The Chancellor has confirmed the Government's commitment to encouraging investment in the UK, introducing new incentives for capital expenditure and allowing accelerated relief for losses incurred by previously profitable businesses. But the Chancellor also expects businesses to pay their share of the tax burden; corporation tax rates are set to rise in the near future for bigger business.
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 total profits of the business. 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
Increase in the rate of Diverted Profits Tax
The rate of Diverted Profits Tax (DPT) is set to increase from 25% to 31%, from 1 April 2023.
The current rate of DPT is 25%, 6% higher than the main rate of corporation tax, which is currently 19%.
As a consequence of the proposed increase in the main rate of corporation tax to 25% for the financial year beginning 1 April 2023, the rate of DPT is being increased.
The result is an increase of 6% for DPT, to 31%, for the financial year beginning 1 April 2023.
The DPT is intended to discourage the use of artificial arrangements that result in erosion of the UK tax base, rather than to raise tax revenues in its own right. With this in mind, the increase in rate is no surprise. The DPT rate must always sit at a level above the associated main rate of corporation tax, in order to act as a deterrent.
DPT applies predominantly to large multinational enterprises, and therefore this change is unlikely to impact the vast majority of businesses. Nevertheless, we expect HMRC to continue its pre-COVID focus on perceived unreported DPT as well as perceived deficiencies in business’ application of transfer pricing rules more widely. Businesses should therefore ensure that their transfer pricing policies are robust, supportable and controls exist to ensure they are adhered to in practice.
When will it apply?
The 31% rate will apply to profits arising from 1 April 2023.
Coronavirus Job Retention Scheme extension
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%.
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.
Changes to hybrids and other mismatches rules
The Government is introducing changes to the hybrids and other mismatches rules to ensure the legislation operates proportionately and as intended.
Following consultation on draft legislative revisions published in November 2020, the Government is introducing a number of amendments to the hybrids and other mismatches legislation to ensure the rules do not result in disproportionate or unintended outcomes for the taxpayer.
The changes follow two consultations, the first of which was announced in the previous Budget, aimed at addressing a number of concerns raised by taxpayers with regards to the impact of the hybrids and other mismatches legislation following its introduction in 2017.
The changes affect various areas of the rules including:
- changes to dual inclusion income, allowing allocation between group members in certain cases and extending it to include income which is fully taxed with no corresponding deduction for tax;
- preventing the ‘acting together’ rules from applying broadly where a party has a less than 5% equity stake;
- amendments to the imported mismatch rules; and
- clarification to the definition of foreign tax to exclude amounts deemed to arise to, and taxed in the hands of, a different party to which the income arose.
Certain changes will come into effect from 1 January 2017, the date that the legislation originally came into force, with the remainder taking effect from Royal Assent of the Finance Bill.
The hybrids and other mismatches legislation was introduced in the UK in 2017 as part of the UK’s response to the global effort to tackle Base Erosion and Profit Shifting (BEPS). The BEPS project, under Action Point 2, set out prescriptive measures to tackle mismatches involving either double deductions of the same expense, or deductions for an expense without any corresponding receipt being taxable, and the UK was an early adopter.
Since 2017 a number of jurisdictions have implemented similar rules and this, combined with a variety of disproportionate or unintended consequences of the regime, has resulted in regular dialogue between HMRC and advisory firms, representative bodies and businesses impacted by the rules. The amendments now being implemented result from two rounds of consultation and include several amendments which will be welcomed by businesses, though the rules remain highly complex to apply. Further, expected amendments to treat US LLCs akin to UK partnerships no longer seem to be present in HMRC’s outline of the changes and so we will need to wait for updated draft legislation to obtain clarity on this point, which could affect many businesses.
When will it apply?
Certain changes will come into effect from 1 January 2017, with the remainder taking effect from Royal Assent of the Finance Bill.
Technical changes to corporate interest restriction rules
Technical amendments are being made to the Corporate Interest Restriction (CIR) legislation to ensure that no penalty arises for the late filing of an interest restriction return if the taxpayer has a reasonable excuse for the failure. Additionally, the changes clarify the way special provisions apply to Real Estate Investment Trusts (REITs) following the move of non-resident landlord companies to be within the charge to UK corporation tax.
