One of the final things I did in the office last March before the office practically emptied due to COVID-19 was watch Budget 2020 and write this article. The intervening year has been simultaneously one of the most eventful and uneventful years in recent times, and this Budget carries a bit of that dual nature.
On the one hand, very little changes as a result of the Budget. Lots of reliefs introduced as COVID-19 support measures are being extended, or in some cases are being tapered during the course of the next tax year to avoid ‘cliff edge’ effects. Lots of rates and thresholds are unchanged. The smorgasbord of tax rises promised by a hyperactive press failed to materialise (although maybe the hyperactive press is part of the reason why they failed to materialise, who knows?).
On the other hand, the Chancellor signalled a substantial shift in business tax policy which will have a big impact in future. After many years of selling ourselves as a country of relatively low profit taxes, a change is gonna come...
There’s a smidgeon of immediate or short-term tax-raising in the Budget, but you won’t see it reflected in headline rates. Instead you’ve got to get into the weeds of tax brackets and thresholds, many of which are staying still.
The Government had already committed to raising some of the high profile personal tax thresholds in line with CPI from 6 April 2021. The personal allowance, higher rate threshold and National Insurance Contribution thresholds will all rise as planned – to £12,570pa, £37,700 and it’s complicated respectively, in case you were wondering.
However, enjoy those rises now because you won’t see their like again for another five years. The Government has committed to freezing these thresholds until 2026. This creates the effect known as ‘fiscal drag’ whereby tax take increases just by virtue of wage inflation and people being pushed into higher brackets over time.
In other areas, the thresholds set for tax year 2020/21 are being frozen until 2025 – the VAT registration threshold, the inheritance tax threshold, the capital gains tax Annual Exempt Amount and the pensions lifetime allowance.
Since we are still in the thick of the pandemic that was only just beginning to make itself felt in the UK this time last year, it made a lot of sense to keep a number of COVID-19 relief measures in place until the Grand Reopening later this year (please please let this one stick). In that spirit:
- The £500k nil-rate band for stamp duty land tax on residential property (the SDLT holiday as it’s generally known, which sounds a lot more fun than any tax policy ought to) will continue until the end of June. After this it will be tapered to a £250k nil-rate band before the nil-rate band reverts to its former level of £125k in October this year
- The business rates holiday will also remain in place until the end of June, and after that will be replaced by a discounted regime for closed businesses for the rest of the year
- Wine, beer, whisky and cider duties have been frozen, as have fuel duties. This has the unfortunate consequence of making it look like the Government wants to encourage drink-driving, which I’m sure is not the case.
The reduced rate of VAT of 5% for the tourism and hospitality sector which was introduced last year to help businesses most obviously affected by the pandemic will remain in place until 30 September at which point it will go up to 12.5% for the remainder of the tax year before reverting to the usual 20% rate next tax year.
Employers and Employees
The Government had introduced a number of temporary relaxations to employee tax / benefits in kind to reduce tax and admin for businesses looking to support their employees during the pandemic. The following have all been confirmed for both 20/21 and 21/22 (in some cases with retrospective effect):
- The cost of COVID-19 tests either supplied or reimbursed by employers will not count as a taxable benefit in kind. I’m sure most employees will agree that a nasal swab isn’t the most glamorous benefit, so this is an example of the tax system and good sense aligning.
- The reimbursement of home office equipment required as a result of working from home during the pandemic is similarly tax-exempt.
- The normal condition for tax exempt cycle provision (which is that the bike or bike equipment be mainly used for journeys to / from work) has been waived to avoid absurdity.
- The requirement of tax-favoured Enterprise Management Incentive share options that the employee meet certain working time conditions has been relaxed for those whose hours have been reduced due to pandemic working arrangements or furlough.
Separately, we can now be 100% confident that the reformed IR35 rules (or the less snappily titled “off payroll working” rules) will definitely definitely come into force from 6 April 2021, after the reprieve last year. The Budget has some minor technical amendments, including making it clear that fraudulent provision of information by any party in the IR35 supply chain could make them liable for unpaid PAYE and NICs.
After many rumours in the press, we now know that the Chancellor plans to raise the main rate of corporation tax from 19% to 25% from April 2023. That’s a chunky increase by any standard, but the pill is sweetened in a few different ways:
- Between April 2021 and April 2023 the Government will offer ‘super deductions’ from taxable income of 130% on purchase of certain new plant and machinery (broadly, the plant and machinery which normally qualifies for a humble 18% writing down allowance). The net effect is that paying £100 on certain plant and machinery will reduce your corporation tax bill by nearly £25. The stated aim of the change is to unlock the cash reserves built up in some companies, and it’s certainly a big incentive to spend.
- The loss carry-back rules will be made more generous temporarily. These allow businesses to set off losses from their current accounting period against taxable profits in previous accounting periods, and potentially claim a refund of corporation tax already paid. Currently the carry back can only extend 12 months into the past. For a limited time only, carry back can be made up to 36 months in the past. This generous treatment will apply to companies with losses in accounting periods ending in the period 1 April 2020 to 31 March 2022. There is a cap of £2m of losses per year that can benefit from the extended carry-back.
- When the increased rate is introduced, there will be a small companies rate set at 19% (the current level) for companies with profits of less than £50k pa, and a tapered rate between £50k pa and £250k pa, so smaller companies will see a reduced impact.
Freeports: Gateway to the Future (or something like that)
The Government has heavily trailed its Freeports policy, and the Budget includes a number of changes intended to support the creation of up to 10 newly designated ‘Freeports’ – areas which will benefit from generous tax reliefs, simplified customs procedures and wider government support. The intention is to boost the local economy in select areas. The Budget includes details on some of the tax reliefs on offer, including stamp duty land tax relief on purchases of commercial property within the area, enhanced allowances for building new structures and enhanced capital allowances for expenditure on plant and machinery.
Big Platform is Watching
Lots of commentators have written about individual service providers operating through digital platforms (Uber drivers, food delivery riders and increasingly freelancers in all sorts of sectors) not fitting neatly into either the model for sole traders or employees. One consequence of them not being employees is that HMRC doesn’t have the PAYE system to keep track of their income. To plug this gap, and to facilitate new international tax information exchange rules, the Government is introducing new powers to create reporting requirements for digital platforms. So if you’re a digital platform connecting service providers with customers then watch out: new regulations may compel you to report the income of your platform’s users. And if you’re one of the users of those platforms hopefully you’re declaring all your income already. If not, now would be a jolly good time to start.
In his Budget speech, Mr Sunak said unemployment will be lower - and growth higher - than previously thought as the UK emerges from lockdown later this year, citing forecasts from the Office for Budget Responsibility (OBR) watchdog. But he warned that repairing the long-term economic damage "will take time", with the economy predicted to be 3% smaller than it would have been without the pandemic, in five years time.