This was Chancellor Rishi Sunak’s second Budget of the year. Set against a backdrop of a steady post-Covid-19 recovery, rising inflation, the risk of an increase in interest rates, and continuing concerns over ‘Plan B’, Mr Sunak had no easy task.
In the days leading up to the 2021 Autumn Budget announcements, Mr Sunak has made (‘leaked’) several funding promises, the highest profile of which was the additional £5.9 billion for the NHS to help it, amongst other things, to clear the backlog of patients waiting for non-Covid related interventions – a backlog which has been one sad feature of the pandemic. There were also promises on public sector pay with a lack of clarity that had all interested parties clamouring for more.
The Speaker of the House was reportedly furious that the Government chose to brief the media on funding increases ahead of MPs, suggesting that the behaviour was ‘discourteous’. In 1947, the then chancellor, Hugh Dalton, resigned after leaking Budget detail to the press. No such concerns for Mr Sunak with his deputy having to justify Mr Sunak’s actions to MPs – a hospital pass if ever I saw one.
Whilst I, and many others no doubt, welcome the additional spending in key areas I cannot help but think – who is going to pay for all this and for how long?
As we have also seen, the Government has not shied away from breaking manifesto pledges with the increase in NIC and dividend taxes – more on this below – but does this pave the way for further tax increases beyond those which have been announced and which are already coming into force in the next few years?
Mr Sunak accepted that there are challenging times ahead, but with the OBR’s improved forecasts, he described his Budget as laying the foundation for a strong post-Covid recovery.
So, against all this what tax changes did he announce?
Covid-19 support measures
No new measures were announced.
As we have seen, the presence of manifesto pledges will not prevent the Government from announcing tax increases. The pandemic was cited by Mr Johnson as the reason for the April 2022 increases to national insurance contributions and dividend taxes which were announced a few weeks ago, a clear breaking of a manifesto pledge.
However, there are to be no changes to the rates of income tax for the new tax year.
The personal allowance and higher rate thresholds remain frozen until April 2026. The personal allowance is £12,570 from 6 April 2022 and the level at which the 40% rate of income tax will apply is £50,270.
This initiative alone will generate considerable sums for the Treasury over the coming years.
No further changes were announced. See below for details of the changes announced before the Budget.
Capital Gains Tax
There was no change to the rates of CGT and the annual exemption will remain at £12,300 until April 2026. Mr Sunak made no mention of any potential changes to the CGT regime.
No changes were announced. The nil rate band will remain at £325,000 until April 2026.
No changes were announced to the rates of corporation tax following the increases announced in March 2021.
Mr Sunak did announce that the Annual Investment Allowance (‘AIA’) of £1 million will now be available until March 2023, it was due to finish on 31 December this year.
The forthcoming changes announced in March are detailed below for reference.
The rate of corporation tax will increase from 19% to 25% with effect from 1 April 2023 for those businesses with taxable profits of more than £250,000. For small companies, with taxable profits below £50,000, the rate of corporation tax will remain at 19%. There will be a tapering of the rates for businesses with taxable profits between £50,000 and £250,000 which will provide a gradual increase in the effective rate of corporation tax. The rate of tax in the margin will be 26.5%. Thus, company tax planning may become more important for a lot of companies in coming years.
The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. Group loss relief planning is likely to become important for some groups.
The Budget in March announced the new first-year capital allowance (the ‘super deduction’) of 130% of main rate expenditure in the two financial years ended 31 March 2022. It is now clear that this allowance needs to be approached with care because of the pooling requirements and the issues which can arise with a sale of the asset in respect of which a super deduction has been claimed.
Loss-making companies will be able to carry back trading losses of up to £2 million arising in each of the two financial years to 31 March 2022 for up to three years rather than the current one year. Note that loss carry back claims can be made outside a corporation tax return where the loss in questions is less than £200,000.
Creative tax reliefs
The reliefs available to those companies involved in the creative sectors (museums, art galleries theatres, orchestras etc.) will be doubled until 2023 only returning to current levels in 2024.
This measure will apply from today with a tapered reduction back to current rates from 1 April 2023 to 1 April 2024.
Value Added Tax
No major changes to VAT were announced. There was no cut in VAT for household heating bills, as some had called for, to help with the steeply rising energy costs. The VAT registration threshold will be retained at its current level of £85,000 until March 2024.
Stamp Duty Land Tax
No changes or further reliefs were announced. The rules are now as they were pre-pandemic.
No changes were announced. The pension lifetime allowance will remain at £1,073,100 until 2026.
Indirect taxes and other measures
There is to be major reforms of alcohol duties in February 2023 after many learned bodies had described the current system as a mess. Such reform is only possible with the UK’s exit from the EU.
The reforms will, in general, result in reduced duties and the removal of various anomalies in line with developments in the sector. The reforms will hopefully give a welcome boost to a sector hard hit by the pandemic.
The planned increase in alcohol duties will be cancelled from midnight tonight.
Air Passenger Duty (‘APD’)
APD will be reduced for domestic flights. This will help to boost regional airports and regional economies. There will be a new higher rate of APD for long haul flights. This is expected to affect no more than 5% of travellers.
