Budget 2021 – Comments and Analysis

Last week, Rishi Sunak announced his various tax changes and economic plans. Given the Coronavirus backdrop, and the ongoing public health and economic crises it has caused, it is not a huge surprise that the Budget focused on measures to continue to support the individuals and businesses affected, while also planning to restart the economy and introduce tax rises to pay for it all.

Corporation Tax

The big headline was the increase of the Corporation Tax rate to 25%. I have now been in the profession long enough to know two things about tax: (1) things are invariably more complicated than the headline will state, and (2) there is nothing new in the world of tax.

As the Chancellor does not want to inflict too great a burden on the smaller companies, there will still be a smaller company rate of 19% (the existing rate) for companies with profits of £50,000 or less. Then there will be “marginal relief” for companies earning between £50,000 and £250,000, whose average rate on total profits will be between 19% and 25%. For companies with profits exceeding £250,000 the rate will 25%.

What this does is effectively creates a third rate of tax – for every £1 earned over £50,000 the effective rate on that £1 is 26.5%. This is because the profits above £50,000 need to get the average rate on the total profits from 19% to 25% so, accordingly, must do more work and are a higher effective rate. Therefore, companies that find themselves in this new band of £50,000 to £250,000 will be encouraged to make plans to minimise their profits and save tax at 26.5%. This could include accelerating spending plans and making investments, or tax efficient payments such as pension contributions to extract profits (albeit for use at a later date).

This is not new. Indeed, when I first entered the profession, the smaller profits rate was 20% for profits up to £300,000 and the main rate was 30% for profits above £1,500,000. The marginal rate was therefore 32.5%. The difference from then to now is that the thresholds are 1/6^th of what they once were. Also, the taxes on dividends, a common way of distributing profits from companies, has increased by 7.5% since back then.

Further complications that tax advisors will not welcome back are the impact on groups. Where there are associated companies – in simplest terms companies owned and controlled by the same person or group of people – the rates will have to be divided by the number of associated companies. This means group companies will reach the 25% rate at a lower profit threshold.

The good news is that we have until April 2023 to prepare for this. Each company will have to consider if their best remuneration strategy is still one focused on dividends. In some cases, businesses may want to explore alternative structures, such as a sole trade, traditional partnership, or limited liability partnership (LLP). For groups, there might need to be consideration for restructuring to minimise the number of associates. It certainly adds to the complexity in deciding if a company is the right structure for your business, something I looked at in more detail in a recent article.

Super Deduction

The term “super deduction”, I believe, is a new thing in tax. That said, various policies have been introduced in the past to encourage investment, but normally they are targeted on certain regional areas or industries. This policy is much broader.

The basics of it are that a company (sorry – no sole traders, partnerships, or LLPs) will be able to claim 130% of purchases of new plant and machinery against their taxable profits. “Plant and machinery” is more than just industrial machinery and will include assets such as computer equipment and vans (although cars are explicitly excluded). It will not include land and buildings.

On the face of it, this is a pretty generous policy. However, for the vast majority of companies, under the existing capital allowance rules they receive 100% relief immediately on capital purchases under the Annual Investment Allowance (“AIA”). This is currently set at £1,000,000, and although it is set to fall to £200,000 in 2022, this is usually plenty. Anything after £1,000,000 is relieved at 18% Writing Down Allowances.

Admittedly, the “super deduction” is 30% more generous than existing allowance, but this is simply political and economic common sense. Given the Corporation Tax rate is set to increase to 25% in April 2023, companies might be tempted to defer their capital investment until then to maximise the tax relief. You might spot that 19% of 130% (24.7%) is remarkably similar to 25% of 100%. It is therefore no coincidence that the “super deduction” ends in April 2023 when the Corporation Tax rate increases. It also explains why it is solely for companies (as there are no changes to the tax rates for the self-employed and partnerships).

The government are also allowing a 50% First Year Allowance for capital purchases that would normally have a Writing Down Allowance of 6% (such as integral features including a lighting or water system). However, under closer inspection, most advisers would recommend the company utilises the AIA first in respect of these types of assets, so it will only benefit the real big spenders.

Losses

Like the “super deduction”, the changes the government has made for losses is a pragmatic approach. The period in which a business can carry-back the loss is extended from the current one-year period to three years. This is great and can prove a real cash flow boost for businesses, but companies should be careful with their calculations. Again, it appears the Government is encouraging the losses to be used now as the tax rate will only be 19%. If companies opted to carry the losses forward instead, they could be saving tax at either 25% or 26.5%. So, don’t rush to carry-back the losses – make sure you’ve considered the options first.