As previously announced, HMRC has made two technical amendments to the CIR rules to ensure that the legislation works as intended.
The first amendment brings the administrative rules of the CIR in line with those for Corporation Tax Self-Assessment, ensuring that where there is a reasonable excuse for the late filing, that there should be no penalty for this.
HMRC will usually consider that a ‘reasonable excuse’ will depend on the circumstances, but will be something that stops a company meeting its compliance obligations, despite taking reasonable care.
The second amendment clarifies that a non-resident company within a UK REIT group will be deemed to be carrying on a residual business within the charge to corporation tax. This change reflects the way the CIR rules are intended to work and was needed to reflect the move from income tax to corporation tax for non-resident companies with UK property businesses.
These are welcome amendments that give companies comfort that they will not receive penalties unduly or unintentionally fall foul of the CIR rules.
When will it apply?
The change to allow a reasonable excuse for late filing retrospectively applies from 1 April 2017 and the change regarding the requirement of a deemed residual business will apply from 21 July 2020.
Changes to the corporation tax loss relief rules
The Government has announced technical changes to the corporation tax loss relief rules, which were relaxed from 1 April 2017.
In 2017, legislation was introduced to allow companies to use carried forward losses with greater flexibility than was previously permitted. Since that time, HMRC has identified some areas where the rules were not working as intended and companies were not accessing the loss relief to which they were entitled. For example, some groups were unable to claim the loss reliefs that they should have been entitled to following certain types of restructuring.
The Government proposes some changes to the detailed rules to correct these anomalies.
The areas subject to the changes are:
- where there has been a transfer of trade following a change of ownership;
- group loss relief;
- the computation of the loss restriction; and
- the group loss allowance allocation statement and its administrative requirements.
These largely technical and administrative changes are to be welcomed as they are aimed at ensuring the loss relaxation rules work as originally planned, as well as reducing the compliance costs for corporate groups.
When will it apply?
Certain changes will apply retrospectively with effect from 1 April 2017. Other amendments will apply with effect from 1 April 2021.
Repeal of legislation relating to the Interest and Royalties Directive
The Government will repeal the domestic legislation that gives effect to the European Union (EU) Interest and Royalties Directive in the UK. This will take effect from 1 June 2021, at which point withholding taxes may apply to payments of annual interest and royalties to EU companies.
When it was part of the EU, the UK benefited from the EU Interest and Royalties Directive. This Directive stipulated that no withholding taxes should apply on payments of annual interest and royalties from one EU company to another.
Following the UK’s exit from the EU, the repeal of the domestic legislation giving effect to the Directive means that companies within the EU will cease to benefit from automatic withholding tax exemptions on payments from UK companies. Such payments must now occur on the same terms as payments to companies based elsewhere in the world, under the terms of any relevant double taxation agreement. Exemptions from withholding tax may still apply to some payments, but only if they are available under relevant double taxation agreements.
The repeal of this legislation may create new withholding tax obligations for international groups, but in most cases it will not be difficult to determine what the new tax treatment is. It is more likely that businesses will be caught out by the new administrative requirements under relevant double taxation agreements.
Multinational groups need to identify payments of interest or royalties made by UK companies to EU entities and determine the extent to which withholding tax can be mitigated. There are often also administrative implications as companies may need to obtain separate clearance from HMRC before making payments of interest gross, even where a double taxation agreement applies.
When will it apply?
1 June 2021
More COVID-19 support for the self-employed
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.
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.
Clawback of self-employment support from those not entitled
This measure will allow the Government to clawback the grant from a self-employed individual who was entitled to the grant at the time of claim, but whose circumstances subsequently changed such that they were not entitled. Current measures only allow clawback if the individual was not entitled to the grant at the time they claimed it.
In order to claim a grant under the self-employment income support scheme (SEISS) an individual must meet various criteria. These include a reasonable expectation that their business will be adversely affected by the pandemic in the period in question. The grants are generally claimed part way through the period, and a full financial picture may not be available for sometime after.
