There were a number of changes announced for businesses in this Budget. For the Financial Services sector this Budget provided several new growth initiatives to encourage investment into the UK.
The fact that there were relatively limited changes announced in the Budget, to what is an already complex tax regime for businesses and individuals in the financial services sector, should bring a general sense of relief. The Government’s focus was firmly on ensuring that those who can afford the most, pay the most, though it may well be that any reprieve is temporary.
The headline change which will impact financial services businesses is the increase in the main rate of corporation tax to 25% from 1 April 2023. This increase applies to businesses with non-ring fenced profits in excess of £250,000. While the rate is still the lowest in the G7, and it has been stated that the Government only expects this to apply to 10% of businesses, but will likely impact businesses widely in this sector.
When combined with the bank surcharge of 8% this leads to a potentially uncompetitive regime for banks. The Government has, therefore, committed to reviewing the bank surcharge regime during 2021 with proposed changes to be legislated in Finance Bill 2021 and 2022. Given the confirmed and potential changes coming up for this sector, businesses will need to consider their tax cashflows carefully, and also the impact on financial statements due to restating deferred tax positions at the increased rate.
In more positive news, the Government’s focus on investment in the UK has seen a series of new measures designed to kickstart the economy. The creation of the UK Infrastructure Bank with £22 billion of financial capacity, £15 billion of Green Gilt issuance to help tackle environmental challenges and the introduction of the Net-Zero Innovation Portfolio to provide funding for low-carbon technologies firmly puts the green agenda at the centre of the UK’s economic recovery and paves the way for new investment opportunities.
The support for innovative and fast-growth companies has continued with the announcement of the Future Fund: Breakthrough, through which the Government will take a stake in tech scale-ups. This is a £375m fund and will be welcomed by FinTech and Insurtech business. In addition, consulting will commence to make it easier for pension funds to invest in innovative scale up businesses. The creation of eight new Freeports creates interesting new investment opportunities and comes with tax reliefs for the purchase of land, associated construction and ongoing employment.
The investment theme continues with a new 130% super-deduction for companies investing in qualifying capital expenditure between 1 April 2021 to 31 March 2023, and the temporary extension of the Annual Investment Allowance of £1 million. With the pre-warned future change in the rate of corporation tax and these short-term expenditure reliefs, many businesses will be considering the timing of their investments.
We welcome the Government’s intention to undertake a review of the competitiveness of the UK’s R&D tax reliefs and the application of the Enterprise Management Incentives. This, along with, the announcement of fast-tracked visas to reduce barriers in attracting overseas talent, should encourage the attraction and retention of new talent. This should be good news for the financial services sector.
Along with restart grants and extended loan schemes, the Chancellor announced the extension of the furlough scheme and the VAT deferral payment scheme. A relaxation of the loss relief carry back rules will be available for two tax years; relief can be carried back to the previous three years rather than the usual one year.
A number of changes for multinational businesses have been introduced and those groups operating internationally may want to undertake a review of their group structures in light of the new rules. The repeal of the legislation that gave effect to the EU Interest and Royalties Directive may create new withholding tax obligations for international groups from 1 June 2021. Multinationals should identify and consider any payments of interest, or royalties, made between the UK and the EU, as new tax exposures may arise.
The Diverted Profits Tax is set to increase from 25% to 31% from 1 April 2023; this will only impact large multinational businesses and is intended to discourage the use of artificial arrangements that result in erosion of the UK tax base. As a consequence of the proposed increase in the main rate of corporation tax to 25%, an equivalent increase in the rate of diverted profits tax is no surprise.
Previously announced changes to the Anti-Hybrid and Corporate Interest Restriction legislation are to be legislated in Finance Bill 2021.
Anti-avoidance and administration
HMRC continue to focus on tax avoidance schemes, tax evasion and improving digital information flow, a theme we have seen throughout recent Budget announcements. The announcement of £100 million to fund a new evasion taskforce, whose initial aim will be to consider those businesses utilising the job retention scheme, was not surprising.
Sticking with improvement of information flow for HMRC, as previously announced, Making Tax Digital will be extended to all VAT registered businesses from 1 April 2022 and a new power will be introduced to enable implementation of the OECD rules which require digital platforms to send information about sellers to HMRC.
In more welcome news, the Government’s review into tax administration for large businesses is expected to attract input from a considerable number of businesses within this sector.
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
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.
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.
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.
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
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
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.
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.
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.
Extension of Making Tax Digital to all VAT registered businesses
It has been confirmed that all VAT registered businesses must comply with Making Tax Digital (MTD) with effect from 1 April 2022.
As previously announced in July 2020, all VAT registered businesses must be compliant with MTD with effect from 1 April 2022.
Currently, VAT registered businesses that have never exceeded the VAT registration threshold are not required to comply with MTD, although can do voluntarily.
VAT registered businesses that trade below the registration threshold and have not yet voluntarily joined MTD must ensure they make the necessary arrangements to be MTD compliant no later than April 2022.
The 1 April 2022 date coincides with a new penalty regime for late payment and late submission of VAT returns, which also includes failure to comply with MTD.
When will it apply?
From 1 April 2022
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
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 www.smithandwilliamson.com prior to the launch of Evelyn Partners.