The Chancellor’s Budget speech, delivered in the continuing pandemic, focused on protecting jobs. He presented a compelling if vague picture of the UK as a scientific superpower but there were few unexpected announcements on tax.
We can expect more detail on plans to fix public finances when consultations on future tax changes are published on 23 March. These are expected to include proposals about tax on private wealth and the 'three person problem' which is how work is taxed.
Nigel Bostock, Chief Executive
The Budget 2021 was always going to be a balancing act for Rishi Sunak. Although post-Brexit, the UK continues to be in the ‘eye of the storm’ of the pandemic, albeit with positive indications ahead with the progressive vaccination roll-out programme and the gradual step 1 to 4 plan to ease restrictions over coming months.
Now does not appear the time to raise taxes while pressure continues to be on the government to provide wider support to people, business, the economy and progress their ‘build back better’ Coronavirus Recovery Campaign. The Budget has effectively delivered on this agenda.
While the Budget delivered what we expected, what remains clear is that at some stage there will be a need to pay for the significant government support provided (estimated at £352 billion worth of COVID-related support out of a sum of £407 billion total fiscal support) and the consequential government borrowing obtained during the pandemic.
Now is not the time, but the balancing act will continue in the future as the need for tax rises will increase against a desire to ensure that, as this happens, such action does not unduly create a loss of public and consumer confidence to damage the economic growth needed for the ‘build back better’ agenda.
In the special episode of Crowe Casts our Partners, Jane Mackay (Head of Tax) Laurence Field (Corporate and International Tax Partner), Rebecca Durrant (National Head of Private Clients) and Robert Marchant (National Head of Corporate VAT), discuss the impact the Chancellor's statement is likely to have on business and individuals.
2021 Budget announcements
Jane Mackay, Partner and Head of Tax
Fairness about who pays the bill and honesty around the parlous state of UK public finances were the key themes of the Chancellor’s Budget speech today. We can all welcome honesty about the concept of fairness, until we are the loser. While he painted a compelling picture of the UK as a global, scientific super-power, he only hinted at how fairness will be applied and who will pay the bill for COVID.
The publication of tax consultations due on 23 March may well provide more visibility. For now, we know he intends that high growth, innovative companies will continue to benefit from tax incentives. The 130% super deduction was unexpected and welcome as it will subsidise the cost of company investment and benefit high capital sectors such as manufacturing. However, there is a sting in the tail as the relief is worth only 21% and expires before the corporation tax increase to 25% in 2023. A 25% headline rate is unexpectedly high but the reintroduction of small companies and marginal rate relief will soften the blow.
Laurence Field, Partner, Corporate Tax
It looks like ‘two’s company’ as corporate tax rates are to begin with a '2' for the first time since 2016.
The Chancellor has abandoned the decade-long plan of reducing the headline rate of corporation tax. The tax rate on large companies will rise to 25% from 2023. The logic of the previous approach was that a low tax rate would encourage investment, investment creates jobs and jobs result in the real drivers of tax – PAYE and NIC. Wages in turn get spent and drive VAT receipts.
What does abandoning the CT reductions approach mean?
The headline rate doesn’t really matter that much. Yield is what really matters. It is driven by the granting and withdrawal of reliefs from that headline rate. More reliefs are a tax giveaway, while fewer reliefs are stealth taxes. According to the OECD, in 2018 the UK got only 8% of its tax revenues from corporation tax at a rate of 19%. Germany and France, with headline rates of 33% and 30% raised only 4.6% and 5.6% of their tax revenues from companies. The headline rates mean little – though we know multinational CEOs check it before embarking on big investment projects. The increased reliefs available for investment, including the 130% super deduction for investment in innovation, should go some way to driving down the effective rate in the short-term. The ability to carry back losses to earlier periods to receive repayments of tax will reduce the effective rate of tax and improve cashflow – but both will have little impact on the post-2023 landscape. What the Chancellor gives, he can also take away – so don’t be surprised to see these reliefs reduced as tax rates go up.
Remember, corporation tax is a tax on investment returns and investments tend to be long-term – so companies will need to revaluate the projects they have at hand and determine whether the after tax rate of return post-2023 is still acceptable. If it isn’t, the project needs to be reconfigured, abandoned or reviewed.
Proper reform still to come
The bad news is that this isn’t the end. On 23 March the Chancellor is holding a ‘tax day’ where he will set out his plans for the tax system over the next few years. We can be pretty sure that the real proposals for a potential reform of the UK tax system will be buried in there. Corporate management should take a long-term view – don’t just fall for today’s headlines about the Budget but wait and see what comes out of ‘tax day’ – that will give the real flavour of how companies are to be taxed in the future.