This measure will allow HMRC to claw back grants paid to those who were entitled to the grant at the time when they claimed it, but subsequently ceased to be entitled to all or part of the grant. The criteria for ceasing to be entitled are not set out, but are likely to be that trading profits turn out to be too high either to be eligible for the grant, or for the higher rate of the two tier fifth grant.
This will take the form of a 100% tax charge on the overpaid grant. Currently, the legislation allows HMRC to clawback SEISS grants claimed by those who were not entitled to them at the time of making the claim.
This change will only apply to the fourth and fifth grants under the scheme, applications for which are yet to open. It will not apply to the previous grants.
Superficially, removing grants from those who turn out not to need them makes sense, but practically it creates enormous uncertainty.
If traders applying for the grants cannot be sure that they will not need to be repaid, then they may be reluctant to claim them, or use them in the business once received. Some may not realise that these need to be paid back until near to the tax due date, and find themselves in a difficult financial position.
When will it apply?
This will apply to SEISS grants made on or after 6 April 2021.
Self-employment support grants taxable in year of receipt
Grants received under the self-employment income support scheme (SEISS) are to be taxed in the tax year in which they are received. Applications for the fourth and fifth grant will only open next tax year, so will all be taxable with that year's profits.
All grants made under the SEISS are taxable, but currently the legislation only provides for them to be taxed in the tax year ended 5 April 2021. The need to extend the scheme into the next tax year was not anticipated when it was drafted.
The first three grants will be taxable in 2020/21, and the fourth and fifth grants taxable in 2021/22. The fourth grant covers the period from 1 February 2021 to 30 April 2021, but applications for it will not open until late April 2021, so the grants will be taxable in the next tax year.
This is a simple change to a more logical approach, rather than taxing all grants in this tax year. An alternative would have been to tax the fourth grant partially in this tax year, and partially in the next, as the period it covers straddles the two years. Taxing the grant simply on date of receipt will be more straightforward for the recipients.
When will it apply?
This will affect SEISS grants received on or after 6 April 2021.
Tax deductibility of business rates repayments
It has been confirmed that repayments of business rates relief are tax deductible for both corporate and income tax purposes.
Following the Government support throughout the COVID-19 pandemic some businesses have repaid relief received from the Government; such as repaying business rates reductions. Where this has been returned to the Government or relevant public authority, a corporate or income tax deduction will be permitted as an allowable expense to ensure parity with the tax treatment of the original expenditure.
This is an expected clarification and puts businesses back into the tax position they would have been in should the rates have been paid in full prior to the availability of the relief. The deduction is allowed in the same accounting period in which the original liability would have been due and paid, and will be limited to the original liability. This relief overrides existing rules regarding allowable expenses to the Government in respect of coronavirus support.
When will it apply?
The relief will apply retrospectively once enacted in Finance Bill 2021.
Tax reliefs for Freeports
Up to 30 September 2026, businesses operating in designated Freeport tax sites will benefit from enhanced rates of Structures and Buildings Allowance (SBA), enhanced capital allowances, full stamp duty land tax (SDLT) relief on qualifying land or property purchases, and full business rates relief. Subject to parliamentary approval, an employer’s National Insurance contributions (NICs) relief is also intended to apply for four years from April 2022 to April 2026, potentially extended to April 2031.
The Government announced eight Freeports in England, being East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.
A further two Freeports are expected to be announced later this year, with additional Freeports in the devolved administrations being delivered as soon as possible.
The Government intends to designate tax sites within these Freeports, which will see the following tax reliefs apply from the date of designation:
- Enhanced SBA of 10% per annum compared to the 3% standard rate, applying to corporation and income tax, for structures or buildings brought into use by 30 September 2026;
- Enhanced capital allowances of 100% relief on qualifying plant and machinery incurred up to and including 30 September 2026;
- Full SDLT relief for land and buildings acquired for and used in a qualifying manner for three years, available for purchases up to and including 30 September 2026; and
- Full business rates relief for five years from the point at which each beneficiary first receives relief.
