The chancellor has set out a three-part Budget plan to “protect the jobs and livelihoods of the British people”. Read on to find out more.
Tax policies and consultations (Tax Day)
The Government published a command paper ‘Tax policies and consultations (Spring 2021)’ on 23 March 2021 setting out a number of measures that are designed to enhance the stability and effectiveness of the UK tax system by outlining a future pathway for its tax administration and tax policy development. These measures are the next steps in delivering the Government’s 10-year tax administration strategy, and will take forward a range of tax issues.
The highlights include:
- Notification of uncertain tax treatment by large businesses (second consultation) – This second consultation on the notification requirement for large businesses which is coming in from April 2022 is seeking views on the following areas in particular: the definition of uncertain tax treatments, the increased threshold for notification, exclusions from the requirement to notify and the proposed penalty for non-compliance. There has been a reduction in the taxes in scope and there is a new definition of an uncertain tax treatment which HMRC intends to be more objective in nature.
- Consultation on transfer pricing documentation – This consultation seeks views on potential changes to transfer pricing record keeping requirements for the largest businesses and the introduction of a new tax filing requirement for all businesses affected by transfer pricing regulations. This will align the UK’s transfer pricing documentation rules more closely with other OECD countries which require standardised filings e.g., the Master and Local File.
- Consultation on the reform of the taxation of securitisation companies – This consultation seeks views on the taxation of securitisation companies and on the stamp duty loan capital exemption as it applies to securitisations and to insurance-linked securities.
- Call for evidence on timely tax payments – This call for evidence seeks views on the opportunities and challenges of in-year calculation and payment for income tax self-assessment and corporation tax for small companies in particular. The call for evidence acknowledges that the Government is already looking at real-time tax payment for the payment of VAT (i.e. split payments) via a Government-Industry Working Group and VAT is not therefore covered. There is a separate call for evidence seeking views on how the tax administration framework could be updated and simplified to provide a better experience for individuals and organisations, enable opportunities to further reduce the tax gap.
Although there are some technical updates promised to the pension tax rules to remove a number of anomalies, there is no general announcement on the future of the pension tax rules. Also absent is any response to the first Office of Tax Simplification (OTS) report on capital gains tax. The Financial Secretary to the Treasury has responded to the first OTS inheritance tax review, which focused on the administration of the tax, and the Government has announced changes to reporting regulations following on from the OTS report. However, the Government has not yet responded to the OTS’ second review of inheritance tax which focused on the design of the tax.
The interim business rates review report does not give any concrete indication of the Government’s intentions in this area, including in relation to a new online retail tax (though there are some hints as to the Government’s likely approach should it decide to progress with such a tax). Separately, the Government is seeking views on reforms to Air Passenger Duty (APD), and in particular, the case for amending the APD treatment of domestic flights and for increasing the number of international distance bands. The Government has also confirmed that there is no current need for comprehensive reform to the taxation of trusts and that changes to VAT grouping previously consulted on will not be going ahead.
As well as the documents published on 23 March, the command paper provides an indication of timing for other policy developments. For example, a consultation on the new property development taxes that were announced in February will be released shorty, as well as a call for evidence on the VAT land and property exemption, and in the Summer, we should see responses to the VAT consultations on value shifting and the public sector. In addition, the Government will undertake a review of landfill tax and there will also be announcements on the proposed tax treatment of pension Superfunds in due course. Technical amendments will also be made to the structures and buildings allowance (SBA) legislation to amend the requirements for SBA allowance statements and provide clarity for taxpayers.
Budget 2021 highlights
Budget 2021 announced the extension of COVID-19 support, largely as anticipated, but with policies that seek to avoid cliff edges as the support winds down. To assist the public finances, this support was accompanied by a 25% corporation tax rate (for larger companies) from 1 April 2023 (returning rates back to the level of ten years ago) with an associated rise in the rate of diverted profits tax to 31% but with a commitment to reviewing the level of the bank surcharge rate. More unexpected was the repeal of the EU interest and royalties provisions with effect from 1 June 2021 (introducing a withholding tax on certain payments out of the UK where the treaty rates in question do not reduce the withholding tax to zero). We also saw the freezing of a number of allowances and thresholds, in some cases up to 2026.
