Spring Budget 2021 - Business Tax Changes

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After the announcement of a further £5bn in Government support taking the total spend to over £400bn, the Chancellor looked to companies to shoulder the tax increases to begin paying it back.  

Corporation tax rate to increase 

Corporation tax for large business will increase from 19% to 25% with effect from 1 April 2023, although “large” businesses for these purposes are those with profits of over £250k (even lower if you have more than one company under common control). To retain the current rate of 19% profits need to stay below £50k for a standalone company. Those in between face the return to the complexity of marginal relief between the two rates.  

It was not all bad news for companies though, with a temporary extension to the period a company can carry tax losses back to generate a cash tax refund, and the introduction of a capital expenditure “Super Deduction”.   

Capital expenditure “Super Deduction” 

From 1 April 2021 there will be a temporary introduction of enhanced tax relief for expenditure on qualifying capital assets up to 31 March 2023. Tax relief on 130% of the expense is given immediately with no limit on the total expenditure (unlike the annual investment allowance). “Qualifying expenditure” has the same definition as assets qualifying for the main rate of Capital Allowances (plant and machinery, IT equipment etc) with a reduced enhancement of 50% for special rate or long life assets (integral parts of a building such as electrical systems).   

When considering, absent this super deduction, your expenditure would only potentially qualify for tax relief at 18% or 6% respectively, both deductions offer businesses a significant short-term cash flow benefit on their capital investment.   

If a business incurred qualifying capital expenditure of £1m in the financial year 1 January to 31 December 2022, prior to these changes, the tax relief position would have been:  

• £200,000 Annual Investment Allowance £200,000  
• £800,000 Writing down allowance of 18% £144,000  
• Total £344,000  
• Tax relief 19% £65,360  

With the Super Deduction the tax relief position is:  

• £1,000,000 at 130% £1,300,000  
• Tax relief at 19%  £247,000  

Tucked away in the detail is the fact that on a future disposal of an asset which qualified for the 130% Super Deduction any proceeds must also be multiplied by 1.3 clawing back at least part of the benefit where an asset will have a residual value. This will likely also be at a time when the Corporation tax rate has increased to as much as 25%.  

Loss carry back  

Historically a company was restricted to carrying back a loss against the profits of the previous 12 months, this has now increased to a period of 3 years to a maximum £2m which can be carried back.  

This relaxation applies for accounting periods ending in the period 1 April 2020 to 31 March 2022. So for a business which was heavily impacted by COVID but had previously been very profitable, this is a great opportunity to get cash back when it is so critically needed.  

While the Government estimates the increase in Corporation Tax will yield an additional £45.3bn over a three-year period from April 2023, this in effect is already offset by the c£25bn subsidy handed out by the Super Deduction. So how does the Government expect to fund our largest fiscal deficit seen outside of war times? We have numerous consultations already issued with more expected on 23 March so don’t breathe a sigh of relief just yet…..this is likely only the beginning.  

VAT 

As expected, the reduced 5% rate of VAT, which has applied in the hospitality and leisure industries since last July 2020, remains and is very welcome. However, in an unexpected move, a transitional rate of 12.5% from 1 October which will apply until March 2022.  

Whilst certain to be welcomed by those who have benefitted to date, there will undoubtedly be disappointment amongst “wet-led” pubs who lack the food service to qualify for relief, and who would arguably view themselves as most in need of support.  

Elsewhere in VAT, a registration-threshold freeze until 2024 fixes the point of mandatory VAT registration at £85,000. 

Customs Duty remains in the spotlight with the Chancellors focus on free ports. These are designated (and often vast) areas which are effectively outside of the UK for the purposes of normal tax and Duty rules, where goods can be imported, processed or manufactured and re-exported without entering the Customs regime. Eight new facilities will be opened around the country, and will no doubt provide further opportunities for those impacted by Brexit to mitigate the impact of new tariffs as much as possible. 