Following the agreement of each Freeport’s governance arrangements and successful completion of their business cases, the Freeport sites are expected to begin operations in late 2021 and will also enjoy customs benefits and wider Government support.
The Government also intends to make an employer’s NIC relief available for eligible employees in all freeport tax sites from April 2022 or when a tax site is designated if after this date. Details of the employer’s NICs relief are expected to be released at a later date.
The introduction of Freeport tax sites are intended to support the policy of levelling up various regions of the UK.
While the reliefs are generous, they are temporary and come with conditions. For example, there is provision for HMRC to claw back enhanced capital allowances claimed on plant and machinery if it is no longer primarily used inside a Freeport area within five years of acquisition or being brought into use. SDLT relief also contains a clawback provision should the purchaser fail to use the property in a qualifying manner within a three year period.
Businesses considering establishing themselves within these tax sites will need to evaluate the time, cost and effort of relocating alongside the temporary benefits planned.
When will it apply?
From the date of designation of the specific tax site, generally until April or September 2026, but with the potential to extend.
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
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?
For accounting periods beginning on or after 1 April 2021
Review of the overall tax rates for banking companies
The Government will review the impact of the increase in the corporation tax rate on banking companies, with a particular focus on the interaction with the banking surcharge. The aim is to ensure that the overall rates of corporation tax imposed on banks remain competitive with major international markets such as the US and EU.
Following the announcement of the increase in the main rate of corporation tax to 25% in 2023, the Government will review the combined tax rate for banks, taking into account the banking surcharge. The Government’s opinion is that the combined rate of up to 33% would not be competitive in the international market.
This will be a very welcome review for banking companies, which would otherwise be facing a significantly increased tax burden. Given how much effort the Government has put into showing the market that the UK tax system is open for business after Brexit, it seems likely that the aggregate tax burden on banks will be eased. It may not, however, be a popular measure in light of the reputation of big banks and the impact of the pandemic on lower-income earners.
When will it apply?
From the date of Royal Assent to Finance Bill 2021-22
New tax reporting requirements for digital platforms
New powers will be introduced to enable the Government to make regulations for tax reporting by UK digital platforms. Digital platforms will be required to report information on sellers using their platform to provide services. These rules aim to reduce errors and prevent tax evasion in the sharing and gig economies.
The Organisation for Economic Cooperation and Development (OECD) has developed model rules that require digital platforms to report to tax authorities on sellers that use their platform. The reported information is also shared with the sellers themselves, and with tax authorities in other participating jurisdictions. The information assists sellers with their tax compliance obligations, and enables tax authorities to detect tax evasion in the sharing and gig economies.
The UK Government will introduce new powers to enable these rules to be implemented in the UK. A consultation will also be held in Summer 2021 to seek the public's views on the proposed regime.
The proposed rules will be yet another compliance burden on businesses, following the trend of ever-increasing tax governance regulations over recent years. Business will surely not welcome an additional administrative requirement - though it is unlikely that anyone will be surprised by it. This particular proposal to implement OECD model rules mirrors the recent replacement of EU tax reporting rules (DAC6) with the OECD's Mandatory Disclosure Rules. The Government's commitment to international standards of tax transparency has clearly not been lessened by Brexit.
When will it apply?
The power to regulate will be legislated in Finance Bill 2021. The reporting regulations are not expected to take effect until 1 January 2023.
Consultation on Mandatory Disclosure Rules confirmed
The Government will consult on draft legislation to introduce the Organisation for Economic Cooperation and Development’s (OECD) Mandatory Disclosure Rules (MDR) in the UK. The MDR is aimed at increasing tax transparency by requiring intermediaries to report to tax authorities on cross-border arrangements that attempt to hide beneficial ownership.
On 31 December 2020, the Government announced its intention to implement the OECD’s MDR in the UK in order to transition from European Union (EU) standards to international standards of tax transparency. The MDR will replace the EU’s tax transparency regime, commonly referred to as DAC6, in the UK.
