups will need to decide how best to utilise losses amongst members. Groups subject to the £2m cap must submit an allocation statement showing how it has been allocated between its members.

What it means for unincorporated businesses

For income tax, trading losses made in the 2020/21 and 2021/22 tax years are subject to these new rules. Sole traders must offset losses against profits of the same trade. Losses are carried back against later years in preference to earlier years.

There is a separate cap of £2m for each tax year of loss. A sole trader therefore has a £2m cap for 2020/21 and another £2m cap for 2021/22.

Sole traders can make a claim in their tax return, or if the claim affects more than one tax year, a standalone claim may be made.

HMRC will not give effect to claims and make repayments until Finance Bill 2021 receives Royal Assent.

Our comment

This is good news for certain businesses struggling because of COVID-19, enabling them to offset trading losses against earlier years of profit to obtain a tax repayment to aid their cashflow.

For companies, the ability to claim outside a tax return is also a welcome simplification for losses of £200,000 or lower. This should allow companies to obtain repayments without having to wait for the submission of the tax return for the loss making period.

For sole traders, these new rules mean they may be able to reduce their marginal rates of income tax in the earlier years.

The extension to the relief does not, however, apply to property businesses who may be struggling because of loss of tenants, especially those in the retail sector.

When will it apply?

For companies, it will apply to losses made in accounting periods ending between 1 April 2020 and 31 March 2022.

For unincorporated businesses, it will apply to basis periods ending in the 2020/21 and 2021/22 tax years.

It has been confirmed that the temporary increase in the Annual Investment Allowance (AIA) for plant and machinery to £1m has been extended by a year. This limit will have effect from 1 January 2021 to 31 December 2021.

As announced in November 2020, the Government will legislate to extend the £1m AIA limit for a further year. The AIA limit was temporarily increased from £200,000 to £1m in January 2019 to stimulate business investment. This increase was originally intended to be for two years, but it has now been extended by a further 12 months to 31 December 2021.

Our comment

The Government remains keen to encourage capital investment in the UK and this extension will be welcome news for many businesses investing in qualifying plant and machinery.

This extension allows businesses further time to plan their capital investment and maximise the 100% relief available for qualifying expenditure. It will be particularly valuable to sole traders, partnerships and LLPs, who cannot benefit from the new super-deduction introduced for companies.

When will it apply?

For expenditure incurred from 1 January 2021 to 31 December 2021