This is a summary of the Budget. It will not cover absolutely everything. It covers issues that I feel will be relevant to most of my client base. Here is the government link if you want to look at the detail of the Budget. https://www.gov.uk/government/publications/budget-2021-overview-of-tax-legislation-and-rates-ootlar/budget-2021-overview-of-tax-legislation-and-rates-ootlar
The Budget was not the most exciting of budgets and wasn’t quite as bad as predictions that I had heard. It could have been a lot worse but thankfully given the challenges most people are facing at the moment; it wasn’t too onerous for now. Nevertheless, it should not be underestimated. There may be future tax changes still to come to keep the Country’s debt within manageable levels. The government needs to recoup money, so how do they propose to do that?
Firstly, HMRC have substantial funding to enable them to recoup COVID financial measures such as SEISS and CJRS, which have been incorrectly claimed. They may also put some of the onus on accountants to help them to do that. So if you have claimed and maybe shouldn’t have you may want to review that.
So the second way they will recoup money is the increase in the corporation tax rate. Fortunately, the increase in corporation tax rate to 25% is delayed till 2023 . There is actually a marginal rate of tax of 26.5% if your profits exceed £50,000 but are less than £250,000.
On first reflection many small businesses may believe that they will not be affected. However, it could have an impact on small businesses that take out small salary and then the rest as dividends. Accountants will need to revisit calculations for clients to assess the most tax efficient remuneration policy. Salary may become more advantageous than dividends in 2023.
This change in corporation tax rates is also going to have an effect that clients won’t be aware of. This will bring back a lot of old issues; such as associated companies, marginal rates of Corporation Tax and Close Investment Holding Companies. I remember the rules well due to my age. This reintroduces a more complicated tax regime, so much for the simplification of tax.
Advisors should review all corporate structures to assess their efficiency under the new rules. If you have shares in more than one company, if you have a group of companies or if family members have different companies, review your position.
In very simple terms associated companies rules means that if you own e.g. two active companies, the Corporation Tax Rates may be more than 19% if profits exceed a mere £25,000 as the £50,000 limit is divided by the number of associated companies.
There may be a lot of planning work to be undertaken before 2023 with regard to corporate structures.
Is government likely to back down on this change before 2023? Probably not as Corporation Tax is one of the areas where they hope to raise monies.
Super deduction allowance of 130%
There is an increased super deduction allowance for acquiring plant and machinery of 130% of the expenditure. Which means tax relief at 24.7% on the expenditure instead of the usual 19%.
If you are considering investing in new equipment then you may wish to hold off on that till 1 April 2021. This allowance is only for companies and the reason for that is probably because the government does not want companies to delay investment till the new 25% Corporation Tax rate comes in, in 2023.
He is trying to encourage investment and spending now. Clearly, it is a win win for companies who will still only pay 19% tax under the new rules. The allowance does not apply to second-hand assets. Cars, integral features, long life assets are also excluded. There are some anti-avoidance provisions, if you were to buy and sell such an asset within the period from 1 April 2021 to 31 March 2023.
Corporate clients therefore need advice specifically for their situation. This super deduction allowance only applies to companies not individuals.
The 100% Annual investment allowance is extended to 31 December 2021. If your accounting period straddles that date we need to be careful if you make purchases of plant and equipment around that time.
The allowance for integral features is increased from 6% to 50% Although smaller businesses are likely to use the Annual Investment Allowance of 100% where possible.
Due to the triple tax lock pledge the Income Tax, National Insurance and VAT rates have remained the same. So instead, they will increase personal allowance to £12,570 for 2021/22. That allowance is then fixed till 6th April 2026. The rate of income tax has not increased, but people will pay more income tax due to the personal allowance freeze over the next 5 years.
The basic rate band has increased to £50,270. Even so if you claim child benefit and your taxable income exceeds £50,000 you start to pay back some of your child benefit. Again tax simplification at its best.
Capital Gains Tax
They have also frozen the chargeable gains allowance at £12,300. They did not increase the capital gains tax rate though. This had been suggested prior to the Budget.