To compensate for these tax ‘rises’ and encourage investment, we saw a new time-limited super-deduction of up to 130% on new plant and machinery and the announcement of new consultations on research and development (R&D) reliefs and references to the expansion of the Enterprise Management Incentives (EMI) Scheme. There is also additional flexibility for the next two years to allow the carry back of up to £2 million of losses for three years and a new small profits corporation tax rate so that only businesses with taxable profits of over £250,000 will pay the 25% rate.
We have set out our summary of the key developments which now includes references to the relevant Finance Bill clauses:
As expected, the Coronavirus Job Retention Scheme (CJRS) which was due to end 30 April has been extended. The length of the extension is more generous than had been thought, with the scheme being extended to 30 September. Employees will continue to receive 80% as under the current scheme. However, for employers, while the CJRS continues in its current form to 30 June 2021, from that point they will be expected to contribute to the cost of the hours their employees do not work (a return to an earlier version of the scheme). In this case, employers will be expected to pay 10% towards the costs of hours not worked in July (in addition to continuing to pay National Insurance contributions (NICs) and pension costs as they would at present) with the Government paying 70%. For August and September, this would rise to 20% for employers with 60% being paid by the Government.
A fourth Self-Employment Income Support Scheme (SEISS) grant will be available to claim from April at the same rate as the third grant payable in January (80% of profits up to £7,500). A fifth grant will then be available in July but for that grant only business who have seen a reduction of greater than 30% in turnover will be eligible for the 80% grant. Business with less than a 30% reduction will only be able to claim a grant of 30%. In a notable change, claims for the fourth and fifth grant will now be able to take into account tax returns for 2019-20 submitted before midnight on 2 March, extending the grants to some of the self-employed who were not previously eligible. However, the Chancellor did not extend any support to some of the other groups that claim to have been excluded, such as limited company directors.
The 100% business rates relief in England will be extended to 30 June with the following nine months then benefitting from a 66% discount (up to a maximum of £2 million).
There is an extension of the reduced 5% VAT rate for the hospitality sector to 30 September and then the rate will rise to 12.5% for the six months to 31 March 2022. Only after that will the full rate of 20% apply (Clauses 92-93). In respect of the VAT payment deferral scheme introduced in response to COVID-19, businesses have the option to pay the VAT they deferred between 20 March and 30 June 2020 in up to 11 instalments, ending by 31 March 2022. Alternatively, it can be paid in full by 31 March 2021. Penalties may apply where a business does not pay the deferred VAT in full by 31 March 2021, or opt into the new payment scheme by 21 June 2021 or agree extra help to pay with HMRC by 30 June 2021 (Clause 95, Schedule 18).
The increased nil rate band for stamp duty land tax of £500,000 which was due to revert to £125,000 on 31 March will be extended to 30 June. The nil rate band will then be set at £250,000 before falling back to £125,000 from 1 October 2021 (Clause 87). This will be accompanied by the introduction of a mortgage guarantee scheme to help people with small deposits (5%) get on the property ladder. The new scheme is not restricted to first-time buyers or new-build homes, but there will be a £600,000 limit.
The Chancellor also provided details of the £5bn “restart grant” scheme to help struggling High Street shops and hospitality firms in England reopen after lockdown. The one-off grants range from £6,000 for non-essential retail to £18,000 for hospitality, leisure and personal care businesses and replace the current monthly grant system.
There will be a new UK-wide Recovery Loan Scheme from 6 April 2021 to make available loans between £25,001 and £10 million, and asset and invoice finance between £1,000 and £10 million, to businesses of all sizes. The Scheme will close at the end of this year.
Finally, the £20-per-week uplift to Universal Credit is extended for six months to 30 September 2021 with a separate one-off payment being made to Working Tax Credit claimants.
The rate of corporation tax will increase to 25% from April 2023. The rise is not being enacted using the Provisional Collection of Taxes Act provisions and is not therefore substantively enacted as yet. Instead, legislation is being introduced in Finance Bill 2021 to set the rate of corporation tax at 19% for the year beginning 1 April 2022 and in the same Bill to set the main rate at 25% for the year beginning 1 April 2023 (Clause 6). The rate of diverted profits tax will increase from 25% to 31% for the year beginning 1 April 2023 (Clause 8). The level of bank surcharge (currently 8%) will be reviewed, to ensure banks do not pay too much tax following the corporation tax increase in 2023.