The economist Samuel Brittan said – "Only individuals pay tax, companies are just a convenient place to collect it. Any increase in tax for companies will actually impact customers, employees and investors. That’s why the reversal of the tax reduction policy needed to be carefully calibrated. Superficially it is good politics to tax companies as they do not have a vote, only lobbying power. The impact of that tax will be felt more broadly throughout the economy – and that’s why the Chancellor has decided to tread carefully today.
We now have a spend and tax government – quite different from the tax and spend governments of the past. The Chancellor has been trying to answer the question of who pays for £407 billion of coronavirus spending and when. The answer is everyone, but not just now.
Increasing personal allowances and then freezing them, deferring an increase in tax on large companies until 2023 but allowing enhanced loss carry backs and super deductions for investment in innovation now – all suggest the Chancellor recognises that there is little point in taxing a struggling economy today.
But if it can start growing quickly in the next year or so, there will be more income and more profits to tax in later years. The political judgement is that the impact of the increases won’t be felt too much in the run-up to the next general election.
The word ‘honesty’ was used repeatedly. I suspect this was because by not increasing the headline rates of VAT, Income Tax and National Insurance, but finding other ways of raising cash, often delayed until the future – the classic way of raising stealth taxes, he wants to avoid accusations of being too stealthy.
Stuart Weekes, Partner, Corporate Tax
Innovation crucial to UK recovery. It is great news for the UK as a whole that the Chancellor has taken the opportunity to promote Innovation in this Budget. The government recognises that this is central to the strategy to boost productivity and economic growth and has a target that spending on research and development should be at 2.4% of GDP by 2027.
At such a pivotal time in the history of the UK we should be showcasing our innovative creativity. The Chancellor's decision to significantly review the effectiveness of the R&D tax credit schemes to make them fit for purpose in a rapidly changing R&D environment will be a welcome boost to many companies
Simon Crookston, Partner, Corporate Tax
It is not a surprise that the Chancellor is seeking to increase the corporation tax rate to 25% following recent press speculation. Delaying the increase to April 2023 is great for businesses in the short-term, many of whom have had to substantially cut costs over recent months in order to break even or survive. Shielding smaller businesses from this increase through a taper system is also very welcome. At the current time, many businesses are looking to reinvest in new plant and equipment and technology to enable them to innovate and get back on track, it is therefore good news that the Chancellor has announced a 130% super deduction for investment in new machinery. This will be very welcomed by business.
Overall, this was a good Budget from the Chancellor which goes a long way to setting out a road map for the country, as we start on a journey of recovery. Clearly there is still a long way to go. Stimulating the economy and supporting entrepreneurial businesses is a key part of this. I would like to have seen more from the Chancellor in relation to providing additional relief for innovative businesses rather than just the announcement of a consultation. In addition, what seems to be missing is a suite of incentives to encourage more private sector investment into growing and innovative businesses. An extension or relaxing of existing venture capital schemes would have been a welcome addition to help reinvigorate the British economy.
Louis Baker, Partner, Head of Professional Practices
Professional firms denied the 'super deduction' for investment in plant and machinery. The government are denying the new 'super deduction' of 130% capital allowances to professional firms trading as partnerships and LLPs. This new special allowance available on qualifying plant and machinery acquired from 1 April 2021 until 31 March 2023 will only be available to companies.
It seems bizarre that the government is denying this relief to many professional firms, when those firms will be looking to make investment in redesigning office floor plates for COVID-19 safe social distancing and investing yet further in their technology hardware and software.
Jeremy Cooper, Partner and Head of Retail
A Budget welcomed by the Retail sector, but State Aid restrictions will limit its impact. With non-essential retail stores closed, and not set to reopen until 12 April 2021 at the earliest, those retailers were desperate for some support from the Chancellor in the Budget. There was certainly some positive news with the extension of the Coronavirus Job Retention Scheme to September 2021 and the additional three months rates relief for retailers but will it be enough for struggling retailers?
The announcement of a £5 billion package of support for Retail, Hospitality and Leisure sectors at the weekend is to be welcomed but without a corresponding increase in the State Aid limits, many of the hardest hit retailers will be unable to benefit from this support.
Sadly there has been no mention today of an increase in these limits so I fear that we will see further store closures and job losses on the High Street as a result. The increase in the living wage, whilst commendable, will further exacerbate the job losses in Retail.
Johnathan Dudley, Partner and Head of Manufacturing
Super deduction answers Manufacturing industry’s cries. The Chancellor’s Budget generated an interesting package today. While welcome measures such as furlough extension were well-trailed, there were still a number of surprises. Generally, the Chancellor has pulled back or deferred punitive tax rises, trusting in a sharp uptick in recovery of GDP as predicted by the OBR and the tax revenues that this will generate, coupled with the fiscal drag of freezing income tax rates, to fund his continuing COVID recovery measures.
