Setting out, during a time of ‘challenge and change’, the 2021 Budget, including some key new tax policies and measures to begin to navigate out in the wake of COVID-19.
As the UK Government continues its unprecedented spending to support the economy and jobs, the Chancellor, on 3rd March 2021, announced his first measures to promote a recovery whilst addressing the growing deficit. These included:
- An increase in Corporation Tax rates to 25% from April 2023
- A new super deduction of 130% for investment in plant and machinery
- Ongoing support measures for businesses to secure their survival and emergence from the pandemic
- The announcement of 8 new freeports across England attracting a wealth of tax incentives for new investment
Corporation Tax Rates
The rate of corporation tax will increase, from April 2023, to 25% on profits over £250,000. The rate for small profits under £50,000 will remain at 19% and there will be relief for businesses with profits under £250,000, so that they pay less than the main rate. In line with the increase in the main rate, the Diverted Profits Tax rate will rise to 31% from April 2023 so that it remains an effective deterrent against diverting profits out of the UK.
Super-deduction for Expenditure on Plant and Machinery
The Government is seeking to stimulate business investment by introducing a “super-deduction” for qualifying expenditure on plant and machinery from 1 April 2021 to 31 March 2023. The temporary tax reliefs will be:
- A super-deduction in the form of an enhanced first-year allowance of 130% on assets that ordinarily qualify for 18% main rate writing down allowances.
- A first-year allowance of 50% on assets that ordinarily qualify for 6% special rate writing down allowances.
Multiple conditions and exclusions apply, including that the expenditure must be incurred from 1 April 2021 to 31 March 2023 and expenditure is excluded if incurred under a contract made before 3 March 2021. An additional tax savings of up to £25 per £100 invested will be welcomed by businesses, but these enhanced allowances are only available in the period of investment. For many, this may simply create additional tax losses to carry forward.
Loss carry back relief
The provisions allowing the carry back of trading losses against total profits will be temporarily extended from the existing one year to three years. Companies will be able to obtain relief for up to £2 million (per group) of losses in each relevant accounting period ending between 1 April 2020 and 31 March 2021 and between 1 April 2021 and 31 March 2022, subject to a group level limit of £2 million. The amount of trading losses that can be carried back to the preceding year remains unlimited for companies.
Repeal of Interest and Royalties Directive
Following the UK’s withdrawal from the European Union and the end of the transition period on 31 December 2020, the Government has resolved to repeal the UK’s implementation of the Interest and Royalties Directive with effect for payments made from 1 June 2021 (although there are provisions to prevent the payments due after 1 June 2021 being brought forward to benefit from the rules). From 1 June 2021, payments of interest and royalties to EU associated enterprises which would have previously been exempt will now be subject to UK income tax at a rate of 20% (unless a double taxation agreement applies).
Interest and royalty payments from UK companies to major EU territories (including Germany, France, the Netherlands and Spain) are likely to qualify for relief under the relevant double taxation agreement, such that the repeal of the Interest and Royalties Directive is unlikely to have a significant economic impact. However, there are a number of instances where either interest or royalties are not reduced to 0% under the relevant double taxation treaty (e.g. interest/royalties paid to Italy, royalties paid to Luxembourg, interest/royalties paid to Portugal). Companies making interest payments under the directive may need to make new treaty claims to obtain reduced withholding rates although this should not be required for royalties.
Changes to Hybrid Mismatch Rules
Following on from the published response to the Consultation in November 2020, the Government has confirmed that it will be amending the UK’s hybrid mismatch provisions. Key changes are to the treatment of exempt investors under the hybrid entities provisions, extension of dual inclusion income for groups and the exclusion of investors with less than 10% in transparent funds. These changes should put the UK provisions on a level playing field with comparable provisions in other European territories (such as Luxembourg and the Netherlands).
Reporting rules for digital platforms
The Government will introduce legislation that enables regulations to be made implementing the OECD’s rules on reporting by digital platform operators. The provisions will require UK digital platform operators that facilitate the provision of services by UK and/or other taxpayers to report information regarding the income of sellers to both HMRC and the sellers. These provisions are not intended to apply to digital platforms which facilitate the sale of goods.
The provisions will be subject to consultation in Summer 2021 and are not expected to come into force before 1 January 2023, with the first reports not due until 1 January 2024.
COVID-19 support measures
The Government is extending the Coronavirus Job Retention Scheme (CJRS) until the end of September 2021. Employees will continue to receive 80% of their current salary for hours not worked. From July, the Government will introduce an employer contribution towards the cost of unworked hours of 10% in July and 20% in August and September.
The Government will continue to provide eligible retail, hospitality and leisure properties in England 100% business rates relief from 1 April 2021 to 30 June 2021 (followed by 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2 million per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties).
The Government will provide ‘Restart Grants’ in England of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses. From 6 April 2021, the Recovery Loan Scheme will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million.
Freeports
The Government has announced plans to create eight “Freeports” in the UK in early 2020. The tax incentives available will include enhanced capital allowances (a first-year allowance of 100% for qualifying expenditure on new and unused plant and machinery for use within the tax site until 30 September 2026), an enhanced rate of structures and buildings allowance of 10% on a straight-line basis for expenditure on qualifying assets brought into use by 30 September 2026 and an SDLT relief for purchases of land and buildings within a Freeport tax site.
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