This was a Budget like no other. The financial turmoil over the past year turned the Budget 2021 in to a ‘must-see’ event. Simon Littlejohns shares his thoughts, along with a summary of the key announcements.
Mr Sunak faces tremendous pressure to deal with a budget deficit which has increased to an unprecedented level following the Covid-19 support measures the government has introduced and is continuing to support. Any Budget measures to address the deficit must be set against the background of material financial uncertainty for businesses and individuals alike. The post-Covid-19 recovery is yet to start in earnest, and Mr Sunak stated that he wants to ensure that any tax raising initiatives he might implement do not directly or indirectly hamper this.
Does he raise taxes? Can he afford not to? Which should he raise? Are there any obvious business areas for targeted tax rises? Which is the ‘least unpalatable’ option? These were all questions he would no doubt have been considering in the lead up to his announcements.
One example of the unenviable position Mr Sunak finds himself in is the subject of Capital Gains Tax. Much has been written about potential changes to CGT for entrepreneurs, and many others, following the OTS reports last year. I have had many a discussion with clients and contacts on this issue in the past few months. Changing the rates and reliefs could stifle entrepreneurship in the UK or force entrepreneurs to set up their new businesses in jurisdictions with more benign tax regimes. The result of any changes could be a reduction, rather than an increase, in the CGT receipts. A Catch-22 situation on so many fronts.
At the end of this summary, I give my assessment as to how well I thought he did.
Overview of the Budget 2021
Mr Sunak set out his three-stage plan for the economy as follows:
- Continue the support for businesses and individuals;
- Fixing the economy once recovery starts; and
- Building the future economy.
The main announcements are as detailed below.
Covid-19 support measures
This is not the place to discuss the support measures in detail, however, in outline, the following additional support measures were announced:
- An extension of the furlough scheme to the end of September;
- The self-employed scheme will also be extended to September with changes which will enable some who had previously been excluded to claim payments;
- £700 million allocated to support culture, arts and sports;
- £520 million for a ‘help to grow’ management training scheme for business bosses;
- £126 million for new traineeships;
- An extension of business grants for those businesses most affected by the pandemic; and
- Start-ups will have access to another £375 million of convertible loans via the Future Fund.
As expected, there are to be no changes to the rates of income tax for the new tax year as this would break a manifesto pledge. However, the personal allowance and higher rate threshold has been frozen – a stealth tax in all but name!
For the coming tax year, the personal allowance will increase to £12,570 and the level at which the 40% rate of income tax will apply to £50,270. Both will be held at these levels until April 2026.
No changes were announced.
Capital Gains Tax
There was no change to the rates of CGT.
The annual exemption will remain at £12,300 until April 2026.
Mr Sunak made no mention of any potential changes to the CGT regime, this may come with the consultations to be published on 23 March.
No material changes were announced.
The nil rate band will remain at £325,000 until April 2026.
The rate of corporation tax will increase from 19% to 25% with effect from 1 April 2023 for those businesses with taxable profits in excess of £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.
To stimulate business investment there will be a first-year capital allowance (the ‘super deduction’) of 130% of main rate expenditure in the two financial years ended 31 March 2022.
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.
Value Added Tax
The availability of the 5% reduced rate for hospitality and tourism will be extended from April to September with a reduced rate of 12.5% until March 2022.
The VAT registration threshold will be retained at its current level of £85,000 until March 2024.
Stamp Duty Land Tax
The SDLT ‘holiday’, which is due to end on 31 March 2021, has been extended to 30 June.
The nil rate band has been increased to £250,000 until the end of September.
Indirect taxes and other measures
There will be no increases in the duties on alcohol or fuel.
The pension lifetime allowance will remain at £1,073,100 until 2026.
The annual ISA allowance will remain at £20,000 for the coming tax year.
The Government will guarantee for first time buyer mortgages of up to 95%.
In a break with tradition, the announcement of consultations on potential changes to the operation of the tax system are being left until 23 March. I will follow up as necessary once these are published.
Tax measures already in place
There are certain tax changes which have already been announced, or which are already in place, which I detail below as a reminder.
R & D tax relief
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 applies from 1 April 2021.
Off payroll working
The implementation of the off payroll working rules for the private sector was delayed by a year because of the pandemic.
From 6 April 2021, all public sector entities and medium or large-sized private sector companies will be 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
One recent change already in place, which is a surprise for many taxpayers, is the need to report and pay CGT in connection with residential property sales within 30 days of completion. This is relevant for those sales where there is a tax liability – so this will typically be on the disposal of second homes, buy to let and other investment property. There is no need to report the sale of a main residence unless there is a taxable element to the sale because, for instance, part of the house has been used for business purposes.
The reporting requirement can be problematic for the vendors especially if they are not fully up to speed with the CGT rules. It may also be difficult for them to find, at short notice, all the necessary details to enable a proper calculation to be prepared especially if the property has been held for some time.
HMRC are still very keen on ensuring that taxpayers are returning all detail of offshore income and gains. Please remember that UK tax residents are subject to UK tax on their worldwide income and gains. Issues can arise where there is a property sale. Do remember that the UK chargeable gain is not the foreign currency gain converted at the rate ruling at the date of sale, it is the UK gain resulting when all transactions are converted to Sterling at the rate ruling on the dates of all the individual transactions.
Making Tax Digital (‘MTD’)
Taxpayers have been working with Making Tax Digital for VAT for some time now. HMRC are pushing on with their MTD initiatives. MTD for VAT will apply to all VAT registered businesses from 1 April 2022.
It is expected that MTD for income tax will be mandatory from April 2023 with much of the precise detail unclear at this stage.
HMRC issued consultation before Christmas in connection with MTD for corporation tax. Their goal is to make this mandatory from April 2026 at the earliest.
Zero emissions vehicles
100% first year allowances for business expenditure on business cars, and zero emissions good vehicles will be extended until April 2025.
With the BIK at a rate of 1% (2021-22) and 2% (2022-23) now is a great time to be considering switching to an electric company car.
Budget 2021 conclusions
Mr Sunak was faced with a very difficult task, but I think that he did very well.
The continuation and extension of the support for businesses and individuals will be welcomed by all those who are affected and will ensure that everyone is well placed to contribute to the recovery which is forecast by the OBR to be better than had been predicted.
The business tax measures were inspired – a delay to the imposition of the expected increase in corporation tax and a ‘super deduction’ to stimulate business investment. The loss carry back changes will benefit a lot of companies which have suffered losses as a result of the pandemic. This change should enable them to source tax repayments.
There was no mention of changes to the CGT regime. Changes had been of concern to many entrepreneurs and business owners. I think that we will need to wait for sight of the consultation documents on 23 March before we can rest easy here.
The freezing of the personal allowance and basic rate band could be viewed as a stealth tax, but in the scheme of things I would hope that most individuals would view this as a minor point in the grand scheme of things.
I believe that business owners should be very pleased with the announcements made today. The business tax strategy is clearly laid out for the next few years with valuable incentives to stimulate investment.
Thankfully changes to the CGT code would appear to be in the long grass for the moment.
The talk of wealth taxes, and other fanciful tax raising measures, have proved to be the usual speculation which always takes place before a Budget especially one as challenging as this.
All in all, a good effort with some surprises. I give Mr Sunak a nine out of ten.
I hope, as we all do I am sure, that the recovery is as imminent and as robust as the OBR has forecast.
If you have any questions, or queries, in connection with any of the announcements made in the Budget 2021, please do not hesitate to get in touch.
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.