We have reviewed yesterday’s budget and have provides some further detail, along with our own viewpoints on the announcement and its impact on the UK’s dentists.
There are some significant changes which will play out over the coming months and years. In addition, it does look like things have been made more complex by the new introduction of both some old and new concepts into the tax system.
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Corporate Tax Announcements from the Budget
Increase in Corporation Tax rates
- The Chancellor in his Budget recognised that business has benefited from unprecedented support during the Coronavirus. In the spirit of fairness, it therefore recognises the role that business have in repaying the historical borrowing costs, by raising the level of corporation tax from 19% to 25% from 1 April 2023.
- This higher rate will apply where company profits are in excess of £250,000, with the low rate of 19% being retained for those with profits under £50,000. For those companies with profits between £50,000 and £250,000, there will be marginal relief applying to bridge the gap between the lower and upper limits.
- These limits will be divided by the number of associated companies; in other words, where one company controls another or both are under the same control. This associated company definition is also going to replace the 51% group company test previously used to identify which companies are required to pay tax by quarterly instalment. This may well increase the number of companies being required to pay tax by instalment and the cash flow impact of this will need to be considered.
This is a return to the days of pre-2014, when multiple rates of corporation tax was last in use. However, the level at which the higher rates apply is much lower (£250,000) compared with £1,500,000 back in 2014.
This means that more companies will be drawn into paying the higher rate of corporation tax, than in 2014. This will make it increasingly difficult to predict future corporation taxes.
Temporary extension to carry back of trading losses for Corporation Tax
- This is a welcomed cash-flow benefit for all companies and unincorporated businesses that may now be able carry back losses, that have arisen recently due to reduced demand for their goods and services, to earlier years. The current rules are restricted to only offsetting losses to the previous 12 months profits.
- The measure applies to companies with accounting periods ending in the period 1 April 2020 to 31 March 2022, and for tax years 2020/21 and 2021/22 for unincorporated businesses.
- The effect of the measure will to be extend the period for which the trading loss can be carried back against earlier profits and will be extended from the current one year element to a period of three years, with losses being carried back against later years first.
- Although there are no restrictions on the amount of the loss to be carried back to the previous year, there will be restrictions on the amount of losses to be carried back to the earlier two years, where a £2m cap will apply for each of the two year periods to 31 March 2022. The £2m cap will apply to groups, where the limit will be shared, and this will need to considered in detail and the submission of a formal allocation statement. There are also measures introduced to allow certain loss carry backs to be claimed outside the company tax return.
This is a welcome cash boost to taxpayers whose profits may have been fundamentally impacted by the COVID-19, which could provide an immediate cash-flow injection.
However, the measure also introduced more complexity to SME’s in managing their tax affairs with the interaction of the cash-flow boost, impact on R&D claims they may have made and the fact that there is now a small company corporation tax rate.
Super-deduction for companies investing in new plant and machinery
- The Chancellor has announced a new tax deduction aimed to stimulate investment by UK companies.
- Between 1 April 2021 and 31 March 2023, companies will be able to claim a corporation tax deduction at 130% of qualifying expenditure. This has not been extended to unincorporated businesses, or other structures such as LLPs.
- This measure only applies to main rate pool assets, but 50% deduction also announced for expenditure on most new assets that would ordinarily qualify for 6% special rate pool.
- Although this is a welcome announcement, , the complexity is in the small print. This measure, in particular, is a super-complex super-deduction.
- Further complexities arise where assets are sold having previously benefitted from the super-deduction.
- Timing for expenditure is going to be key. Whilst we would encourage companies to delay expenditure until April, contracts entered into before 3 March will not benefit from the super deduction even if the date of the expenditure is delayed.
- Whilst the rate of super deduction does not appear to be affected if expenditure is incurred in accounting periods which straddle 1 April 2021, the rate of deduction is reduced for periods straddling 1 April 2023. It may be worth considering changes to accounting periods to mitigate a loss in the deduction if expenditure is planned to be significant in late 2022 or early 2023.
- Additional conditions will be imposed on expenditure on assets acquired under hire purchase or similar contracts.
From a cash flow perspective the benefit of the enhanced deduction, whilst welcome, will not be felt until the company is due to pay its corporation tax liability. This again introduces increased complexity to the tax system which will make it harder for SME’s to plan.
Temporary increase in Annual Investment Allowance
- There was confirmation that the Annual Investment Allowance will increase from £200,000 to £1m from 1 January 2021, for expenditure on plant and machinery incurred during the year ended 31 December 2021.