Businesses with profits of £50,000 or less will continue to be taxed at 19% with the return of a small profits rate. A taper for profits above £50,000 will be introduced so that only businesses with profits greater than £250,000 will be taxed at the full 25% rate (Clause 7, Schedule 1). The related 51% group company test at s279F to s279H CTA 2010 will be repealed and replaced by associated company rules. This will apply for determining whether a company is large or very large for quarterly instalment payment purposes or for determining whether a company may elect to use the small claims treatment for the Patent Box etc (Clause 7, Schedule 1)
A new super-deduction will provide additional relief for expenditure on plant and machinery. Investments in main-rate assets will qualify for a 130% super-deduction, whilst investments in assets qualifying for special rate relief will benefit from a 50% first-year allowance. The super-deduction will apply to contracts entered into on or after 3 March 2021 and be available in respect of expenditure incurred from 1 April 2021 to 31 March 2023. Losses created can be carried forward (Clauses 9-14). More detail on this relief, including its application in practice and the accounting and cash flow consequences is available here.
The Government will legislate to turn off certain parts of anti-avoidance legislation affecting leases extended as a result of COVID-19. The easement in Finance Bill 2021 (Clause 17) will restore eligibility to claim capital allowances. Another measure in Finance Bill 2021 (Clause 16) will clarify that certain expenditure incurred by oil and gas companies on decommissioning plant and machinery prior to the approval of an abandonment programme does qualify for decommissioning tax relief.
The Chancellor also announced the locations of eight chosen freeports in England - special economic zones with tax incentives to help stimulate regional growth. Incentives include enhanced rates of Structures and Building Allowances at 10% (Clause 110, Schedule 21). Relief from stamp duty land tax will also be available for the purchase of non-residential property used for qualifying purposes in designated tax sites. This will apply from the date the tax site is designated until 30 September 2026 (Clause 111, Schedule 22).
A review of research and development tax reliefs will be taken forward which will incorporate a decision on relief for expenditure on data and cloud computing. The Government will go ahead (with some amendments) with the implementation of a cap on the payable tax credit in the SME R&D scheme from 1 April 2021 at £20,000 plus three times the company’s total PAYE and NICs liability (Clause 19, Schedules 3-4).
There will be a temporary extension of the period over which businesses may carry-back trading losses from one year to three years. This extension will apply to a maximum £2 million of unused trading losses made in each of the tax years 2020-21 and 2021-22 for unincorporated businesses and to unused trading losses made by companies, after carry-back to the preceding year, in relevant accounting periods ending between 1 April 2020 and 31 March 2021 and a separate maximum of £2 million for periods ending between 1 April 2021 and 31 March 2022 (Clause 18, Schedule 2)
The £2 million cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of £200,000 to apportion the cap between its companies. Further detail on the group limit will be published in due course.
Legislation in Finance Bill 2021 (Clause 34) repeals the domestic legislation that gives effect to the EU Interest and Royalties Directive. This legislation currently provides an exemption from withholding tax on intra-group interest and royalty payments between UK and EU companies. From 1 June 2021 withholding taxes will apply to payments of annual interest and royalties made to EU companies, subject to the terms of the relevant double taxation agreement
Finance Bill 2021 (Clause 36, Schedule 7) also contains the promised measures making significant changes to the corporation tax rules for hybrids and other mismatches. The commencement date for each of the Finance Bill provisions varies, with certain changes applying retrospectively so that the relevant existing hybrid mismatch rules will apply as amended from their 1 January 2017 commencement date. Many changes will only apply prospectively, taking effect from the date on which Finance Bill 2021 receives Royal Assent.
However, in addition to the two general commencement options for commencement (1 January 2017 or Royal Assent in 2021), there are other complexities to take into account. These include the commencement of the new rules providing for the allocation of dual inclusion income within a group, which will be effective from 1 January 2021 (with an adjustment mechanism for straddling accounting periods). There is also the option for taxpayers to elect to make the amendments in Part 5 of Schedule 7 (deemed dual inclusion income) retrospective. The default position is that those amendments take effect by reference to the date on which the Act is passed, but if a taxpayer makes an election by 31 December 2021 to make those changes retrospective, they will be deemed to always have been in place. Taxpayers also have until 31 December 2021 to make any amendments to claims, returns and elections already submitted (if they would otherwise be outside the time limits to make such an amendment) as are reasonable to give effect to the retrospective change in law following any ‘Part 5 retrospection election’.
