The Government is seeking to lay the foundations for a recovery driven by the private sector and, for entrepreneurs, the announcements focused on recovery, growth & support rather than increasing taxes.
For entrepreneurs, the 2021 Budget was very much about what was not announced, following mounting speculation regarding capital gains tax (CGT) rate increases in the run up to the Budget. This was driven primarily by the November 2020 report by the Office of Tax Simplification (OTS) in which a key recommendation was to more closely align income tax and CGT rates; the OTS report followed a substantial erosion of Entrepreneurs’ Relief announced in the 2020 Budget.
The retention of current CGT rates will be welcome news to entrepreneurs working to eventually realise capital value from their business, although the Chancellor could still revisit the issue in his Autumn Statement. The Government will also be releasing a number of tax consultation papers on 23 March, which may provide further insight on potential wider tax changes that could be introduced as the economy recovers. These consultations may include recommendations from recent reports on more wholesale reforms to capital gains tax and inheritance tax.
Looking at corporation tax, the headline was the increase in rates from 1 April 2023. The main rate will increase from 19% to 25%, where taxable profits are £250,000 or more. For taxable profits of £50,000 or less, the current rate will be retained. A taper will apply between these two numbers. As most other economies around the globe will have to raise their corporate income tax rates, the UK should not lose any competitive advantage in attracting foreign direct investment.
This will have an impact on how business owners extract cash from their company. For a number of years, dividends have had the edge over salary payments, with a circa 3.5% lower tax rate. From 1 April 2023, that advantage disappears entirely, with dividends being fractionally more expensive in overall tax terms once the annual £2,000 dividend nil rate band is used.
Capital allowances have been given a boost with the introduction of an enhanced super-deduction of 130% for main rate (18%) asset investments, while assets normally qualifying for special rate relief (6%) will attract a 50% first year allowance. Both allowances apply from 1 April 2021, but will not be available for expenditure in connection with contracts entered into before 3 March 2021. The enhanced allowances do not apply to second-hand assets. These changes, along with the increase in corporation tax rates, turn back the clock somewhat, once again favouring capital-intensive companies.
From a cashflow perspective, the ability to carry back up to £2m in trading losses for up to three years, instead of one, for both 2020/21 and 2021/22 tax years will be welcome. For groups of companies, the £2m cap will apply to the group.
Pensions would appear to be unchanged; entrepreneurs can still make payments of up to £40,000 per year - either personally or from their companies - into their pension schemes. The standard Lifetime Allowance will, however, be frozen at £1,073,100 until 5 April 2026 at the earliest. In real terms, that provides a significant erosion of the amount that can be put into pension schemes. An increase in inflation rates would exacerbate this.
There were also no changes announced to tax reliefs available to individuals when they invest in businesses, including the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and the lesser known Investors’ Relief, which can enable investors to pay a 10% rate of capital gains tax on gains up to £10m. With Business Asset Disposal Relief (the replacement for Entrepreneurs’ Relief) having a reduced £1m lifetime allowance, Investors’ Relief may attract increased attention.
Two other areas are worthy of note.
The Enterprise Management Incentive (EMI) scheme is to be reviewed, with a possible extension of the scheme to support high growth companies. In the meantime, it was confirmed that the furloughing of staff will not affect the working time requirement for EMI share option holders. This remains a potent tool for businesses wishing to recruit, retain and incentivise key employees.
R&D claims by small and medium enterprises for a payable tax credit will, from 1 April 2021, be subject to a cap, being £20,000 plus a multiple of three times the annual PAYE and Employers’ National Insurance liability. This is an anti-avoidance measure to curb perceived abuses of the relief. On a larger scale, the new ‘Future Fund: Breakthrough’ initiative will help R&D-intensive businesses; where private investors lead funding rounds of £20m or more, the British Business Bank will take equity. £375m is committed by the Government for this initiative.
In summary, the Budget has sought to drive investment and growth, but recognises that not all businesses have had a smooth ride in the last twelve months. A resurgent economy will provide wealth and opportunity; it will also provide much needed additional revenue to the Treasury, not least in increased corporation tax rates.
Changes to the UK corporation tax rates from 1 April 2023
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.
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
Temporary changes to the trading loss relief carry back rules for businesses
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.
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.
Super-deductions for expenditure on qualifying plant and machinery
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.
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.
Extension of the £1m Annual Investment Allowance limit
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.
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
PAYE cap for small or medium enterprises claiming R&D relief
The implementation of the PAYE cap for small and medium enterprises (SMEs), postponed in last year’s budget, is set to launch on 1 April 2021.