Coronavirus Job Support Scheme

The good news for employers is that the furlough system, formally known as Coronavirus Job Support Scheme (“CJRS”) has been extended until 30 September 2021. For now, employers who have furloughed staff will be able to claim 80% of the usual wages (capped at £2,500 per employee). This support will be scaled back, dropping to 70% from 1 July (capped at £2,187.50) and then 60% from 1 August until the end of the scheme (capped at £1,875).

The calculations and eligibility do require some careful computations, so if you are unsure, I would recommend discussing with an expert.

Self-employment Income Support Scheme

There was also good news for the self-employed. Or for some of them at least. The Self-employment Income Support Scheme (“SEISS”) will be returning for instalments four and five, and a bit like Die Hard (the films series with five films (currently)), each grant is slightly less impressive than its predecessors.

While the basic amounts are the same as in previous iterations – 80% of self-employment profits for three months (capped at £7,500) – the more recent grants have been more stringent in their requirements to show the business has been impacted by Coronavirus (see my article on part three for more details on that). And the fifth (and likely final) instalment adds further restrictions, namely your turnover has fallen by 30% to receive the 80% grant (capped at £7,500). Otherwise, the cap will be £2,850 if turnover has fallen by less than 30% (subject to the same other criteria).

I still have my concerns that the SEISS is not generous enough. It is only available to those whose profits were less than £50,000 (regardless of how decimated your industries and profits have been, for example actors and musicians), while those individuals who have traded through a company have no access to SEISS and no meaningful access to CJSS (either as the salary they paid themselves was small and, even if not, they would have to furlough themselves). Also, while it is great that those that started trading shortly before the pandemic and have now filed their 2019-20 tax return can make a claim, what about those that started trading after 6 April 2020, perhaps after being made redundant due to Coronavirus. For those individuals there is still little in the way of support.

Seemingly, HMRC is very concerned that taxpayers have not been claiming this grant under the rules (nor the spirit) it was intended. Indeed, they have hired some 1,265 employees to check for erroneous claims and seek repayments (which shows the kind of money they think has been overpaid). And it will not be hard for them to identify the incorrect claims once the tax returns for 2020-21 start to be filed from 6 April. If you think you have overclaimed or are just unsure, seek advice as soon as possible.

Other Taxes and Measures

There is nothing much in the budget for personal taxes. Perhaps limited by their election promise of not touching Income Tax, National Insurance or VAT, the government have kept the rates for these the same. More surprisingly, they decided to not touch the rates of Capital Gains Tax or Inheritance Tax. The cynic in me thinks that is more to do with the government’s key voting demographic rather than prudent tax policy.

However, they have continued their offering to the hospitality sector in the VAT cut by extending the 5% reduced rate until 30 September 2021 then introducing a 12.5% rate until 31 March 2022 to help transition back to normal. I would not expect a reduction in beer prices though, as it seems most hospitality businesses will use this tax make up for their lost income in the last year.

The government also gave an extension of the Stamp Duty Land Tax threshold increase (or “holiday” as it is known, the only holiday some have had in the last year), giving until 30 June 2021 to access the £500,000 nil rate band. Furthermore, the nil rate band will drop to £250,000 until 30 September 2021 until it returns to its pre-COVID level of £125,000.

The have also announced both grants and business rates reliefs for various retail, hospitality, and leisure businesses. While these are only for a limited sector of the economy, hopefully they have a knock-on effect. For example, while a musician will be unlikely to receive a grant or rates relief, a music venue will, so at least there will be places for the musician to perform when we escape the lockdown.

If you do not qualify for these, there are also Coronavirus loans schemes that have an 80% guarantee. Similarly, to help the housing market and first-time buyers, the government are guaranteeing 95% mortgages.

However, to help to pay for all of this, they have frozen pretty much every tax allowance and threshold you can think of. The personal allowance (Income Tax), annual exemption (Capital Gain Tax), VAT threshold, nil rate band (Inheritance Tax – which has not changed since 2009) and many more. Any rises for 2021-22 already announced will still be enacted, but otherwise the rates are now frozen until April 2026. Due to inflation this is effectively a tax increase and will certainly reduce the disposable income of taxpayers, which, in fairness, Sunak acknowledged.

Conclusion

I certainly do not envy the government having to produce a budget in these uncertain times. I was somewhat surprised by the extent of the tax rises for companies but equally surprised they made no changes to the rates for Capital Gains Tax and Inheritance Tax. It will be interesting to see if they hold their nerve and keep the various thresholds frozen until 2026 given there will be an election no later than 2024. Only time will tell.

---

If you want to discuss any of the above, or any other matter, just give us a call on 020 7183 3383 or email info@kma-spotlight.com.