Business rates remain; however, there are to be several changes which will reduce the burden for many businesses:
- A move to more frequent, three-yearly, valuations from 2023;
- Investment relief for green technology;
- No business rates for 12 months on property improvements; and
- One year 50% discount for those businesses involved in retail and hospitality.
Mr Sunak told his listeners that this would be a business rates saving of £7 billion.
Tax reminders for measures already in place
There are certain tax changes which have already been announced, or which are already in place, which I detail below.
National insurance contributions and dividend tax increases from April 2022
National insurance contributions (‘NIC’)
From 1 April 2022, there will be a temporary 1.25% increase in Class 1 (employee and employers) and Class 4 (self-employed) NIC.
As from April 2023 the increase will be enacted as a separate tax – a ‘health and social care’ (‘H & SC’) levy. The NIC rates will then return to 2021/22 levels.
The H & SC levy will extend to individuals working above state pension age, who are currently exempt from paying NIC.
Dividend tax rates
The following rates will apply from 6 April 2022:
- 8.75% for dividends in the basic rate band;
- 33.75% for dividends in the higher rate band; and
- 39.35% for dividends in the additional rate band.
The dividend allowance of £2,000 will remain.
Remember that the rate of tax payable by companies on any overdrawn director’s loan account (‘DLA’) will also increase to 33.75%, as this rate is linked to the rate of tax payable on dividends. Thus, DLA planning may become a little more important for owner managed businesses.
Owner managers may want to review their profit extraction strategies on the back of the above and possibly advance their dividends. This of course would have to be weighed up against the commercial and practical factors.
R & D tax relief
The class of allowable costs will be expanded to include cloud computing and data costs. The relief will also concentrate on UK activity. The changes will be effective from April 2023 with further details to be published in due course.
For loss-making companies undertaking R & D work, the repayable tax credit will be capped at £20,000 plus 3 times the company’s PAYE and NIC liability for the period of the claim. The cap is effective from 1 April 2021.
At present HMRC are very concerned about the level of ‘R & D chugging’ in the tax advisory market. Many corporate taxpayers are being encouraged by the chuggers to make R & D claims which would not stand up to scrutiny if they were to be reviewed by HMRC. The chuggers are simply exploiting the fact that HMRC do not have the resources to check all R & D claims.
The first time an adviser may be aware of such activity is when they receive notification, as agent, of a tax repayment made to their client!
The worry for advisers, with clients who have been approached in this way, is what unconnected issues might HMRC choose to review if they find that their client company has made an invalid R & D claim?! It would be left to the agent to deal with any such issues.
Sadly, this R & D activity can be difficult for an adviser to deal with when they know that a client’s activity is not qualifying and yet the chuggers promise a tax repayment with no strings attached, other than a fat fee!
Companies who believe that they may be carrying on qualifying R & D activity should take proper independent advice. Do remember that there is reasonably clear guidance from HMRC on what is and is not qualifying R & D.
The company does not have to be creating a vacuum cleaner powered by bee venom for the activity to be qualifying R & D.
Off payroll working
The implementation of the off payroll working rules for the private sector are now in place.
From 6 April 2021, all public sector entities and medium or large-sized private sector companies are now responsible for deciding on the employment status of the workers they engage. This includes some charities and third sector organisations. Sadly, the online tool HMRC have created to help engagers decide on status for a worker is not a reliable tool.
I suspect that many engagers, to eliminate administration time and reduce risk, will simply say to a worker that they are on the payroll and that is it. The downside, of course, is the increased direct and indirect costs of employment for the engager.
The new measures may cause uncertainty for engagers and will certainly increase their compliance and administration costs.
Residential property sales
The ‘new’ reporting and payment requirements for CGT in connection with residential property sales are causing a few problems for taxpayers with investment property and/or second homes. The sale of a main residence does not normally need to be reported in this way.
The first issue for taxpayers is the CGT calculations themselves. With a property which may have been owned for a while, finding all the necessary details to complete the calculations could be troublesome, especially if there is no digital trail. This needs to be addressed as soon as possible once a sale has been agreed.
Next, the taxpayer will need to set up a CGT account with HMRC which is different to the HMRC personal tax account they may already have. Only once the CGT account has been set up with HMRC can an agent get involved to help their client to fulfil their responsibilities.
Hidden away in the press releases was one extending the deadline from 30 days to 60 days of completion for reporting disposal. This applies to completions after today!
Making tax Digital (‘MTD’)
MTD for VAT will apply to all VAT registered businesses from 1 April 2022.
As we know, following the announcements in September, MTD for income tax will now be mandatory from April 2024 and not 2023 as originally planned. This delay in implementation is in recognition of the difficulties facing taxpayers because of the pandemic, and the knock-on effects on the economic recovery.
HMRC’s original aim for MTD for corporation tax was that it would be mandatory as soon as possible after April 2026. However, in view of the changes we have seen with income tax, I expect there to be a delay with the roll out of MTD for companies.
There is also to be a delay in the ‘rationalisation’ of tax basis periods for sole traders and partnerships.
Taxpayers will need to pay attention to these developments so that they engage with their advisers, and HMRC, in time to ensure that they can comply with the new rules.
