Budget 2021: Key tax points

The Chancellor of the Exchequer delivered his Budget to Parliament on Wednesday 3 March 2021. His stated aims were to protect jobs and strengthen public finances so that as the UK emerges from the Covid-19 pandemic it can “forge a path to recovery”.

Rates of income tax, national insurance and VAT were not raised. However, a number of significant changes to the corporation tax regime, including a future rate change, were announced and are discussed in more detail below.

To support the tourism and hospitality sectors, the temporary 5% reduced rate of VAT has been extended until 30 September 2021. To help businesses manage the transition back to the standard rate, a 12.5% rate will then apply for a further six months, until 31 March 2022.

In addition, the business rates holiday in England has been extended by an additional three months, as has the temporary SDLT relief on the first £500,000 of the purchase price of residential property.

The income tax personal allowance and the higher rate threshold will rise from April 2021 and will then be maintained at that level until April 2026. The capital gains tax exempt amount, inheritance tax thresholds and lifetime allowance for pensions will all be maintained at their current level until April 2026.

Following Brexit the government has announced that it will be repealing the withholding tax exemptions for payments of interest and royalties by UK companies to associates in EU member states. However companies can apply for withholding tax relief under relevant provisions in double taxation treaties.

Further tax announcements are expected on 23 March 2021.

Corporation Tax

The rate of Corporation Tax will increase to 25% from 2023. Businesses with profits of £50,000 or less, around 70% of actively trading companies, will continue to be taxed at 19%. A tapered rate will also be introduced for profits above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate. We expect that these thresholds will need to be shared between members of corporate groups.

Loss Relief

The Chancellor announced a temporary extension of the period for which trading losses may be carried back and set against profits of earlier years. Under current law, a company’s losses can be carried back to the previous accounting period but, following the Budget announcement, losses realised in accounting periods ending in the period 1 April 2020 to 31 March 2022 can now be carried back for an additional two years.

There is no limit on the amount which can be carried back for one year, but the amounts which may be carried back to earlier years will be limited to £2 million for each of the two accounting periods, the one ending in the period 1 April 2020 to 31 March 2021 and the one ending in the period 1 April 2021 to 31 March 2022. Groups of companies will have to split the £2 million cap between group members.

There will be a similar extension of the carry back period for the trading losses of individuals and unincorporated businesses, applying by reference to tax years rather than accounting periods. Individuals in partnership will not be subject to a partnership-level limit.

The Government also announced technical changes to the loss relief carry forward regimes introduced in 2017 and the group relief rules. The details will only become apparent once the draft legislation is published. Changes to the reform of loss relief rules for Corporation Tax - GOV.UK (www.gov.uk)

Capital allowances super-deduction

In addition the chancellor announced a temporary new “super-deduction” for expenditure incurred on qualifying plant and machinery between 1 April 2021 and 31 March 2023. The new deduction will take effect as first year capital allowance of up to 130%.

Normally, a company obtains a deduction for expenditure on capital assets by claiming a writing down allowance each year on a reducing balance basis. The current rates are 18% for general plant and machinery and 6% for other types of plant and machinery such as integral features. The new super-deduction will allow companies to claim an immediate deduction for 130% of the expenditure on general plant and machinery and 50% in relation to integral features and other types of qualifying expenditure on plant and machinery. Where expenditure is incurred in an accounting period which ends on or after 1 April 2023, the 130% rate is reduced to reflect the proportion of the accounting period falling on or after 1 April 2023, with a minimum rate of 100%.

The new enhanced deductions will not apply to certain categories of expenditure including expenditure on cars and on plant and machinery for leasing. Whilst capital allowances apply to unincorporated business as well as companies, the new super-deduction will only apply to companies.

The new rules will not apply where a contract is entered into for the provision of plant or machinery before 3 March 2021, even if the expenditure would have been regarded as being incurred on or after 1 April 2021 under the normal rules in relation to the timing of expenditure. The draft legislation includes anti-avoidance rules which seek to prevent uncommercial or contrived steps to bring expenditure within the scope of the super-deduction.

R&D tax credits

The Chancellor is capping the amount of R&D tax credits that can be repaid in cash to SMEs in any one year at £20,000 (plus three times the SME’s total PAYE and NICs liability) and will be consulting on R&D incentives generally.