The MDR focuses on preventing taxpayers from undermining or circumventing the beneficial ownership reporting required by the Common Reporting Standard (CRS). Under the MDR, intermediaries will have to provide tax administrations with information on CRS avoidance arrangements.
The Government has confirmed in the Budget that it will consult later this year on the transition and implementation of the MDR in the UK.
We have been aware of the forthcoming MDR consultation since it was announced on 31 December 2020 that DAC6 in the UK was to be largely repealed. This was a major change that significantly reduced the reporting burden for UK intermediaries with reporting duties. The replacement of the remaining DAC6 regulations with the MDR in the UK will, in contrast, have very little effect on such intermediaries; the reporting required under the MDR is almost identical to that required by what is left of DAC6. This announcement is, for reporters, merely a formality.
When will it apply?
The consultation is expected to take place later this year.
Review of tax administration for large businesses
The Government is continuing to progress its strategy to improve tax administration. Over the coming months, it will review large businesses’ experiences with UK tax administration with the aim of improving the UK's competitiveness and promoting investment.
In July 2020, the Government set out a 10-year strategy for the improvement and modernisation of tax administration in the UK. The review of large businesses’ experiences of UK tax administration is part of this wider strategy. It aims to help the Government understand the experiences and challenges large businesses face and collate ideas for improvements.
It is expected that the review will focus on the degree to which the UK’s tax administration provides large businesses with:
- appropriate and early certainty over tax matters;
- efficient dispute resolution; and
- a collaborative and constructive approach to compliance.
This is a welcome update insofar as it shows a continued commitment from the Government to an effective and competitive tax administration. As is the case with all consultations, however, the real test is whether or not it actually leads to useful improvements in the tax system. The COVID pandemic has certainly highlighted the importance of a modern, digital tax system, and businesses will not be short on ideas for improvements.
When will it apply?
Initial discussions are expected over the coming months.
New power for HMRC to obtain information
HMRC will have a new civil information power to obtain information about taxpayers from financial institutions. Currently, HMRC must obtain permission from the tribunal before getting this information directly.
As previously announced, HMRC will be able to issue a Financial Information Notice (FIN) to a financial institution such as a bank, requiring it to provide HMRC with information about a specific taxpayer. Information gathered using FINs can be used for debt collection purposes as well as checking the taxpayer’s tax position.
As well as helping HMRC, this is designed to aid international cooperation. Overseas jurisdictions regularly request this type of information from HMRC, and FINs will make this process quicker and more simple.
This measure is balanced by 'taxpayer safeguards', designed to replace the safeguard of oversight by a tribunal. The main safeguards are that the information must be reasonably required to check the tax position, and that HMRC must tell the taxpayer why the information is needed, unless a tribunal permits otherwise.
This measure is designed to save HMRC time and effort. HMRC regularly applies to the tribunal for power to obtain this type of information, so giving blanket permission cuts out a step in most cases. The loss of independent oversight is, however, a significant shift. Given that this power can also be used for debt collection, it may become commonplace for HMRC to issue these notices.
When will it apply?
From the date of Royal Assent to Finance Bill 2021.
Clamping down on promoters of tax avoidance schemes
As announced at last year's Budget, the Government is strengthening its powers to tackle those who promote and market tax avoidance schemes. This includes increasing information powers for HMRC and amending existing anti-avoidance legislation.
The Government has repeatedly affirmed its commitment to protecting taxpayers from promoters of tax avoidance schemes. The changes cover a range of measures, including increasing HMRC's power to obtain information and clarifying how the General Anti Abuse Rule applies to partnerships. Amendments will also be made to the Disclosure of Tax Avoidance Schemes and the Promoters of Tax Avoidance Schemes regimes. These amendments were the subject of a public consultation in 2020.
After initially touting the proposal as targeting promoters of disguised remuneration schemes, the Government seems to have accepted that the impact of these changes is clearly not limited to that narrow spectrum. Preventing tax abuse is always a welcome goal, but the continual expansion of HMRC's powers without correlating improvements in taxpayer safeguards is a concerning trend.
When will it apply?
These changes will be legislated in Finance Bill 2021, and the rules will come into effect from the date of Royal Assent.
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.