With the progression of the MTD initiatives there is to be a new points-based penalty regime for filing failures. As with MTD for income tax, the implementation date has been put back a year for personal taxpayers.
The new regime will be effective as follows:
- For VAT from 1 April 2022;
- For businesses and landlords with income over £10,000 from 6 April 2024; and
- For other personal taxpayers from 6 April 2025.
The new regime is intended to ‘punish’ more harshly those who miss deadlines regularly, rather than those who occasionally default due to a simple oversight. The penalties are very clear because they are fixed.
With the delay to the introduction of MTD for income tax, no ‘soft landing’ is expected with the new penalty rules, so all taxpayers will need to be aware of them in good time to avoid unexpected fines.
Changing the tax year end
We have got used to the fact that the tax year end is 5 April each year.
Now the Government is considering a potential change to bring it in line with a month end (say 31 March) or the calendar year. This has been badged as simplification for taxpayers, but the cynics amongst us may view it more as the first step in a tax collection acceleration initiative.
Whilst the professional institutes are urging caution, I believe that it will happen. Let us hope that, when it does, it is not too soon and it has been properly thought through, so that the burden on taxpayers is minimised.
Zero emissions vehicles
100% first year allowances for business expenditure on business cars, and zero emissions good vehicles are in place for all expenditure incurred prior to 1 April 2025.
With the BIK at a rate of 1% (2021-22) and 2% (2022-23, 2023-24 and 2024-25) now could be a great time to be considering switching to an electric company car.
HMRC Trust Registration Service (‘TRS’)
The TRS has been operational since June 2017. Up to now it has only been necessary for trustees of trusts paying Income Tax and/or Capital Gains Tax to register their trust using the TRS. The position has now changed. All trusts, subject to certain limited exceptions, now need to register.
The non-taxable trusts are called ‘express trusts’ for these purposes. As an example, trusts which have been used for IHT planning, loan trusts and discounted gift trusts, will now need to be registered. The deadline for compliance is 1 September 2022.
Trustees who are familiar with HMRC systems, which can be unwieldy at times, may be happy to deal with the registration themselves. As part of the process, a ‘lead trustee’ would need to be appointed who is then responsible for the TRS registration. If trustees are unwilling, for whatever reason, to deal with the registration, it is possible for them to appoint an agent to do so on their behalf.
There are inbuilt time delays in the registration process to allow HMRC to issue the necessary codes. Thus, trustees should not leave registration until the last minute as they may miss the filing deadline. Penalties are leviable for late registration.
Once a trust has been registered, any changes in the trust detail (trustees, beneficiaries etc.) must be notified within 90 days of the change. The lead trustee must update the TRS system accordingly.
Taxpayers may need to engage with their financial planning advisers to establish which of their trust tax planning arrangements need to be reported.
The following links may be helpful for trustees who are approaching this issue for the first time:
- Registering a trust as a trustee: https://www.gov.uk/guidance/register-a-trust-as-a-trustee
- Registering a trust as an agent: https://www.gov.uk/guidance/register-your-clients-trust
Family Investment Companies (‘FICs’)
HMRC announced before the Budget that it has disbanded the group set up to examine FICs. There had been a fear, on the part of HMRC, that FICs were being used for nefarious tax avoidance purposes.
No evidence was found that this was the case, rather HMRC found that FICs were being used for acceptable IHT and other tax planning purposes.
Sensibly HMRC has concluded that its limited resources can be better employed elsewhere.
Conclusions: no major surprises and certainly no shocks
Another charismatic speech from Mr Sunak with an apology to the Deputy Speaker to start, no doubt for his transgressions with the media. He had his usual crop of jokes and digs at the opposition in what was an upbeat performance with plenty of positive messages.
Again, as in March, there was no mention of changes to the CGT regime. Changes had been of concern to many entrepreneurs and business owners. Thankfully changes to the CGT code would appear to be in the long grass for the moment.
The freezing of the personal allowance and basic rate band could be viewed as a stealth tax, but I would hope that most individuals would view this as a minor point in the grand scheme of things.
The business tax strategy is clearly laid out for the next few years with valuable incentives to stimulate investment in R & D and the creative sectors. The extension of the availability of the AIA is welcome.
The talk of wealth taxes, and other fanciful tax raising measures, has proved to be the usual speculation which always takes place before a Budget.
Mr Sunak finished his speech with a rousing ‘call to arms’. He emphasised his desire for the Government to be seen as a tax reducing administration. He stated his wish to be able to reduce taxes before the end of the Government’s current term. As one indicator of his intention, his final announcement was an almost immediate change to universal credit which will benefit the lowest paid. Mr Sunak described this one change as a £2 billion tax cut.
His speech contained no surprises, and a quick review of the press releases has not identified any sneaky measures. I am sure that there may be a few items which come to light over the coming days.
The speech was perhaps just what was needed to settle down those worried about the economic recovery and the challenges ahead.
If you have any questions, or other points, in connection with the contents of this note, please do not hesitate to get in touch through the normal channels.
Please bear in mind that this is a general overview of the announcements.
Actions should only be taken after having secured appropriate detailed professional advice.