Budget 2021: Corporate & Business Tax

3 March 2021 / Insight posted in Budget 2021

With record low corporation tax rates, it was always likely that the Chancellor would see this as an area for raising revenue, and this has proven to be the case.  While the UK will still have the lowest corporate tax rate in the G7, it is more important to look at effective tax rates that take into account reliefs, allowances and other adjustments – in this respect there was also good news, with an innovative new ‘super deduction’ for capital expenditure. In addition to these headline announcements, various other announcements will be relevant to businesses throughout the UK.


Corporation tax (CT) rate

The Chancellor announced that the rate of CT will increase to 25% from April 2023 where profits are in excess of £250,000. For companies with profits below £50,000, the rate will remain at 19%. There will be a tapering of the rate for companies with profits falling between £50,000 and £250,000. Close Investment Holding Companies will not be eligible for the lower rate and so will always pay CT at 25%.

Moore Kingston Smith comment

An increase in the rate of corporation tax was widely expected. The reintroduction of a “small companies rate”, while this will give rise to a measure of complexity, is welcome to protect smaller businesses from an increased tax burden. An increase in the rate of the diverted profits tax to 31% was also announced, and this represents an increased deterrent to businesses tempted to artificially divert profits out of the UK. Overall, these measures should protect the UK tax base while still ensuring the UK remains internationally competitive. The Close Investment Holding Company provisions may however affect certain Family Investment Companies, which have increased in popularity in recent years.


Super deduction – capital allowances increase

130% first-year capital allowances for qualifying plant and machinery expenditure will be available to companies for two years from 1 April 2021, giving rise to a “super deduction” from taxable profits.

Assets that previously would have been entitled to capital allowances at the lower rate of 6% (for example integral features of a building) will be entitled to a 50% deduction for the two-year period.

Much of the expenditure eligible for this “super deduction” would have been eligible for the existing Annual Investment Allowance (AIA) of 100%. For such expenditure, the super deduction equates to a £5,700 additional corporation tax saving for every £100,000 of expenditure. Where the expenditure would not have qualified for the AIA, the benefit will be much greater.

The new rates will only apply to the purchase of new (not second-hand) equipment. Where an asset on which the super deduction has been claimed is subsequently sold, 130% of the proceeds will be included in the calculation of taxable profits for the year.

Moore Kingston Smith comment

While overall this is a welcome announcement, there are a few points to bear in mind. Where expenditure would otherwise have been subject to a 100% deduction, the new rate is perhaps not as attractive as at first glance. There will also be administrative requirements involved in tracking assets on which the super deduction has been claimed (in order to account properly in the case of a disposal). Those who operate as sole traders, partnerships and LLPs should also note that it does not appear that they will be able to take advantage of these rules.


Loss relief carry-back rules extended

For two years, companies and unincorporated businesses will be able to carry back trading losses to offset profits made in the preceding three years.

The amount of trading losses that can be carried back to the immediately preceding year will (as is currently the case) remain unlimited. After this, a maximum of £2,000,000 of unused losses will be capable of being carried back against profits of the previous two years. As this measure will be in place for two years, £4 million of losses may eventually be used in this way.

As far as companies are concerned, the £2 million limit will be available on a group-wide basis, and will be available for accounting periods ending between 1 April 2020 and 31 March 2022. For unincorporated businesses, this will apply to losses made in 2020/21 and 2021/22.

Moore Kingston Smith comment

With the main rate of corporation tax increasing from 1 April 2023 to 25%, companies will need to consider whether they carry back all available losses to save tax at the current rate of 19%, or whether they carry them forward to set against future profits, where the tax benefit could be more valuable.  It’s a case of cash now, or more tax saving in the future.


Self-Employment Income Support Scheme (SEISS)

The Chancellor announced a further extension to SEISS to support self-employed individuals through to the end of September 2021.

The fourth grant under the scheme is designed to cover the period from February to April 2021. It was confirmed that this will be worth 80% of three months’ average trading profits, with an overall cap of £7,500. The grant can be claimed from late April.

A fifth grant was also announced to cover the period from May to September 2021. The maximum grant will again be calculated as 80% of three months’ average trading profits, with the same overall cap. However, the basis of this grant will be different to the previous grants, in that that the maximum grant will only be available to those whose turnover has fallen by 30% or more. Those whose turnover has fallen by less than this amount will only be entitled to receive 30% of the full amount.