Tax avoidance 

The Government has pledged £100 million for a new Taxpayer Protection Taskforce to crack-down on COVID fraudsters who have dishonestly exploited the Government COVID financial support schemes. Rishi Sunak announced that the taskforce, of over 1,250 HMRC Officers, would be responsible for investigating those who have made fraudulent claims through the Job Retention Scheme and the Self Employment Income Support Scheme. 

If you are aware of any errors in the Job Retention Scheme or Self Employment Income Support Scheme claims you have made, these should be disclosed to HMRC in order to mitigate any potential penalties. 

However, it would appear from the supporting policy documents that investment in taxpayer non-compliance actually goes much further than the new Taxpayer Protection Taskforce. In the tax years up to and including 2022/23, the overall HMRC investment in tackling non-compliance is estimated to be over £1bn. This investment is likely to be in recruitment, training and setting up IT infrastructure (such as data analytics tools) to support these activities. The Government estimates that in the following three tax years, the tackling of non-compliance will result in a yield of almost £2.2bn. 

In our recent experience we have seen more extensive information requests from HMRC when a Compliance Check is opened, increasing the burden on our clients (whether or not there has been non-compliance). Utilising the services of competent professionals to deal with your tax affairs will mitigate the risk of compliance errors and robust record keeping will be highly important should HMRC open a Compliance Check in the future. 

HMRC consultation on Research and Development Tax Reliefs 

The Government has launched a review of Research and Development (R&D) Tax Reliefs, with the intention of reviewing the eligibility and scope of the reliefs and how the reliefs benefit both the claimants and the UK economy. 

The Government aims to raise total investment in research and development to 2.4% of UK GDP by 2027. R&D Tax Reliefs have a key role in incentivising this investment by reducing the costs of innovation. Currently R&D Tax Reliefs provide significant tax benefits for innovative companies, with large companies receiving relief under the RDEC scheme by way of an “above the line” credit equal to 13% of qualifying R&D costs and small/medium companies obtaining relief under a separate scheme whereby they receive a deduction from profits of 230% of qualifying costs. 

The consultation document is aimed at firms which undertake R&D, academic institutions and accountants and their governing bodies.  The document includes a number of questions, some of which seek views on the complexity of the scheme and how this might be simplified, including the merging of the separate RDEC and SME schemes.  Opinions are also sought on R&D expenditure which is capital in nature and R&D activities which are undertaken abroad. 

There are also a number of questions which seek views on the robustness of the scheme from a compliance point of view.  There is a longstanding view amongst the accountancy profession that some R&D boutiques are submitting exaggerated claims knowing that HMRC do not currently have the resources to critically examine and challenge these claims.  The consultation document is an opportunity for accountants working within the rules when preparing R&D claims for clients to feed into the consultation to ensure it remains a valuable incentive for truly innovative companies rather than a tax avoidance opportunity for unscrupulous advisers. 

Enterprise Management Incentives 

The Government has also opened a consultation to ascertain if the Enterprise Management Incentives (‘EMI’) scheme should be extended to include more companies. The policy objective when EMI was introduced was to assist SMEs in recruiting and retaining employees who may be able to obtain a better overall remuneration package at a larger organisation. With this in mind, there are conditions that limit who can take part in the scheme.  

The EMI scheme is an employee share scheme with generous tax advantages to both the employee and the employer. The Government seeks views from businesses to establish: 

• whether the current scheme is fulfilling its policy objectives of helping SMEs recruit and retain employees; 
• whether companies that are ineligible for the EMI scheme because they have grown beyond the current qualification limits are experiencing structural difficulties (i.e. in the labour market) when recruiting and retaining employees; 
• whether the government should expand the EMI scheme to support high growth companies and how; and  
• whether other forms of remunerations could provide similar benefits for retention and recruitment as EMI for high-growth companies. 

The call for evidence suggests that EMI may become less restrictive in the future and/or that new similar tax-advantaged schemes could be introduced by the government for larger companies or those who operate in restricted trades.