The Spring Budget 2021
The Chancellor of the Exchequer stood up today to present what he must be hoping was his "end of" or "almost end of" pandemic budget. As always there was a plethora of stats and forecasts from the OBR and the Treasury. It is clear that the state of public finances is not at all where Rishi Sunak would wish it to be - at least in normal times.
As we all know however the past 12 months have been anything but normal and we are by no means out of the woods yet. As such, much of Mr Sunak’s speech focused on the continued government support measures for the economy which are needed to help those impacted most adversely by Covid and the restrictions which have been imposed. As part of these measures the furlough scheme will be extended to September, the self-employed income support scheme has been widened in scope and the business rates relief will also be extended. Public debt in the UK will continue to grow as a result. The Chancellor said he wanted to level with the British people about the need to develop a sustainable plan to reduce the debt burden over time and warned of the consequences if this was not achieved. Whilst he had ambitious plans about how the future economy would develop, the immediate tax proposals were for tax increases rather than reductions to be achieved partly through rate rises and partly through the fiscal drag of freezing many allowances. We will have more tax proposals in three weeks’ time (on the newly announced and slightly bizarre sounding “tax day” of 23rd March) but the “highlights” at this point for me are:
1. Extension to the temporary increase of the Stamp duty land tax (SDLT) nil rate band
In a welcome confirmation of the predictions made over the last couple of weeks, the Chancellor confirmed that the temporary increase of the SDLT starting rate band threshold (from £125k to £500k) for residential property that he announced at the Summer Statement last year will be extended to 30 June 2021. This measure has provided an SDLT saving of up to £15k for individual buyers of single homes. The so-called ‘holiday’ will then be phased out gradually from 1 July 2021 to 30 September 2021 (when the starting rate threshold will fall from £500k to £250k) after which it will return to its normal £125k.
The impact of this for non-resident buyers is somewhat muted given the confirmed introduction of the 2% non-resident surcharge with effect from 1 April 2021.
2. Changes to corporation tax rates
The corporation tax rate will remain at 19% until 31 March 2023 after which it will rise to 25% for many businesses. A concession will however be given to small businesses with the introduction of a small profits rate (SPR) meaning that businesses with profits of £50k or less (this threshold being pro-rated for short accounting periods and where there are associated companies) will face no change to their tax rate and will continue to pay at 19%. The Chancellor has also confirmed that the £50k threshold will not be a cliff-edge for businesses, as companies with profits between £50k and £250k will be able to claim ‘marginal relief’ to bridge the gap between the SPR and the main rate.
Close investment-holding companies will not be eligible for the SPR.
3. “Super deduction”
In a bid to stimulate business investment, the Chancellor has announced the introduction of a temporary “super deduction” in the form of enhanced capital allowances for companies investing in plant and machinery on or after 1 April 2021 up to and including 31 March 2023. This generous measure comes in addition to the confirmation that the Annual Investment Allowance will remain at £1m until 31 December 2021.
Companies will be able to claim allowances at 130% of expenditure on most new plant and machinery investments that would ordinarily qualify for writing down allowances at 18%. An enhanced 50% first year allowance on other plant and machinery investment that ordinarily qualifies for capital allowances at 6% (commonly so-called ‘integral features’) will also be available.
Special rules will apply to determine the treatment of proceeds arising if or when assets on which the super deduction has been claimed are sold, in broad terms proceeds will be accounted for at a factor of x1.3 too.
Businesses will only be eligible for relief on new (rather than used or second-hand) plant and machinery. Restrictions apply to ring-fenced trades and expenditure incurred under a hire purchase contract. Expenditure incurred pursuant to contracts entered into prior to 3 March 2021 will be excluded (even if expenditure is incurred after 1 April 2021) and there is a specific anti-avoidance provision to counteract arrangements which are contrived, abnormal, or lacking a genuine commercial purpose, alongside existing anti-avoidance rules, including the exclusion of connected party transactions from first-year allowances.
4. Flexibility on losses
Both companies and sole traders will benefit from the temporary extension to the carry back of trading losses (up to a maximum of £2m) for up to three years (rather than 12 months). This will give many businesses much needed cash flow. Losses will be carried back against later years before earlier years. The extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022, and for unincorporated businesses in tax year 2020/2021 and 2021/2022.
The Chancellor closed his speech with the ‘bold and radical’ announcement of eight new freeport sites across England, a policy designed to ‘level up’ towns, cities and regions across the UK. Businesses located in freeport sites will benefit from a variety of tax reliefs to incentivise investment and boost employment.
Amongst the tax reliefs announced are:
- Enhanced capital allowances (at 100% for qualifying expenditure incurred before 30 September 2026) and structures and buildings allowances (at an enhanced rate of 10%, as opposed to the usual 2%, until 30 September 2026).
- SDLT relief for the purchase of land and buildings within a freeport site, subject to the land/buildings being used in a ‘qualifying manner’ within a three-year control period. The detail on what will classify as a ‘qualifying manner’ is yet to be announced but we can expect that it will require genuine business (rather than private domestic) use.
6. The EU Interest and Royalties Directive (IRD)
Finally, the IRD as it applied in UK law is being repealed, meaning that companies resident in EU member states will cease to benefit from UK withholding tax exemptions on payments of annual interest or royalties made by UK resident companies to connected companies resident in an EU member state. The UK’s ability to withhold tax on cross-border payments of annual interest and royalties will be governed solely by the reciprocal obligations in double taxation agreements. Although the repeal of the legislation has immediate effect it will apply to payments of interest and royalties made on or after 1 June 2021.
Please note: This bulletin is intended to provide a first point of reference for current developments in aspects of the law. It should not be relied on as a substitute for professional advice. If advice on a particular circumstance is required please contact your Boodle Hatfield lawyer.