Moore Kingston Smith comment

The SEISS has come in for some criticism over the past year for the individuals who have been left out of the scheme. The Chancellor announced that the fourth and fifth grants will be available for those who began trading in 2019/20, which will help some of these individuals. It appears that other gaps will remain and there is still no help for individuals operating through their own personal service company and paying themselves largely with dividends.


Additional finance to support business recovery

With existing packages of government support coming to an end, the government announced new measures to support businesses through the next year.

It was announced that a new Recovery Loan Scheme will run from 6 April 2021. Under this scheme, the government will guarantee 80% of eligible loans made by participating banks.  Businesses will be able to apply for loans even if they have received support under the existing government loan schemes, and loans from £25,000 – £10 million will be considered.

In addition to the Recovery Loan Scheme, Restart Grants will be made available for non-essential retail businesses (up to £6,000) and hospitality and leisure businesses (up to £18,000).

The Business Rates holiday is to be extended.

Moore Kingston Smith comment

This package of announcements shows the government’s commitment to continue to support businesses who have been severely impacted by the pandemic. For businesses in need, the ability to access the Recovery Loan Scheme quickly and efficiently will be key to its success, and it hoped that the lenders will be able to process the applications and undertake their financial due diligence without undue delay.


Research and development (R&D) relief

The government has announced that a review of the current R&D tax reliefs will be undertaken. They will consider several areas including the definitions, the reliefs’ competitiveness, the scope of qualifying expenditure (such as cloud computing costs and purchase of datasets), and whether the schemes effectively target the right areas.

As previously announced, the government will introduce a PAYE cap on the payable tax credit in the SME R&D scheme from 1 April 2021. The cap will be subject to certain exemptions for companies managing IP and will be set at £20,000 plus three times the client’s PAYE and NIC liability.

Moore Kingston Smith comment

It is pleasing that the government has kept its focus on improving the R&D relief schemes by protecting the schemes from abuse and launching consultations as to how the schemes can be improved. Given the new freedoms the government has as a result of Brexit, the government may be able to use the schemes to accelerate British innovation like never before.

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 the current large company R&D Expenditure Credit scheme. We hope the government will make changes to offset this.


Repeal of provisions relating to the Interest and Royalties Directive

Following the end of the Brexit transition period, UK companies no longer have the benefit of the EU Interest and Royalties Directive when they receive interest and royalties from the EU. The UK has implemented the EU Directive into UK law which currently enables payments to the EU from the UK to be made without deduction of tax. It was announced that this measure is to be repealed for payments made after 1 June 2021. This means that EU recipients will no longer receive more favourable treatment than recipients based elsewhere in the world. The obligation of UK businesses to deduct withholding tax will be determined by the relevant double tax treaty with the country concerned.

Moore Kingston Smith comment

Following the removal of the benefit of the directive for payments from the EU to the UK, many corporate groups will already have reviewed their structures to establish the extent of tax leakage on intra-group payments. The fact that payments from the UK to the EU will no longer be exempt under UK law emphasises the need to ensure that relief is maximised by treaty claims. This may may involve a degree of planning ahead, and applying for relief in advance of making payments of interest and dividends.


Tax incentives for Freeports

A number of generous tax reliefs will be available to businesses operating within set areas within Freeports, which should begin operating from late 2021. The Freeports that have so far been announced are East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.

The enhanced tax reliefs have been announced as follows:

1.     A 10% rate of Structures and Buildings Allowance will be available for companies and unincorporated businesses that construct or renovate non-residential structures and buildings within Freeport tax sites. This contrasts with the standard rate of 3%.

2.     An enhanced capital allowance of 100% will be available for companies acquiring plant and machinery to use in Freeport tax sites.

3.     The purchase of land or property for a qualifying commercial purpose within Freeport tax sites in England will attract full relief from stamp duty land tax until 30 September 2026.

4.     Full business rates relief will be available for a period of five years to all new businesses in Freeport tax sites and to certain existing businesses which expand.

5.     The government intends to provide for relief from employer’s national insurance contributions for eligible employees in all Freeport tax sites.

Moore Kingston Smith comment

The government has proposed a very generous package of tax reliefs to encourage businesses to relocate to tax sites in Freeports, and it is hoped that this will play a part in capitalising on the UK’s exit from the EU.


Enterprise Management Incentives (EMI)

The government today published a call for evidence on EMI share options, with a view to ensuring the scheme will provide the right support for high-growth companies.