The introduction of the 130% super deduction on Investment, from first look, seems to absolutely answer the call that we were crying out for. To attract investment, enhanced relief above 19% was required and the effective 24.7% tax incentive for capital expenditure is a welcome introduction. Introduced for the next two years, it will incentivise business to invest in new machinery and processes to improve productivity and competitiveness.
Given that the headline rate of corporation tax rises in two years anyway to 25% for larger profit makers, it does actually advance the tax relief to largely that level; early.
A surprise came in the form of no immediate corporation tax increase. However, the rate rise in two years’ time, with the reintroduction of both the small company and marginal tax rates, will provide a level of complexity that will not be welcome for many and one which, when it does arrive, will drive decisions on investment, revenue expenditure timing and indeed maybe even timing of business to manage profit streams given that a marginal rate of corporation tax is always effectively greater than the full rate.
There doesn’t seem to have been the much talked about reform of Entrepreneurs Relief; yet, and so the drive to carry out corporate transactions before this is even further curtailed, removed, or the 20% rate is changed, will continue.
The measures announced to launch the European infrastructure bank, increase funding for apprenticeships and the Help to Grow schemes look eye-catching; as do the measures to stimulate R&D, ‘Green’ products and offshore wind too as there is a clear drive to ‘modernise’ both manufacturing and the products that the sector produces.
The establishment of eight new freeports send a clear signal that the country is open and keen to support international trade in the post-Brexit and post-COVID era.
Our Manufacturing Survey called for more help post-COVID to assist recovery and the new Recovery Loan scheme to replace CBILS and BBILS is welcome, though we are thin on detail as to repayment holidays, personal guarantees or servicing support and there is no sign at all of reintroducing the £1000 per employee job retention grant which so many manufacturers were banking on before it was ‘postponed’. So maybe this is now defunct?. What is possibly a new source of funding is the extension of loss relief carry back, but this is only relevant where losses were sustained in the past and tax paid.
Caroline Fleet,Partner, Corporate Tax
Short-term wins but real estate measures merely sticking plasters, with holistic review required. For the Real Estate sector, today’s Budget had some short-term wins but long-term costs.
The extension of the Stamp Duty holiday to the end of June and then the increased nil rate band to September will take some of the pressure off immediate transactions but will do little to stimulate the market long-term. It does not address the concern that SDLT rates are too high. The introduction of the 2% surcharge for non-residents from April will mean that there are still increases on the immediate horizon.
With the demise of the high street, the continued business rates holiday and reduced VAT are welcomed but a fundamental review of the business rates is needed to address the affordability and future use of these properties. The announcement of higher corporation tax rates and potentially another new property development tax following Grenfell will add more complexity into an already complex tax system for Real Estate. What is really needed is a holistic joined up review of how we tax Real Estate.
Coronavirus Job Retention Scheme (CJRS). Having extended the original 2020 furlough scheme three times, it comes as no surprise that the Chancellor has extended it once again, so it will now run to 30 September 2021. Employees will receive 80% of their wages throughout, while employers will contribute 10% in July and 20% in August and September. This will be extremely welcome to businesses that have been unable to re-start recovery. In particular, this will support the hospitality and retail sectors providing a lifeline as the country aims for a June re-opening and summer recovery.
There will be a taskforce established to tackle alleged fraud to ensure compliant funding – an important announcement given the volume of government support that has been extended to mitigate the impact of COVID. It is right that a taskforce applies scrutiny to ensure such funds are used appropriately.
Apprenticeships. In order to support future employment opportunities the current grant of £1,500 (for those aged 25 +) will be doubled to £3,000 per year with no age restriction. Whether this will have the desired effect is debatable, as the existing apprenticeship scheme has so far failed to demonstrate the impact the government expected.
National Living Wage. In line with already published plans to increase the national living wage to £10.50 per hour by 2024 for all workers aged 21 and over, the full adult rate will increase by 2.2% to £8.91 from April 2021 and the age qualification drops to 23 from 25. This increase continues to be welcome and on target.
Personal Allowances, Income Tax and National Insurance Contributions. The personal allowance will rise to £12,570 from April 2021 and the rate at which higher rates of tax are paid will increase to £50,270, Thereafter, there will be no proposed changes or increases until 2026. Taxpayers would naturally wish to see index-linked increases year-on-year, but against the alternative backdrop of higher taxation to help the economy recover, this appears to be a reasonable compromise, at least in the short-term.