For research and development claims from 1 April 2021, SMEs will experience a limit to the payable R&D tax credit they can receive.
The payable R&D tax credit is capped at £20,000 plus 300% of its total PAYE and national insurance contributions liability for the period.
There is an exemption to this cap, provided the company can meet both of the following conditions:
- the company must be creating or actively managing intellectual property; and
- it must not spend more than 15% of its qualifying expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons.
The implementation of the cap was a logical step forward for the Government as a similar cap already exists in the Research & Development Expenditure Credit scheme. The introduction of this cap will reduce the risk of fraudulent claims being submitted to HMRC and should not adversely affect genuine claimant companies.
The cap will impact businesses with limited UK payroll costs, and in particular those who utilise third parties. This, unfortunately, is likely to reduce the benefit available to legitimate start-up or scaleup businesses.
The exemptions to the cap are generally welcomed as it ensures that highly innovative, and research and development intensive businesses are not restricted by the cap. An area that may cause concern is in relation to the second exemption condition which, although reasonable, may restrict businesses that are able to capitalise on the expertise of sister companies within its group.
When will it apply?
From 1 April 2021
Consultation on research and development tax incentives
Following a consultation last year that considered the eligibility of cloud computing and data expenditure, it was highlighted from respondents that a wider consultation of research and development (R&D) incentives was required. The consultation will run from 3 March 2021 to 2 June 2021.
The UK Government has previously stated its commitment to increase spending in R&D to 2.4% of GDP by 2027. In July 2020, the latest figures reported a spend of just 1.7%. This drive to invest in R&D aligns with the Government’s strategy to ensure the UK remains a global centre of excellence in science and innovation, and to make the UK the best place in the world for high growth, innovative companies. In order to achieve these ambitious objectives, the Government needs to ensure that both R&D schemes remain relevant, effective and globally competitive.
The R&D landscape has changed significantly since its introduction in 2000, with a revision in 2004. Since then, there have been significant changes to certain industries. The consultation will review and consider the following areas:
- whether or not the R&D definition, eligibility criteria and scope of relief are appropriate and competitive;
- whether or not the current rates of relief remain appropriate;
- how the two schemes support R&D and the main differences between them, and so whether they remain an effective way to support R&D within the UK, or require changes; and
- whether the schemes remain globally competitive, or should be amended to keep the UK at the forefront of innovation.
The aim of the consultation is to gain an understanding of how successful the incentives are from an operational standpoint, that is, for both HMRC and businesses and whether or not there is an opportunity for improvement.
R&D tax incentives are vitally important to many businesses in the UK, ensuring they continue to invest in innovation, upskill employees, take risks and grow. A consultation into the UK’s R&D tax incentives schemes is welcomed.
The announcement of this consultation is a positive step forward for businesses and the wider UK economy. As the R&D landscape has changed over the years, the schemes need to change to reflect this landscape. Significant developments in the technology sector have taken place over the last couple of decades and it is important that the incentives are reviewed to enable businesses in these sectors to continue to innovate and grow. Scientific and technological innovation can take many forms and it is important that all forms of innovation are given equal consideration during the consultation.
The consultation is a positive step towards ensuring businesses are getting maximum value and the R&D tax incentives are targeted appropriately. This helps to ensure that the UK is globally competitive on the innovation stage. The ultimate goal is to create certainty and to enable businesses to drive strategic decision making around R&D tax incentives.
It is an exciting time ahead for companies looking to benefit from R&D tax incentives and we look forward to engaging in, and seeing the results of this consultation.
When will it apply?
Consultation to run from 3 March 2021 to 5 June 2021
Working time exception extension for Enterprise Management Incentives
An existing relaxation to the Enterprise Management Incentive or ‘EMI’ scheme qualifying conditions has been extended. This will allow employees who have reduced hours or are furloughed due to COVID-19 to continue to meet the eligibility requirements of the scheme.
Employees can be granted tax-efficient share options under the EMI scheme, subject to meeting a number of requirements. One of these requirements is that participating employees must work 25 hours a week or 75% of their working time in the tax year.
Employees who are furloughed, working reduced hours or taking unpaid leave as a result of COVID-19 may be unable to meet this requirement.
The Government previously introduced an exception to this requirement for employees who have not met the working time requirements as a result of COVID-19. The exception meant that such employees could retain the tax benefits of their existing options, or be granted new options. The exception will be extended until 5 April 2022.