In addition, Finance Bill 2021 will allow HM Treasury to lay secondary legislation to amend the banking definitions used within the bank surcharge, bank loss restriction and bank levy rules following implementation of the Investment Firms Prudential Regime from 1 January 2022 (Clause 130). Finally, the Government will also legislate in Finance Bill 2021 to deal with the withdrawal of LIBOR and the reform of other benchmark rates (Clauses 128-129).
The Government has stood by its commitment to its ‘Triple Lock’ (its promise not to raise rates of income tax, NICs or VAT). The already announced inflationary increase in the personal allowance figures and higher rate threshold for 2021-22 will go ahead but after that both will be frozen at the levels of £12,570 and £37,700 until 2026 respectively (Clause 5).
The Chancellor announced the freezing of the pensions Lifetime Allowance at £1,073,100 (Clause 28), the inheritance tax thresholds (Clause 86) and the annual allowance for capital gains at £12,300 (Clause 40). He did, however, announce the extension of Social Investment Tax Relief (SITR) to April 2023 (Clause 20).
Finance Bill 2021 (Clause 41) also clarifies the anti-avoidance rule that disapplies gift hold-over relief when a non-UK resident person gifting a business asset also controls the recipient company. This will affect disposals made on or after 6 April 2021.
There are no general rises in either employer or employee National Insurance rates. The NIC Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate threshold at £50,270 for the years to April 2026.
As part of the focus on investment and attracting talent, a call for evidence has been launched seeking views and evidence on whether and how the Enterprise Management Incentives (EMI) scheme should be expanded.
The Chancellor also announced the extension of the apprenticeship hiring incentive in England to September 2021 and an increase in the payment to £3,000. There are also funds for a new ‘flexi-job’ apprenticeship programme in England, that will enable apprentices to work with a number of employers in one sector.
The Chancellor has confirmed a ‘fast-track’ visa scheme to help start-up and rapidly growing tech firms source talent from overseas. The new scheme removes the need for a ‘third-party endorsement’ or a sponsor organisation.
Small and medium-sized employers in the UK will continue to be able to reclaim up to two weeks of eligible Statutory Sick Pay (SSP) costs per employee from the Government.
Finance Bill 2021 includes changes to off-payroll working rules which come in from 6 April 2021 to inset a new condition to identify when a company is an intermediary (to avoid catching unintended corporate entities). There is also a targeted anti-avoidance rule to ensure the definition of intermediary is not exploited, and amendments in respect of the provision of information in the labour supply chain and the consequences of providing fraudulent information (Clause 21). There are also changes to Post-Employment Notice Pay (PENP) calculations and alignment of tax treatment for non-residents from 6 April 2021 (Clause 22).
Finally Finance Bill 2021 contains amendments to the Construction Industry Scheme (CIS) rules to clarify the rules on deductions for materials, and provides a new power allowing HMRC both to amend an incorrect CIS set-off claim and prevent the contractor from making further set-off claims in relation to the same tax year. There is also an expansion of the scope of penalties (Clause 30, Schedule 6).
Separately, Finance Bill 2021 brings in a number of COVID-19 related provisions. There are changes to requirements relating to enterprise management incentives (EMI) in relation to persons who are not required to work for reasons connected with COVID-19, the scope of which is extended to 5 April 2022 (Clause 24). Finance Bill 2021 also clarifies that all SEISS grants received on or after 6 April 2021 will be taxed as income in the year of receipt. In addition, there will be a 100% tax charge if a person receives a grant that they are not entitled to, or cease to be entitled to (Clause 32).
Changes to the cycle to work rules treat the ‘mainly used for commuting’ condition as met for the period commencing with 16 March 2020 and ending with 5 April 2022 where the equipment was first provided before 21 December 2020 (Clause 25). Finally, for tax years 2020-21 and 2021-22, no liability to income tax arises on the provision of COVID-19 tests to employees, or on the payment or reimbursement of the costs of such tests (Clause 26). An NIC disregard also applies on this expenditure for these tax years.
The easements to business rates and the stamp duty land tax nil rate band are covered in the section on COVID-19 support. Finance Bill 2021 contains legislation to ensure that any repayments of business rates relief are deductible for corporation tax and income tax purposes. This will have retrospective effect once enacted (Clause 33).