Why not? They seem to think that they do not need to do so. Do they believe there will be an increase in the capital gains tax take over the next few years without increasing it. Do they think we are in for a property boom?
There may have been an increase in recent property sales due to the stamp duty holiday, due to landlords selling as a result of the restriction on mortgage interest relief and possibly due to people speeding up sales due to the mere suggestion that capital gains tax rates were to increase. The question is whether the property market prices and activity will be a temporary situation or whether it will actually provide the monies the Chancellor desperately needs. Time will tell. The stamp duty holiday is extended till 30 June 2021 so it may keep the housing market buoyant for now. The question is what will happen when it ends? If it is only a temporary boom we may yet see that capital gains tax rate rise.
With IHT, the nil rate band allowance is to remain the same as it has done for the last ten years. Fortunately none of the tax reliefs and exemptions have been removed, so again things could have been worse. Although the nil rate band has not increased for a long time, we must remember that we also have the residence nil rate band. The residence nil rate band is fully phased in now and helps families who leave their family home directly to their children. The latter relief is a little too restrictive for many tax payers out there to benefit but it does exist.
Trading losses can be carried back for three years instead of one year. This is to provide a refund of taxes to try to assist businesses that have struggled due to the pandemic. The length of time that this pandemic has progressed means that a carry back of losses for one tax year would have prevented some businesses from using the carry back to obtain a refund as their losses may have spanned two taxable periods.
If you are a company do not be quick to carry back losses. With the increase in CT rates starting in 2023 those losses may be worth more if they are offset in the future when business recovers. If you need the cashflow now though, cash may be king.
Always consider carefully how you use losses, to ensure they are being used to the optimum effect.
Further COVID Support
Coronavirus Job Retention Support is extended till September 2021. The 80% of employee’s usual wages will be paid, up to a cap of £2,500 per month, up to the end of June 2021. Then the amount the government will pay decreases from July onwards. The good news is that from 1 May 2021, you can claim for furlough for employees that were reported under RTI upto 2nd March 2021. That allows some who were unable to claim to claim should they still need to.
There will be a 4th and 5th SEISS grant for the self employed. Some self employed who previously missed out, due to not having filed self assessment tax returns in time or maybe because they had moved from employment to self employment, may now qualify.
Don’t assume that you can claim it just because it is there. If your business has not been affected by COVID then you need to consider the rules very carefully and if you are not intending to carry on your business any longer then again you should think twice about claiming. As mentioned above they will seek to recoup money you should not have claimed. They have introduced a 100% tax charge on such grants received, that shouldn’t have been. Unfortunately the 4th one is not due to be paid till late April.
The VAT deferral scheme is now open. It allows businesses who deferred tax in the COVID deferral period to pay the amount in monthly interest free instalments, over 2 to 11 monthly payments depending on when you join. You need to join the scheme before the end of June. If you are unable to meet your liability over that period then you will need to contact HMRC to arrange a time to pay arrangement. Here is the link to government website.
THE VAT rate reduction to 5% for goods and services supplied by tourism and hospitality sector will continue until 30 September 2021. Then it will increase to 12.5% for the six months to 31 March 2022 after which it will return to standard rate of VAT.
Reform of interest and penalties for VAT and Income Tax Self Assessment
The interest and penalty regime are being reformed. The dates of the reforms link up with dates that Making Tax Digital are introduced for the various types of reporting. This is only an issue if you file late or pay taxes late. Further details can be found on HMRC website.
Moving away from the Budget it is worth remembering that the VAT Domestic Reverse Charge for the construction industry came into effect on 1 March 2021. Please see our earlier blog on that.
Off payrolling rules also comes into effect for the Private Sector from 1 April 2021. Many contractors are finding that their new contracts are being affected.
The Research & Development tax credit cap is reinstated from April 2021. R&D tax credit claims will be restricted, based on the PAYE/NIC payments of the business.
We are still moving forward with Making Tax Digital with it applying to other VAT registered businesses from 1 April 2022. That deadline feels pretty close now, so time to start thinking about how you will meet that requirement, if you have not already done so.