The Government has also released a call for evidence on the EMI scheme generally. The Government is considering the extension of the scheme, so that more companies can participate. The deadline for responses is 26 May 2021.
These are welcome changes which should mean that the tax position of employees holding EMI options is not adversely affected by events outside their control.
The call for evidence on the EMI scheme is also a welcome development. The tax benefits of the scheme are extremely valuable to high-growth companies and their employees.
When will it apply?
The relaxation will apply from the date of Royal Assent to the 2021 Finance Act until 5 April 2022
Inheritance tax nil rate band and residence nil rate band frozen
The inheritance tax nil rate band and the residence nil rate band will remain at their current level up to and including the 2025/26 tax year.
The nil-rate band (NRB) threshold, above which inheritance tax becomes payable, will remain at £325,000 until April 2026. The residence nil-rate band (RNRB), which applies when taxpayers pass their main residence to their direct descendants on death, will also be kept at £175,000 for this period. The RNRB is reduced by £1 for every £2 that an estate exceeds £2 million in value and this £2 million threshold will also remain fixed until April 2026.
The combined effect of the NRB and RNRB means that, in some circumstances, an estate worth up to £1 million can be passed on, without any charge to inheritance tax, on the death of a surviving spouse or civil partner.
The decision to maintain the NRB and RNRB at their current levels could see more estates exceeding these thresholds if asset values continue to rise. This would result in more estates becoming liable to inheritance tax or ceasing to qualify for the RNRB.
The NRB has been set at £325,000 since 6 April 2009 and so it is not a surprise that there are no plans for this to rise in the coming five years. The RNRB was introduced in April 2017 and, though it offers welcome relief from inheritance tax for smaller estates, it is a poorly understood and an unnecessarily complicated relief.
It is disappointing that the Chancellor did not take this opportunity to merge the two bands together. Broader changes to the inheritance tax system may still be on the cards, with further HMRC consultation documents expected on 23 March.
When will it apply?
From 6 April 2021, the thresholds will remain frozen at their existing levels until 5 April 2026.
Pension lifetime allowance frozen for next five years
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.
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
New penalty regime for late submission and payment of VAT
Changes to the current penalty system for late payment of VAT will come in with effect from 1 April 2022. These will see potential penalties for both late submission and late payment, whereas the current penalty regime financially penalises late payment only.
The changes to the current penalty regime, effective from 1 April 2022, will see the introduction of a points-based system for late submission and a percentage-based penalty for late payment.
The new late payment penalty regime will apply penalties calculated as a percentage of underpaid tax at set trigger points. The first penalty will be charged after 15 days at 2%, or will be charged at 4% if between 16 and 30 days late. A second penalty will be charged at an annualised rate of 4% from day 31, calculated on a daily basis.
Under the points-based system for late submission, exceeding the points threshold, which differs depending on whether the business submits annual, quarterly or monthly returns, will result in a fixed penalty of £200. For businesses that submit quarterly VAT returns, four late submissions within a 24 month period will result in this fixed penalty. Further late submissions within the same 24 month period will result in a further fixed £200 penalty.
While the new penalty system appears to be more complicated than the current provisions, it does overall seem to be fairer and should help encourage compliance.
Businesses will have an additional 15 days' grace to pay the outstanding VAT without incurring a penalty, and are likely to incur lower penalties. The maximum penalty under the current provisions is 15% of the VAT outstanding, and under the new system it will take over a year to accumulate a penalty of 8%.
When will it apply?
For accounting periods beginning on or after 1 April 2022.
Extension to the temporary reduced rate of VAT
The 5% reduced rate of VAT for the hospitality and tourism sectors has been extended to 30 September 2021. A reduced rate of 12.5% will then apply until 31 March 2022.
The temporary 5% reduced rate for the tourism and hospitality sectors, which has applied since 15 July 2020, has been extended for another 6 months to 30 September 2021.
This will be followed by a new interim reduced rate of 12.5% for a further 6 months to 31 March 2022, before reverting back to the standard rate from 1 April 2022.
These measures apply to supplies of restaurant services, hot takeaway food, holiday accommodation and admission to many attractions.
The extension of these measures will be a huge relief to one of the sectors hardest hit by the pandemic and ensures that the benefit covers the important summer season.
Although there is no requirement to do so, businesses may choose to pass on some or all of the savings to their customers.
It is worth noting that the scope of these measures has not been expanded, so the sale of alcoholic beverages will continue to be subject to VAT at the standard rate of 20%.
When will it apply?Reduced rates will continue to apply until 31 March 2022.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.