Autumn Budget 2021: Corporate & Business Tax
The announcements made by the Chancellor today were a mixed bag. They include sensible enhancements to categories of qualifying expenditure for research and development tax reliefs, increased reliefs for companies in creative sectors that have suffered as a result of Coronavirus, clarification of the Residential Property Developer Tax, and several other changes. It is interesting to note that we saw some signs of tax changes that can only be made now that the UK is no longer part of the EU.
The reaffirmation of the increase in the rate of corporation tax to 25% will be a disappointment. While this rate remains low internationally, the Chancellor will need to continue to keep in mind the overall competitiveness of the UK tax regime.
Corporation tax rates
The Chancellor confirmed that the previously announced increase in the rate of corporation tax from 19% to 25% will take effect as planned with effect from 1 April 2023. He also announced that the surcharge on banking companies will be reduced from 8% to 3% (meaning banks will pay corporation tax at 28%, a slight increase over the 27% they currently pay).
Moore Kingston Smith comment
Many had hoped the Chancellor would change his mind on the proposed increase in corporation tax rates, but it does not currently appear that he is intending to do so. The rate of 25% will still be the lowest rate in the G7 and the fifth lowest rate in the G20. However, the tax ‘competitiveness’ of the UK is not just about corporation tax; separate research shows that, when all taxes are considered, the UK ranks 22nd overall on the 2020 International Tax Competitiveness Index, one place worse than in 2019. This is something the Chancellor will need to watch in the future.
Research and development (R&D) relief
As well as announcing significant additional spending on research and development, the government announced several changes to R&D tax relief.
The definition of qualifying expenditure for R&D tax relief will be expanded to include cloud computing and dataset purchase costs. This follows a consultation which was launched earlier this year, and has the aim of better supporting modern research methods.
The government also announced changes that aim to focus R&D tax relief on activities carried on specifically in the UK. Further changes will also be made to tackle perceived abuse and improve compliance. These changes are set to take effect from April 2023.
Moore Kingston Smith comment
We are glad to see that encouraging innovation remains a high priority for the government. The inclusion of the new expenditure categories is welcome and shows that the government has listened to the representations of those in industry and their advisers although refocusing the relief on innovation taking place in the UK may reduce the claims that can be made by businesses with an international footprint.
As things stand, the increase in the main rate of corporation tax to 25% from 2023 will have a negative knock-on effect on the generosity of R&D tax relief for large companies. We hope that the government will address this in due course.
Creative sector tax reliefs – rates of relief
The Chancellor announced a temporary increase in the rate of certain creative sector tax reliefs.
These increases are for a limited period only and are intended to kick-start activity in these sectors post-Coronavirus.
The changes are:
- The rate of Theatre Tax Relief for non-touring productions is to be increased to 45% until 31 March 2023, then to 30% for the following year, before returning to 20% from 1 April 2024. For touring productions, the rates are respectively 50%, 35% and then back to 25%.
- The rates of Orchestra Relief will become 50% from today until 31 March 2023, 35% for the following year and then return to 25%.
- The rate of Museum and Galleries Relief will increase in line with Theatre Tax Relief above and the regime will now run until March 2024 instead of ending in 2022.
Some technical changes are to be made to the above reliefs to clarify some of the rules. Full details have yet to be published.
Moore Kingston Smith comment
The Treasury estimates that these changes will have a positive impact on around 1,200 companies operating in the relevant sectors, and they will certainly be welcomed by many.
There are no increases for other sectors which have similar reliefs, such as film, TV, animation and video games, but presumably the argument here is that these sectors have not suffered so much (or might even have thrived) over the past year or so. During lockdown, however, some films that were intended for theatrical release were broadcast directly on TV or the internet. This change of intention would have denied the production company either the film or the TV relief, but a welcome amendment is being made so that a change of intention will not jeopardise the ability to claim tax relief.
Tonnage Tax
The government will make substantive reforms to the UK’s Tonnage Tax regime, with the aims of helping shipping companies that want to move to the UK, reducing unnecessary administration, and removing provisions no longer relevant following Brexit.
Some of the detailed measures will include:
- Guidance on the vessels and operations which qualify for the regime being reviewed to reflect developments in the shipping market and technology since the introduction of the regime.
- An increase in the limit for permitted qualifying secondary income.
- A reduction in the period for which a Tonnage Tax election remains in force from ten years to eight years.
Moore Kingston Smith comment
This section of the Chancellor’s speech was brief and focused on the removal of the consideration of flags from EU and EEA countries. But behind the talk of flags, there is plenty of detail, including some positive changes to simplify and modernise the regime and hopefully to encourage shipping companies to relocate to the UK.
