We had anticipated wide-ranging reforms to Capital Gains Tax, Inheritance Tax and Corporation Tax to deal with the deepest and longest economic crisis since WW2
What we actually got was the extension of COVID-19 support, largely as anticipated, but with policies that seek to avoid cliff edges as the support winds down. To assist the public finances, this support was accompanied by a 25% corporation tax rate (for larger companies) from 1 April 2023 (returning rates back to the level of ten years ago) with an associated rise in the rate of diverted profits tax to 31%.
More unexpected was the repeal of the EU interest and royalties’ provisions with effect from 1 June 2021 (introducing a withholding tax on certain payments out of the UK where the treaty rates in question do not reduce the withholding to zero). We also saw the freezing of a number of allowances and thresholds, in some cases up to 2026.
To compensate for these tax ‘rises’ and encourage investment, the Chancellor introduced a new time-limited ‘super-deduction’ of up to 130% on new plant and machinery. There is also additional flexibility for the next two years to allow the carry back of up to £2 million of losses for three years and a new small profits corporation tax rate so that only businesses with taxable profits of over £250,000 will pay the 25% rate.
The ability to take into account tax returns for 2019-20 submitted before midnight on 2 March extends the fourth and fifth SEISS grants to some of the self-employed who were not previously eligible for support under the scheme. However, the Chancellor did not extend any support to some of the other groups that have not benefitted under either the CJRS or the SEISS, such as limited company directors.
A mixed bag then, which does not radically alter the UK’s taxation system
- COVID-19 Relief Schemes
Coronavirus Job Retention Scheme (CJRS)
CJRS is extended until the end of September 2021. Employees will continue to receive 80% of their current salary for hours not worked. No employer contributions are required (apart from National Insurance contributions (NICs) and pensions) in April-June. From July, employers will be required to make a contribution towards the cost of unworked hours. This will be 10% in July, 20% in August and 20% in September.
Self-Employment Income Support Scheme (SEISS) grants
The fourth SEISS grant will be worth 80% of three months’ average trading profits, paid out in a single instalment and capped at £7,500 in total. The grant will cover the period February to April, and can be claimed from late April. Self-employed individuals must have filed a 2019- 20 Self-Assessment tax return to be eligible for the fourth grant.
There will be a fifth and final SEISS grant covering May to September. The value of the grant will be determined by a turnover test, People whose turnover has fallen by 30% or more will continue to receive a grant worth 80% of three months’ average trading profits, capped at £7,500. People whose turnover has fallen by less than 30% will receive a 30% grant, capped at £2,850. The final grant can be claimed from late July.
Income tax exemptions for COVID-19 tests and home office expenses
The income tax exemption and NICs disregard for COVID-19 antigen tests provided by, or reimbursed by, employers, and for employer reimbursed expenses covering the cost of home office equipment, is extended to the 2021-22 tax year.
Statutory Sick Pay (SSP) Rebate Scheme
Small and medium-sized employers across the UK will continue to be able to reclaim up to two weeks of eligible SSP costs per employee.
Welfare Universal Credit and Working Tax Credits
As anticipated, the temporary £20 per week uplift in Universal Credit Standard Allowance payments has been extended by a further six months. In addition, the Government announced that it will make a one-off payment of £500 to eligible Working Tax Credit recipients.
2. Temporary Tax Reliefs related to COVID-19
VAT reduction for the UK’s tourism and hospitality sector
The temporary reduced rate of 5% VAT for goods and services supplied by the tourism and hospitality sector is extended until 30 September 2021. To transition back to the standard 20% rate, a 12.5% rate will apply for the subsequent six months until 31 March 2022.
Business rates reliefs
Eligible retail, hospitality and leisure properties in England will continue to receive 100% business rates relief from 1 April 2021 to 30 June 2021. This will be followed by 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2 million per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties.
Temporary Stamp Duty Land Tax (SDLT) cut
The temporary increase in the residential SDLT Nil Rate Band to £500,000 in England and Northern Ireland is extended until 30 June 2021. From 1 July 2021, the Nil Rate Band will reduce to £250,000 until 30 September 2021 before returning to £125,000 on 1 October 2021.In Scotland and Wales the equivalent taxes are administered by the devolved administrations.