A particular objective of the call for evidence is to understand whether the EMI scheme should be extended to include more companies. One frustration of the current rules is that share options cannot be granted under the scheme when the company or group has more than 250 employees at the date an option is granted.  This can be particularly problematic for high-growth companies and may well be one of the issues that the government looks to address.

Moore Kingston Smith comment

EMI is the most valuable and popular share incentive scheme for many of our clients.  It does, however, contain some restrictions that can prove frustrating, the employee limit referred to above being one. If this call for evidence leads to a relaxation of the rules, that will be more than welcome.


Tax avoidance

As is typical, several measures designed to tackle fraud and tax avoidance were flagged, with some of the key points being:

  • HMRC will be setting up a ‘taxpayer protection taskforce’ to combat fraudulent CJRS and SEISS claims. 1,265 staff are to be allocated to the taskforce, with 100 of these being trained investigators.
  • Various measures will be announced to target serial promoters of abusive tax avoidance schemes. These will include measures to enable HMRC to obtain information about tax schemes at a much earlier stage and to stop the promotion abusive schemes.
  • The government will invest a further £180 million in HMRC in 2021-22, to include IT systems and to recruit new compliance staff to target tax avoidance and evasion.

Moore Kingston Smith comment

With government finances under significant pressure, it is wholly reasonable and natural that the government will look to close the “tax gap” relating to tax avoidance and evasion. An estimated £3.75 billion has been lost to fraudulent furlough claims alone, and there will be few who disagree with attempts to recover this.


Interest harmonisation and penalty reform for late submission and payment of tax

A new penalty regime will be introduced for VAT and income tax, dealing with both late submissions and late payments.

The regime for late submissions will be points-based, with penalties kicking in for each missed submission after specified points thresholds have been reached. Under the new late payment penalty regime, penalties will be charged in proportion to both the amount of tax owed and how overdue tax payments are, with “penalty interest” of 4% per annum being due on the total amount unpaid after 31 days.

The government will also introduce measures to ensure that interest charges and repayment interest for VAT are aligned with other tax regimes.

For VAT, these measures will come into effect for periods starting on or after 1 April 2022, and for income tax, they will begin to be introduced for accounting periods beginning on or after 6 April 2023.

Moore Kingston Smith comment

This new regime is designed to make sense in light of the Making Tax Digital regime, which gives rise to new submission requirements, and which is now being gradually implemented across the taxes. The current VAT default surcharge can provide some surprising results, and it is hoped that this new regime will remove some perceived unfairness.


Social Investment Tax Relief (SITR)

SITR was due to expire on 5 April 2021 but the Chancellor has announced a two-year extension until 5 April 2023.

The purpose of SITR is to encourage investment in qualifying social enterprises (such as charities and community interest companies) by giving investors income and capital gains tax reliefs. In many respects, its design is similar to that of the Enterprise Investment Scheme, which gives similar tax reliefs to those who invest in qualifying businesses.

Moore Kingston Smith comment

We understand the policy has had a fairly low take-up since its introduction in 2014. Part of the reason for this has been the presence of several significant restrictions and conditions in the rules. The government carried out a consultation in 2019 in order to understand the way the scheme was being used. It does not appear as though there will be any changes made to the rules of the scheme after 5 April 2021. However, the government may use the additional two years to consider whether any changes can be made to the scheme to allow it usefully to continue into the future.


OECD reporting rules for digital platforms

Rules will be introduced – to take effect from January 2023 at the earliest – requiring certain UK digital platforms to report to HMRC information about the income of the sellers using the platform. HMRC will then exchange this information with tax authorities in the jurisdictions in which the sellers are resident. There will be a consultation during the summer on the implementation of these rules. At this stage, this measure is intended to be restricted to sellers of services, such as food delivery services, taxi hire and short-term accommodation lettings.  The measure is likely to involve the operators of digital platforms collating and then verifying a significant amount of information on their sellers and providing this to HMRC in a specific format.

Moore Kingston Smith comment

This measure forms part of the UK’s commitment to working with the OECD on aligning global standards on tax and fighting tax evasion.  The need to ensure that taxpayers operating in the digital economy pay their fair share of tax in the right country is a key focus of the OECD, and measures that can facilitate this are generally to be welcomed.  It is however hoped that the government will seek to minimise the administrative and cost burden to businesses likely to be caught by the rules.

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