- This is another boost for businesses who will be able to obtain a 100% tax deduct when they invest in plant and machinery.
This temporary increase together with the announcement of the super deduction, could play an important factor to help kick-start business investment, and may also attract foreign companies to invest in the UK.
Personal Tax and Private Client Announcements from the Budget
Self-employed grants for the newly self-employed in 2019/20
- This group of individuals missed grant funding when COVID-19 hit, as they had no proof with HMRC that they were self-employed.
- Provided their self-assessment returns for 2019/20 have now been filed, these individuals can now claim the 4th and 5th grants.
- 4th grant covers period from February until April, available from late April and 5th grant covers May until September, to be claimed from late July.
- 4th grant available will be 80% of three months’ average profits, capped at £7,500 paid out in a single payment.
- Final grant will be based on a turnover test, so more targeted. Those whose turnover has dropped by at least 30% will be eligible to claim up to 80% of a three month average trading profit, but those whose turnover has not dropped as much will only be eligible to claim 30%, capped at £2,850.
- It has been confirmed that grants are taxable in the year in which they are received.
- As this is taxable income, possible knock-on effects are that it should be pensionable income, but could also impact on things like the clawback of child benefit.
- Finally some support for a group of people who fell into no man’s land from March last year.
Temporary extension to carry back of trading losses for Income Tax
- Trading losses made by unincorporated business in tax years 2020/21 and 2021/22 will be eligible for loss carry back relief.
- The losses can be carried back against the profits of the same trade for a period of three years instead of the usual one year period.
- A £2m cap will apply to the extended carry back of losses for each tax year.
- With temporary closure of businesses during the national lockdowns, this measure could prove to be an additional lifeline for some unincorporated businesses to obtain tax repayments from prior years to ease cash flow.
Capital Gains Tax (CGT) – Annual Exempt Amount will remain at current level to April 2026
- There will be no increase or reduction in the tax-free amount for Capital Gains Tax from the current level until April 2026. There was considerable speculation this may change but this has not occurred as yet.
- This annual tax-free amount will therefore remain at £12,300 for individuals, personal representatives and some Trusts and £6,150 for all other Trusts.
- Private clients are now in a position to carefully consider their assets in the round to make decisions when selling their assets or passing their wealth on to the wider family.
Stamp Duty Land Tax (SDLT) – extension to the temporary SDLT holiday
- Up to the end of June 2021 there will be no SDLT on the first £500,000 for purchases of homes in England and Northern Ireland, where this is the purchaser’s sole residence. The 3% surcharge will remain in place if this will not be the purchaser’s only residential property or if the purchaser is a company.
- From 1 July to the end of September 2021 the holiday amount reduces to £250,000.
- Importantly both the new dates of the end of June and September are ‘cliff edges’ so a purchase must be completed to take advantage of the SDLT holiday.
- This is not only a great boost for those people seeking to get onto the property ladder, especially in conjunction with the news that 95% LTV mortgages will soon be available again, but also good news for those looking to move.
- In addition to this, for those people with a personally held rental property portfolio it extends the timeframe to consider whether incorporating their property business is worthwhile whilst there is not a punitive upfront SDLT charge to doing so.
Inheritance tax – nil rate band frozen
- The Chancellor did not announce any changes for IHT other than to freeze the nil rate band of £325,000 and residence nil rate band of £175,000 until April 2026. The nil rate band has now been frozen at the same level since 6 April 2009, resulting in increasing numbers of estates being brought within IHT, particularly in London and the South East. This measure is expected to raise £985m and highlights the need to take timely advice.
- We may see further announcements as part of “Tax Day” on 23 March 2021, particularly regarding simplification of lifetime gifts and the interaction of IHT with Capital Gains Tax.
Employment Tax announcements from the Budget
Extension of furlough arrangements
- Scheme extended to 30 September 2021.
- Currently employer claims 80% of reference pay.
- Employer will be required to contribute 10% from 1 July 2021, and 20% for August 2021 and September 2021 (with the employees still receiving 80%).
This measure will ensure employees are no worse off than currently but will increase the cost burden for the business as the scheme winds down to 30 September 2021.
National Living Wage changes
- From April 2021, NLW will increase by 2.2% to £8.91 per hour.
- This was previously for workers aged 25 and over, but now it will apply to workers aged 23 and over.
- This will add to employer costs which may inadvertently impact jobs.
Again this is an extension to bring further employees within scope in the 23-25 age range.