Finance Bill 2021 confirms the introduction of a 2% SDLT surcharge on non-resident purchasers of residential property in England and Northern Ireland from 1 April 2021 (Clause 88, Schedule 16). It also provides relief from the 15% higher rate of stamp duty land tax for qualifying housing co-operatives purchasing residential property for more than £500,000 from 3 March 2021 (Clause 89, Schedule 17).
The Chancellor has followed previous Chancellors in deciding the time has still not come for a rise in Fuel Duty. In addition, the Chancellor froze duties on beer, wine, cider and spirits. The VAT threshold will be also be frozen for a further two years from April 2022.
The Government is legislating in Finance Bill 2021 to remove the entitlement to use red diesel and rebated biofuels from April 2022. A few sectors will retain their entitlement to use red diesel beyond April 2022 (Clause 98, Schedule 20).
A large part of Finance Bill 2021 is given over to the ‘plastic packaging tax’ coming in from April 2022 (Clauses 42-85, Schedules 9-15). Finance Bill 2021 (Clause 94) also extends the Making Tax Digital for VAT requirements to all VAT registered businesses from 1 April 2022. It has been confirmed with HMR that this will not apply, for now, to section 41(3) VATA 1994 bodies i.e. certain Government and Public Health bodies.
Legislation in Finance Bill 2021 (Clause 108) repeals the provisions in Finance Acts 2019 and 2020 relating to Carbon Emissions Tax, which were not brought into effect. This follows the Government’s announcement in December that the UK Emissions Trading System rather than the Carbon Emissions Tax would be the UK’s carbon pricing policy from 1 January 2021. The Government’s response to the consultation will be published on 23 March.
The Government is introducing a new power in Finance Bill 2021 (Clause 125) which will enable regulations to be made to implement OECD rules that will require digital platforms to send information about the income of their sellers to both HMRC and to the seller themselves. A consultation will take place in Summer 2021. The Government has also reconfirmed it will consult later this year on draft regulations to implement the OECD’s Mandatory Disclosure Rules.
Finance Bill 2021 introduces a new penalty regime for VAT and Income Tax Self Assessment (ITSA). The reforms will come into effect for VAT taxpayers from periods starting on or after 1 April 2022. For taxpayers in ITSA, they will apply from accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA); and for all other ITSA taxpayers, from accounting periods beginning on or after 6 April 2024 (Clauses 112-114, 116, Schedules 23-26 and 28).
Finance Bill 2021 also provides for new information powers for HMRC, from the date of Royal Assent, to allow a Financial Institution Notice (FIN) to be issued to require certain information to be provided without the need for approval from the First-tier Tax Tribunal (Clause 122, Schedule 33). In addition, there is a reduction in the level of penalties (from 50% to 30%) for people receiving Follower Notices. A further penalty of 20% will be charged on recipients of Follower Notices who continue litigation proceedings against HMRC on an unreasonable basis. This change applies from Royal Assent (Clause 115, Schedule 27).
There is a new requirement to provide information regarding tax compliance when applying for certain licenses. In England and Wales this applies from 4 April 2022 (Clause 121, Schedule 32). There are also changes to strengthen the sanctions against those who promote or enable tax avoidance schemes in the DOTAS and POTAS rules along with changes to the GAAR (in relation to partnerships) (Clauses 117-120, Schedules 29-31).
The Government has also committed to a review of tax administration for large businesses, including the degree to which it provides businesses with early certainty where appropriate, ensures the efficient resolution of disputes in accordance with the law, and promotes a collaborative and constructive approach to compliance with the law. Discussions will be initiated with businesses, advisers and stakeholders over the coming months.
Finance Bill 2021 was published on 11 March. Clocking in at around 360 pages and 130 clauses, this year’s Finance Bill is on the shorter side of the Finance Bills from the last decade.
The timetable for the passage of the Finance Bill through Parliament has not yet been published, with no guide as yet as to when scrutiny of the Bill in Committee might take place. It is not therefore possible to say when Third Reading (which would constitute substantive enactment for IFRS and UK GAAP purposes) will take place and in particular whether it will be before or after 30 June 2021. Royal Assent (which constitutes enactment for US GAAP purposes) usually takes place in July before Summer recess.
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