Basis Period Reform
Following consultation over the summer, the government has confirmed that it will legislate in the next Finance Bill to simplify the rules that determine how and when the profits of self-employed individuals and partners are subject to tax. The basic proposition, as previously announced, still stands in that income tax will now be charged on profits that arise in the tax year.
The plans previously consulted on will, however, be revised to incorporate some of the suggestions received, including provisions to reduce the impact of the transition on allowances and benefits.
Transition to the new rules will take place in 2023/2024, with the new rules being fully in force from 6 April 2024.
Moore Kingston Smith comment
While this measure is badged as simplification, it will not feel that way for many affected self-employed individuals and partners whose trading period of account is not in line with the UK tax year. They will be paying tax on their profits sooner than they otherwise would and (unless they change their period end date) will need to apportion profits between tax years. In reality, the measure is intended to simplify the Making Tax Digital reporting regime, which will be introduced on 6 April 2024.
Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA)
As announced on 23 September 2021, the government will bring sole traders and landlords with income over £10,000 within the MTD for income tax regime from 6 April 2024. From this date, they will need to maintain digital accounting records and submit quarterly summaries of these to HMRC directly from their records. General partnerships will be required to join the regime from 6 April 2025. We are still to learn when LLPs (and other partnerships with corporate members) will come within the regime.
New penalties for the late submission and late payment of income tax will come into effect in line with the introduction of MTD for income tax.
Moore Kingston Smith comment
The delay to the previously announced timetable was welcomed, although affected taxpayers should ensure they do not waste the additional time they have been given – they should continue to prepare for this new regime as it is inevitable.
The new penalties will be ‘points-based’, and are intended to encourage compliance while not excessively punishing those who miss occasional deadlines. Any change that gives some leniency for first-time failures is to be welcomed, although taxpayers will need to be aware that, under the new regime, there is the possibility for penalties to ramp up substantially.
Residential Property Developer Tax
The government has provided final details of its proposed new Residential Property Developer Tax (RDPT), which will be introduced in April 2022. The aim of this new tax is to raise at least £2 billion to contribute towards the cost of cladding remediation.
The new tax will apply to companies with profits from UK residential property development activities in excess of a group-wide annual profits allowance of £25 million. The rate of the RDPT will be 4% on RDPT activity profits in excess of the £25 million allowance.
There are no reporting requirements for groups with profits below the threshold, and the tax will be administered by means of extension to the existing corporation tax self-assessment regime.
Profits from build-to-rent activities will not be within the scope of the RDPT, although this will be kept under review.
Moore Kingston Smith comment
It is good news that the government has decided to target the tax at larger companies. We also welcome the simplicity of aligning the administration of RDPT with corporation tax self-assessment.
However, for affected companies with profits in excess of the £25 million threshold, there is not much time to get to grips with the new rules before they come into effect in April 2022. Companies will have to ascertain what activities are RDPT activities, make the required profit adjustments and ensure that the group-wide allowance is allocated effectively.
While the tax was originally announced as temporary and intended to have a ten-year lifespan, the government has not included a “sunset clause”, giving uncertainty as to how long the tax will apply.
Annual investment allowance (AIA)
The AIA – which gives businesses a 100% first year write down for qualifying capital expenditure – has a ‘permanent’ level of £200,000. This has been subject to a temporary increase to £1 million since 1 January 2019. This was due to expire at the end of this calendar year, but the government’s plan now is that this will be extended for another 15 months, until 31 March 2023.
Moore Kingston Smith comment
The extension of the AIA limit of £1 million for a further 15 months is welcomed. To a large extent, its benefit will be limited by the “superdeduction” for capital allowances which will also be in place until 31 March 2023. But it will be of benefit to some businesses, and for some types of expenditure, and perhaps encourage businesses to make investments that otherwise they would not.
Corporate re-domiciliation
The government is keen to promote the attractiveness and availability of the UK as a place to do business and to headquarter corporate groups. With this in mind, a consultation is being launched on the government’s proposals for a “Corporate Re-Domiciliation” regime. It is intended to allow companies to move their place of incorporation to the UK. This will bring the UK in line with many other developed countries.
Moore Kingston Smith comment
Over the years, many groups have – for a whole variety of reasons – moved away from the UK to other jurisdictions. In the past few years, some groups have chosen not to maintain their headquarters in the UK as a result of uncertainty over the long-term effects of the UK’s exit from the EU. This proposal could be one the tools that will be used to reverse this trend.
Notification of uncertain tax treatments for large businesses
In Budget 2020, the government announced the introduction of a new regime requiring large business to notify HMRC of “uncertain tax treatments”. In a series of consultations, the proposed rules have been refined, with the result that there is now a settled position for the new rules to come into effect on 1 April 2022. Importantly, the scope has been reduced to cover only those situations where the potential tax advantage at stake is expected to be more than £5 million over a 12-month period.
