Spring Budget 2021 – spend now, tax later?
Last week the Chancellor delivered his Spring Budget. Unsurprisingly, the measures announced were dominated by the Covid-19 pandemic and the planned roadmap out of lockdown.
This blog focuses on some of the key business tax measures announced.
Another date for the diary is 23 March 2021 (so-called "Tax Day"). It is expected that a number of tax consultations will be published by the Government on Tax Day, which are likely to give further insight as to the Government's longer-term tax policy plans. In particular, there is speculation that further detail may be provided as to thinking on planned changes to – and potential increases in rates of – CGT.
1. Corporation tax rate and DPT
From 1 April 2023, the rate of UK corporation tax will be raised from 19% to 25%. From that date the current 19% rate will remain for profits below £50,000. Profits between £50,000 - £250,000 will be eligible for marginal relief, so that the rate of tax applicable to profits within this range will gradually increase up to the new 25% headline rate.
This was perhaps a larger than expected increase, and reverses a long-trend of downwards corporation tax rate changes. As the Chancellor emphasised however, it will still leave the UK with a main rate of corporation tax lower than most of the G20 nations.
As a result of this announcement, the diverted profits tax (DPT) rate will increase from 25% to 31% from 1 April 2023, so that the DPT rules continue to serve as an effective deterrent against diverting profits out of the UK (by maintaining the 6% differential between DPT and the top rate of UK corporation tax).
For the period 1 April 2021 – 31 March 2023, a 'super-deduction' will be available to companies that invest in qualifying new plant & machinery. As a result:
investments in main rate assets (that usually attract 18% writing down allowances) in this period will attract a 130% super-deduction
investments in assets qualifying for special rate relief (that usually attract 6% writing down allowances) will attract a 50% first-year allowance
The super-deduction will allow companies investing in qualifying assets to cut their tax bill by up to 25p for every £1 they invest, during this period.
3. Trading losses carry back
The period for which businesses may carry back trading losses (to set against profits from earlier years) has been extended from one year to three years. This is a temporary measure for tax years 2020/21 and 2021/22.
For companies, a maximum of £2,000,000 of unused trading losses will be eligible for this extension (after carry back to the preceding year – the amount available for carry back to the preceding year is uncapped) for accounting periods ending between 1 April 2020 and 31 March 2021. A separate £2,000,000 maximum will apply to accounting periods ending between 1 April 2021 and 31 March 2022.
For unincorporated businesses, this extension will apply to a maximum of £2,000,000 of unused trading losses.
4. UK withholding taxes on interest and royalty payments
UK legislation giving effect to the EU Interest and Royalties Directive will be repealed. Under current UK law, there is an exemption from UK withholding taxes on intra-group interest and royalty payments made by a UK company to an EU company.
From 1 June 2021, UK withholding taxes will apply to payments of UK-source interest and royalties to EU member state companies (subject to the provisions of any relevant double tax treaty, which may reduce or even eliminate the UK withholding taxes due).
The reason for this change, of course, is that following the end of the Brexit transition period EU companies should not be treated more favourably than non-EU companies when in receipt of UK-source interest and royalty payments.
5. VAT – reduced rate for hospitality and tourism
The reduced rate of VAT (5%) for certain supplies of hospitality, hotel and holiday accommodation, and attractions has been extended again to 30 September 2021.
Originally this reduced 5% VAT rate was intended to revert to 20% from 12 January 2021 (it was then further extended to run to 31 March 2021).
Following last week's announcement the 5% VAT rate will now taper from 5% to 12.5% on 1 October 2021, before reverting back to 20% after 31 March 2022.
6. EMI schemes – call for evidence
A call for evidence has been published as to whether (and, if so, how) to widen the existing tax-favourable Enterprise Management Incentives (EMI) share option scheme. The current EMI scheme offers significant tax benefits for both qualifying employees and employers, and is designed for smaller, high-growth companies.
The temporary increase in the stamp duty land tax (SDLT) nil-rate band for purchases of English and Northern Irish residential property will remain at £500,000 until 30 June 2021 (the nil-rate band had been due to revert to £125,000 on 1 April 2021). From 1 July 2021 – 30 September 2021, the nil-rate band will be £250,000.
It was also confirmed that a 2% SDLT surcharge would apply on top of existing residential SDLT rates for non-resident purchasers of English and Northern Irish residential property, from 1 April 2021.
The Chancellor also announced a raft of 'freezes' to certain personal tax allowances, thresholds and exempt amounts. Together with the announced increase in the UK corporation tax rate, these 'real terms' tax rises will mean that (according to the Government's published calculations) by 2025-26 there will be an extra yield for the UK economy of c.£28bn a year. It is hoped that this will go some way towards paying for the huge cost of the measures announced last week (£59bn), when added to other pandemic-related measures announced over the last 12 months.
To summarise, the take-away from the Chancellor's announcements is that it's very much a case of spend now, raise taxes later.