Budget 2021: Many changes for large and international businesses with new tax reliefs, investment incentives and an increase to the corporation tax rate

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

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

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

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

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

Our comment

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

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

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

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

When will it apply?

From 1 April 2023

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.

Our comment

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.

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

What it means for companies

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

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

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

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

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

What it means for unincorporated businesses

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

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

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

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

Our comment

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

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

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

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

When will it apply?

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

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

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

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

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

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

Our comment

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

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

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

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

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

When will it apply?

From 1 April 2021 for two years.

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

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

Our comment

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

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

When will it apply?

For expenditure incurred from 1 January 2021 to 31 December 2021

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.

Our comment

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.

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.

Our comment

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

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.

Our comment

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.

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.

Our comment

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.

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.

Our comment

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

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.

Our comment

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.

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.

Our comment

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.

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

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

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

Our comment

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

When will it apply?

Business can opt in from March 2021.