Moore Kingston Smith comment
This regime will be relevant to businesses with a turnover of £200 million and/or a balance sheet total of £2 billion. Many of these businesses will already have an ongoing relationship with HMRC, such that an open dialogue between HMRC and the taxpayer is already expected to be taking place.
This measure is therefore designed to target those big businesses that do not have a transparent relationship with HMRC. The scope is relatively narrow in that it only affects transactions with the largest amount of tax at stake. It will also only apply where a provision in respect of the tax at stake has been made in the accounts and/or the tax treatment is contrary to a known HMRC position. The government may seek to increase its scope in due course.
Cross-Border Group Relief
Cross-Border Group Relief (CBGR) and other related reliefs will be abolished. UK companies had, in limited circumstances, been able to use losses from EEA-based companies with the same corporate group to offset their taxable profits. This relief will cease to be available for accounting periods ending on or after 27 October 2021, with transitional arrangements in place for periods straddling that date.
Moore Kingston Smith comment
The CBGR legislation was forced upon the UK government by the EU, and it is no surprise that, post-Brexit, the relief is being removed from the statute book. The relief was always very restrictive in its application so its loss will not be significant for many businesses. That said, the repeal is not retrospective, so groups with existing claims should continue to pursue these.
Employment tax
A limited number of employment tax measures were announced, including the following:
- From 6 April 2025, the government will make top-up payments directly to low-earning individuals saving in a pension scheme using ‘Net Pay Pension Arrangements’. Net pay arrangements involve an employee’s pension contributions being taken from their gross salary before income tax is deducted. Low earners (those with a marginal rate of income tax below the basic rate) may lose out where they are in schemes that are administered in this way, and the government now plans to make changes to level the playing field.
- From 6 April 2022, fuel benefit charges and the van benefit charge will increase in line with CPI. The flat-rate van benefit charge will increase to £3,600; the multiplier for the car fuel benefit will increase to £25,300; and the flat-rate van fuel benefit charge will increase to £688.
Moore Kingston Smith comment
Tax relief for pension contributions can be a source of confusion for employees and employers. The proposals to remove the disadvantage faced by low earners contributing to a pension scheme under a net pay arrangement will provide welcome news and clarity to low earners.
No further extensions were announced to the tax and NIC free provision and reimbursement for Coronavirus antigen tests, and the tax and NIC free reimbursement of employee’s home office costs. Both of these are set to end on 5 April 2022. More generally, nothing was done to recognise the impact that Coronavirus will have on how and where people will work in the future, and this is surely something that will need to be addressed before too long.
VAT and indirect taxes
No substantial changes were made regarding VAT, although certain areas are worthy of highlighting briefly.
As far as VAT is concerned, the government announced that it would publish a consultation document on the simplification of the VAT treatment of fund management fees. It has also announced plans to legislate to introduce additional elements to the VAT-free zone model for Freeports.
The general system of alcohol duties has remained largely the same for a significant period of time. The government has reviewed the current system and made several announcements designed to simplify and modernise the current system, and reduce the administrative burden.
Moore Kingston Smith comment
Simplification is always to be welcome. The measurers announced today should help in this aim, as will the fact that we are not currently looking at any other significant changes in any VAT rules.
Online sales tax
The government announced that it is continuing to explore the possibility of introducing a UK-wide Online Sales Tax (OST) and will publish a consultation on this soon. Revenue raised from an OST would be notionally used to reduce business rates for retailers with properties in England (with block grants of the devolved administrations increased accordingly).
Moore Kingston Smith comment
It has been evident for some time that the Treasury has been looking into the introduction of an OST, and there has been pressure for them to do so from more traditional retailers. It may well be that the scope of any tax will be limited to larger sellers. We now await the consultation document for more insight and detail on the government’s intentions.
Protecting the Exchequer
The tax tribunal decided earlier in the year that some of HMRC’s powers did not allow them to recover certain tax liabilities relating to the High Income Child Benefit Charge (HICBC), and by extension other liabilities. New legislation will be introduced to change this position.
The government also announced its intention to introduce stronger sanctions for the promoters of tax avoidance schemes and for UK entities that facilitate tax avoidance schemes on behalf of overseas promoters. The proposed legislation will give HMRC the power to issue freezing orders when promoters try to evade paying penalties by hiding their assets, increased penalties for UK entities that endorse schemes for overseas promoters, the power to close down entities that promote the schemes, and the ability to name and shame promoters.
Moore Kingston Smith comment
Importantly, the new legislation relating to the recovery of tax will apply retrospectively as well as to future assessments.
The new powers relating to promoters are designed to remove the financial benefit of promoting tax avoidance schemes. HMRC has identified that promoters of tax avoidance schemes have moved away from the wealthy to focus on healthcare workers and more modest earners; it is hoped that these new sanctions will mean the risks of selling these schemes will be too great to continue.