Budget 2021 and the changing landscape

He has made it clear that there is a political appetite to borrow as much as five times the amount borrowed in 2019 to provide further support through Covid incentives, as well as additional support for those sectors most impacted by the pandemic. As well as the incentives offered in specific areas, through this approach of ‘borrow to invest’ he has clearly signposted the drive to broaden the geographical spread of the economic recovery away from London and the South East. There is also support for those sectors that currently, and are likely to continue to, contribute significantly to the tax base.

Notwithstanding this policy approach, there was also a clear indicator of the desire to ensure those earning at the highest levels, from both a business and personal perspective, shoulder much of the burden as we start to look at how these record levels of borrowing might be repaid.

Freezing rates

As expected, the Chancellor did not increase the income tax or the national insurance rates. Instead, he has frozen several thresholds and tax-free allowances for the next five tax years. As already announced there will be no income tax or NIC charges on employer reimbursements for the cost of Covid-19 tests.

The tax free personal allowance will increase from £12,500 to £12,570 from April 2021 and the basic rate band will increase from £37,500 to £37,700. These bands will then remain fixed for the next five years (2021/22 to 2025/26). The NIC Upper Earnings and Upper Profits Limit will increase to £50,270 (the higher rate threshold) from April 2021 and will remain aligned with the higher rate threshold for these five years. While not a tax rate increase, this policy will in real terms bring more people within the income tax net and the 40% tax rate as inflation takes its effect. 

Similarly to income tax, the tax free annual capital gains exempt amount has been fixed at £12,300 for the 2021/22 to 2025/26 tax years. Surprisingly there has so far been no announcement to increase the capital gains tax rate.

Corporation tax: A significant but delayed tax rise

The Chancellor’s headline tax raising measure was a rise in corporation tax to 25% from April 2023 for companies with annual profits over £250,000. A rise in the rate seemed inevitable as speculation ramped up in the days before the Budget but the Chancellor chose to delay the rise for 2 years to allow the recovery to become embedded.

The rate rise is most likely to impact profitable businesses that have weathered the pandemic well in sectors such as technology, healthcare and online retail.

The proposed rate rise also had some specific consequential effects. The rate of diverted profits tax will increase to 31% to maintain its aim to discourage avoidance, but indications were given that the bank surcharge is likely to reduce to maintain a globally competitive tax rate for banks.

Even with the anticipated rate rise, the UK corporation tax rate remains the lowest in the G7. The UK remains one of the most attractive tax regimes for international businesses to base themselves due to its widespread tax treaty network and generous reliefs for innovation and interest costs, together with tax exemptions for gains on disposal of trading investments and corporate dividend receipts.

Smaller companies with profits less than £50,000 will be protected and continue to benefit from a 19% rate with a taper system introduced for companies with profits falling between the lower and upper limits providing a gradual increase in the Corporation Tax rate.

The increase in the corporation tax rate will impact on planning for privately owned businesses, such as paying director shareholders dividends rather than salary. By April 2023 those companies will need to rework their calculations to see if such planning still makes sense.

Incentives for investment

One of the concerns with raising the corporation tax rate is that it will damage business investment. The Chancellor had his answer ready for that criticism with the announcement of the 130% super tax deduction for 2 years from April 2021 for all purchases of new qualifying plant and machinery. For the first time businesses will benefit from an immediate tax deduction greater than the cost of the asset they are purchasing and there is no limit on the size of the benefit.

This is an unprecedented move and provides a serious incentive for UK business to invest in the post pandemic post Brexit world. It will be interesting to see if it also helps improve our modest rates of productivity growth in recent years by encouraging businesses to invest in new equipment.

The £1million annual investment allowance has been maintained for any expenditure that does not qualify and new expenditure on the electrical and mechanical systems in buildings will also benefit with a 50% initial tax deduction for such expenditure.

The government announced consultations in 2 important areas that could signal future expansions to 2 important reliefs that many companies currently enjoy.

Enterprise Management Incentives (EMI)

The government has requested evidence on how more UK companies can access EMI to help them recruit and retain the talent they need to scale up. EMI is the most tax advantaged share incentive plan so it is good news that the government is indicating they are looking to expand its use in this consultation.

R&D Tax Credits

There will be a review of R&D tax reliefs considering all elements of the two R&D tax relief schemes. The aim is to make sure that the UK remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.

The government has also published the responses of the recent consultation on the scope of qualifying expenditures for R&D tax credits across the UK.  Interestingly they have signaled that they will consider bringing data and cloud computing costs within the scope of relief.

As previously announced though there are measures targeted at abuse of SME R&D tax credit repayments. For accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a company can receive in any one year will be capped at the lower of the normal calculation of the repayment and £20,000 plus three times the company’s total PAYE and National Insurance contributions liability (including that of certain connected parties).

Withholding tax

From 1 June 2021, companies paying interest or royalties to EU based connected parties will have to rely on the relevant tax treaty to determine the rate of withholding tax to be deducted from payments to EU associates and can no longer rely on the EU interest and Royalties Directive.

Freeports

In a clear signal of the desire to broaden the geographic base of the economy, the Chancellor announced that the Government will reintroduce Freeports in England, commencing operation by the end of 2021. Discussions to expand the programme across the rest of the UK continue.

Businesses operating within a Freeport will benefit from cash flow advantages in respect of Customs Duty deferrals, as well as other benefits in the form of exemptions or incentives. There will also be a reduced administrative burden in the form of simplified Customs Declarations. The Government’s aim is that the reintroduction of these Freeports will enable the UK to develop its International Trade and support jobs and businesses in the post Brexit landscape.

New Fast-track visas for the UK

The Chancellor has announced a fast-track visa for highly skilled migrants in the Budget today, in a move which will especially be welcomed by fintech companies, which contribute £11 billion to the UK economy each year.

The UK has a 10% share of the global fintech market and attracts more fintech investment than the next four European countries combined. Around 42% of the UK’s 76,500 fintech workers come from overseas, and the new visa rules aim to consolidate and build upon the UK’s strong position in the market.

The scheme will open in March 2022, and the Government will set out more details this July- but it is clear that the Chancellor recognises the importance of competing for talent on a global scale if the UK is to flourish in innovative, fast-growth sectors.

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