- Business Taxation changes
Corporation tax rate increase
The rate of corporation tax will increase from April 2023 to 25% on profits over £250,000. The rate for small profits under £50,000 will remain at 19% and there will be taper relief for businesses with profits between £50,000 and £250,000, so that their average rate is less than the main rate. In line with the increase in the main rate, the Diverted Profits Tax rate will rise to 31% from April 2023.
The small profits rate will not apply to close investment-holding companies
Extended loss carry back for businesses
The trading loss carry-back rule will be temporarily extended from one year to three years. This will be available for both incorporated and unincorporated businesses.
Unincorporated businesses and companies that are not members of a group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22.
Companies that are members of a group will be able to obtain relief for up to £200,000 of losses in each of 2020-21 and 2021-22 without any group limitations.
Companies that are members of a group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22, but subject to a £2 million cap across the group as a whole
Super-deduction for plant and machinery
From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. Investing companies will also benefit from a 50% first-year allowance for qualifying special rate (including long life) assets.
Businesses will welcome this temporary first-year allowance, implementing a super-deduction of 130% on most new plant and machinery investments which would have ordinarily qualified for 18% relief, and a first-year allowance of 50% on most new plant and machinery investments which would have ordinarily qualified for 6% relief. This will provide not only an accelerated timing benefit but additional tax relief on expenditure incurred. For example, a company incurring £10m of expenditure on a new factory will receive an additional £1m of cash tax saving over the two-year period the measure is in place.
Capital Allowances – Annual Investment Allowance – extended
As previously announced by HM Treasury, the £1mn temporary increase to the Annual Investment Allowance (AIA) will be extended for an additional year to 31 December 2021.
The AIA provides a 100% deduction for qualifying plant and machinery spend which would have ordinarily been eligible for another type of capital allowance (either main pool or special rate allowances). The AIA will decrease to the initial limit of £200,000 from 1 January2022 and will be subject to a number of transitional adjustments.
The increased AIA will work alongside the super-deduction special rate first year allowances announced at the Budget.
Making payments of interest or royalties to connected companies in the EU
Domestic legislation that gives effect to the EU Interest and Royalties Directive will be repealed. This legislation currently provides an exemption from withholding tax on intra-group interest and royalty payments between UK and EU companies. Repeal will mean that from 1 June 2021 withholding taxes will apply to payments of annual interest and royalties made to EU companies, subject to the terms of the relevant double taxation avoidance agreement.
SME R&D Cap
The proposal to reintroduce the PAYE/NIC cap for SME payable credit claims was first raised in a consultation launched in March 2019, but has now been introduced with a commencement date of 1 April 2021
There will be a cap on the amount of payable R&D credit that may be claimed by an SME. The payable credit will be capped at three times the relevant PAYE/NIC liability of the company, plus £20,000.
There is also a possible exemption which would mean that the company is not subject to the cap at all. To qualify for this exemption, the company must meet two conditions:
Condition A requires the company to be creating or preparing to create intellectual property or managing intellectual property which it holds. These activities must be undertaken mainly by the company’s own employees, and the company must have the right to exploit the intellectual property.
Condition B requires that the company’s qualifying expenditure with connected persons on EPWs and on subcontracting R&D activities does not exceed 15% of its qualifying expenditure.
- Personal Tax changes
Personal Allowance and higher rate threshold (HRT)
The income tax Personal Allowance will rise in line with Consumer Price Index (CPI) to £12,570 from April 2021 and will remain frozen at this level until April 2026. The income tax HRT will rise to £50,270 from April 2021 and will remain frozen at this level until April 2026.
Inheritance tax nil-rate band and residence nil-rate band
Inheritance Tax rate bands
The inheritance tax nil-rate bands will remain at existing levels until April 2026.
Capital Gains Tax Annual Exempt Amount (AEA)
The value of gains that a taxpayer can realise before paying Capital Gains Tax, the AEA, will be maintained at the present level until April 2026. There were no further announcements on CGT rates.
Pensions Lifetime Allowance
The government will maintain the Lifetime Allowance at its current level until April 2026.
Starting rate for savings tax band
The band of savings income that is subject to the 0% starting tax rate will remain at its current level for 2021-22.
Individual Savings Account (ISA) annual subscription limit
The adult ISA annual subscription limit for 2021-22 will remain unchanged at £20,000.
The VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2022.
Additional SDLT charge on purchases by non-UK residents
The additional 2% charge to SDLT has been confirmed as applying to purchases of residential property in England and Northern Ireland by non-UK residents from 1 April 2021.
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