Off Payroll Working / IR35 / CIS. It was not expected that the Budget would make any mention of (or postpone) the change to legislation for Off Payroll Workers in the private sector from 6 April 2021. There has been speculation of a further deferral, however it is clear that the new rules will come into play as on time and as intended. Although not particularly welcome, many businesses have taken the delay from April 2020 as an opportunity to meet the new compliance conditions. It comes as no surprise that the planned changes will proceed unheeded. The proposed changes to tighten the CIS compliance will go ahead as planned.
Shaun Young, Director, Share Scheme Plans
With statistical evidence from various sources demonstrating a positive link between employee share ownership and productivity, anything other than an extension of the benefit of the Enterprise Management Incentive (EMI) will be extremely unwelcome by the entrepreneurial businesses best-placed to underpin a recovery from the economic downturn resulting from the Pandemic.
Although the focus of this development is the review of EMI, it is clear from the questions raised by the Chancellor and the approach adopted that the review is not solely going to be restricted to EMI and could bring about the biggest shake-up in the share plans landscape for years.
Rebecca Durrant, Partner and National Head of Private Clients
The Chancellor has revealed his ‘three part plan’ to lead us
out of the pandemic and set the country on the road to recovery.
He committed to protect jobs and businesses and there was
some good news for hospitality and retail with extension to furlough, grants,
business rates and VAT reductions which should help rejuvenation.
For property investors, the expected extension to the SDLT
holiday until June for properties up to £500k and to September for properties
up to £250k was also welcome. These measures will no doubt ensure that the
current boost to the property market continues.
There was no real news for private clients as the Chancellor
stuck to his triple tax lock, although the freezing of personal allowances and
higher rate tax brackets at 2021/22 rates (£12,570 and £50,270) will
increase the tax take. All other rate bands such as inheritance tax and capital
gains tax were frozen.
The biggest impact will be for business owners; whilst we
expected the corporation tax rate to increase, a rate of 25% from 2023 was a
real surprise. This will affect the ability for business owners to withdraw
cash from their businesses so budgeting for the future will be important.
The rate of 19% on first 50,000 profits will still apply,
with rates tapered up to £250,000 welcome news for owner managers with smaller
As expected any big news around major tax reform for capital
gains tax, inheritance tax and any income tax rises has yet to be seen. Private
clients will need to wait a while longer before we have any clarity here.
Nick Latimer, Partner, Private Clients
Chancellor’s measured approach welcomed: Walking the tightrope of freezing allowances without more draconian measures will help businesses get back on their feet. I was pleasantly surprised at the measured approach to tax raising while providing more support to those who have suffered through COVID, and the additional incentives given for those investing for the future. Overall, it was a Budget that supports the economy while signalling the need to start collecting taxes to pay off our debts. We should expect more measures to follow depending on how the economy performs against the OBR and red book predictions. As long as interest rates remain low, the government may be able to walk this tightrope of freezing allowances without more draconian measures.
The extension of the SDLT holiday to the end of June, with a less generous extension to the end of September, will provide a further boost to the residential property market and much-needed relief for those tied up in the conveyancing process. The 130% super deduction for business investment in assets that qualify for plant and machinery allowances, and 50% for special rate assets such as electrical and water systems, will also encourage further investment at a time when the most important thing is for our economy to be first out of the blocks post-COVID. The ability to carry back losses three years will also help those clients impacted during COVID to obtain cash to help them get back on their feet.
Phil Smithyes, Partner, Head of Financial Planning
Green savings scheme likely to have wide appeal. It will be interesting to see the details behind the new ‘Green’ savings product to be offered by the government through National Savings & Investment later this summer. NS&I savings accounts and Premium Bonds have been a popular safe haven for investors during the pandemic and the introduction of a ‘Green’ savings scheme is likely to have wide appeal given the surge in monies invested in social impact and value based investments in recent years.
Rob Warne, Partner, Head of VAT and Customs Duty Services
Two standout headlines from this year’s budget. The first standout headline from a VAT perspective is that organisations in the hospitality and tourism sectors will continue to enjoy the temporary reduced rate of 5% VAT that was first introduced in July 2020. This lower rate will apply until 30 September 2021. To then continue to help with their economic recovery, a new rate of 12.5% will apply for another six months before the rate of VAT returns to the standard 20%. There are no changes to the sectors to which the VAT reduction applies.
The second standout headline from a VAT perspective is that the threshold for registration is to remain at £85,000 until April 2024. The 'cliff-edge' effect of exceeding the threshold and having to register and account for VAT remains, but the Government must feel this is preferable to reducing the threshold which would require even more businesses having to VAT register.
Other important announcements include a freeze on duty, which will be another boost for hospitality and tourism. The creation of eight new freeports located around the country should also boost the economy through tax reliefs, although the exact benefits these will bring need to be understood first.