Fact3 Guidance on March 2021 Budget
Last week’s budget held few surprises, mainly due to the large amount of content being leaked in advance. Now we have had a few days for full details to emerge, we take a look at the Budget 2021 Facts for SMEs.
Contrary to a lot of pre-Budget speculation, there was no mention of any new wealth tax. There were no sudden changes to Capital Gains Tax either, despite mounting rumours of an increase and the rushing through of transactions ahead of Budget day. This will come as something of a relief to any business owners planning for an exit.
COVID-19
Extending existing support
The previously announced extension of the Coronavirus Job Retention Scheme (CJRS) to the end of September was reiterated. This is potentially great news for employers and employees, the intention being to avoid redundancies whilst the economy hopefully recovers.
The Self-Employment Income Support Scheme (SEISS) is also being rolled out into 4th and 5th grants, taking that through to the end of September too. Some further good news for the self-employed is that people who were previously ineligible for the scheme, having only recently become self-employed, could qualify for the 4th and 5th grants if they have now filed their 2019/20 tax return. However, there will be restrictions on this grant if your self-employed turnover hasn’t been impacted by a reduction of at least 30% due to coronavirus.
The 5% VAT rate for hospitality, accommodation and attractions across the UK will remain in place until 30 September 2021, then increase to 12.5% until 31 March 2022 when it reverts to standard.
Various other support measures have been bolstered, including business rates relief for certain affected businesses, the Film and TV Production restart scheme, the apprenticeship hiring incentive and the Cultural Recovery Fund which will support theatres, museums and other cultural organisations.
The £500k Stamp Duty Land Tax (SDLT) nil rate band threshold will now remain until 30 June 2021, then halve to £250k until the end of September 2021 before returning to its original level of £125k from 1 October 2021.
New support packages
Picking up where the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loans (BBL) left off, a new Recovery Loan Scheme will offer loans from £25k to £10m to businesses, with the government providing an 80% guarantee to lenders.
Tax Measures
Super-deduction for companies
Some potentially great news for companies buying new assets from 1 April 2021 to 31 March 2023 came in the form of the new super-deduction for corporation tax relief purposes. This gives additional tax relief on qualifying plant or machinery spend. For example, if a company spends £100k on a new qualifying machine, it can claim tax relief on £130k. There will be a lower rate of relief for certain special rate assets and there are some detailed rules around assets acquired under HP contracts. However, when a qualifying asset is sold after such a claim, the proceeds will be taxed at a multiple of 130% too. There are some excluded assets, including cars and assets used for leasing, which may be a disappointment for some businesses.
We believe that the Annual Investment Allowance (AIA) will remain at £1m for this year and will be relevant for assets that don’t qualify for the new super-deduction.
For qualifying companies this super-deduction could be a significant boost when looking to invest in assets this year and next, and it may well prove to be a good method of economic stimulus. As you might expect, the rules surrounding this are complex and if you intend to purchase something to take advantage of the measure, you should get in touch so that we can ensure it is going to work for you in the way that you hope.
If you have an existing contract to purchase an asset before 3 March 2021, that asset will not qualify for the super-deduction even if it is physically acquired on or after 1 April.
Tax losses for companies and unincorporated businesses (loss carry back)
Another welcome announcement was the temporary enhancement of the loss carry back rules. Current rules on carrying back a trade loss by one year are being extended for accounting periods ending between 1 April 2020 and 31 March 2022, and for tax years 2020/21 and 2021/22, so that losses can be carried back for three years (starting with the later years). Enabling businesses to reclaim tax from earlier periods could provide valuable support and losses carried back can generally offset all income, not just trading income, but can only be carried back after the end of the accounting period making the loss.
Corporation tax
We were expecting some tax increases and in a blow to SMEs we have the rise in Corporation Tax, albeit with two years’ notice. The rate will jump substantially from 19% to 25% from 1 April 2023, although small businesses with profits of £50k or less will be protected by a small profits rate maintained at 19%. There is also a taper above £50k so that only businesses with profits of more than £250k will be taxed at the full 25% rate.
However, there will be provisions that look at the number of associated companies to establish entitlement to the 19% rate, so it will not be possible to set up multiple companies to each pay at 19%.
VAT
VAT registration and deregistration thresholds have been fixed for a further two years, giving much-needed certainty to smaller businesses that are not currently registered for VAT.
Personal tax
The main personal tax measures were restricted to a freezing of bandings for income tax, so the personal allowance will remain at £12,570 and the basic rate limit will remain at £37,700 from 6 April 2021 through to 5 April 2026, pushing more people into the higher earnings bracket. In addition, the National Insurance Contribution (NIC) limits will remain aligned to the higher rate threshold of £50,270.
The Capital Gains Tax (CGT) annual exemption has been frozen at the current level of £12,300 until 5 April 2026, whilst the Inheritance Tax (IHT) nil rate band remains at £325,000 and the residence nil rate band stays at £175k for the same period. Dare we take it that these measures mean any wide-ranging CGT or IHT reforms are unlikely in the near future? Only time will tell. However, it has been confirmed that a number of new tax consultations will be announced on 23 March 2021, so we could potentially know more then.
Other matters
In delivering part three of his Budget and laying the foundations for a new economy, the Chancellor announced eight new English Freeports (with more to be confirmed in the other UK countries) which will benefit from different rules to make it easier and cheaper to do businesses. There will be enhanced capital allowances for companies investing in plant or buildings within these designated areas.
There is to be a new penalty regime for VAT and Income Tax Self-Assessment which will apply to VAT from 1 April 2022 and then to Income Tax from 6 April 2023. This will work on a points-based system, with penalties proportionate to the amount of tax owed and how late payment is, issued for every missed submission on and after the relevant points threshold is reached:
no penalty will be payable on tax paid up to 15 days after the due date,
a 2% penalty will apply on tax paid between 16 and 30 days after the due date,
a 4% penalty will be chargeable on tax unpaid after 30 days, and
a further 4% annualised penalty rate will be chargeable on outstanding tax due after 30 days.
Mr Sunak also revealed consultations into Research and Development (R&D) tax reliefs and the Enterprise Management Incentive scheme (EMI). On the latter, there is a call for evidence about how it can be expanded to ensure it is offering effective support for its intended purpose of enabling companies to recruit and retain key employees.
No changes to the R&D tax credit system were announced except confirmation that from 1 April 2021 there will be a cap on the R&D tax credit that a business can claim in one year under the SME scheme. The cap will be £20,000 plus three times the company’s total PAYE and NICs liability, but won’t apply in certain circumstances, including where no more than more than 15% of qualifying R&D expenditure is on subcontracting the work to connected persons. The Chancellor also announced the launch of a consultation into how the R&D relief scheme influences R&D which will consider, amongst other things, merging the two current schemes, and whether more information should be required at the start of a claim and more routine investigation of claims undertaken. Recent announcements indicate an intention to encourage and support R&D but through a more targeted system.
Laura Brogden, Fact3 Partner said, “Whilst there is a lot to be encouraged by, including the extended support through the CJRS providing a lifeline to many. We are now starting to see signs of how the costs of the extended support will be recovered, the increase in the Corporation Tax rate being a particular concern for many of our SME clients and we will be working alongside them in the coming months in order prepare appropriately.”
We will be issuing further updates in due course, but if you have any specific questions please feel free to get in touch in order to discuss in relation to your own circumstances.
