On 3 March 2021, the UK Chancellor delivered his Budget. The UK will be hoping it's past the worst of the COVID-19 pandemic but there is still a long way to go and this was reflected in the Chancellor’s approach, with what has been dubbed a “spend now, tax later” budget.
Promising to do “whatever it takes” to support British businesses through the crisis, Budget 2021 had a strong emphasis on encouraging capital spend as a kick-start to an economic recovery.
There were stark warnings of future tax increases though; with borrowing at its highest level since the Second World War and debt expected to reach 97.1% of GDP in 2023-24, the Chancellor gave notice that “Once we are on the way to recovery, we will need to begin fixing the public finances.”
We've highlighted below some of the tax announcements of most relevance to Channel Island businesses:
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 taper relief for businesses with profits between £50,000 and £250,000.
The Diverted Profits Tax rate will increase to 31%, maintaining the current differential of 6% between the DPT and the main rate of corporation tax.
From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. Investing companies will also benefit from a 50% first-year allowance for qualifying special rate assets.
However, there are a number of exceptions to the expenditure that will qualify for this “super-deduction” and the 50% allowance, including plant and machinery that is used for leasing (whether in the course of a trade or otherwise). Therefore, whether investors in real estate will be able to benefit significantly, directly or indirectly, as a result of this announcement, remains to be seen.
The main rate of capital allowances on plant and machinery will remain at 18% and the special rate relating to integral features is also unchanged at 6%.
The trading loss carry-back rule will be temporarily extended from one year to three years. This will be available for both incorporated and unincorporated businesses, although it should be noted that it is unlikely to be available to property investors except where their activities are treated as a trade.
Proposed changes to the hybrid mismatch rules were first announced in a policy document issued by HMRC on 12 November 2020 that was then subject to further consultation. A further policy document has now been issued confirming the changes, which only differ slightly from those announced in November.
In particular, these changes should make compliance with, and managing, the UK hybrid rules significantly more simple for partnership fund structures.
Legislation in Finance Bill 2021 will repeal the domestic legislation that gives effect to the EU Interest and Royalties Directive. This legislation currently provides an exemption from withholding tax on intra-group interest and royalty payments between UK and EU companies. Repeal will mean that from 1 June 2021 withholding taxes will apply to payments of annual interest and royalties made to EU companies, subject to the terms of the relevant double taxation agreement.
No changes were announced in the Budget itself, but regulations were laid following an earlier consultation. One key change resulting from these regulations is that eligible overseas life insurance companies and offshore CIV’s that also meet the non-UK real estate condition (i.e. broadly, by reference to its prospectus, UK property is not expected to comprise more than 40% of its investments), will be outside of the scope of the indirect disposals charge where they have a disposal of a less than 10% stake in a UK property rich CIV which is a company. This change is retrospective to 6 April 2019.
The temporary increase in the residential SDLT Nil Rate Band to £500,000 in England and Northern Ireland is extended until 30 June 2021. From 1 July 2021, the Nil Rate Band will reduce to £250,000 until 30 September 2021 before returning to £125,000 on 1 October 2021. In Scotland and Wales the equivalent taxes are administered by the devolved administrations.
The existing 3% additional dwelling supplement for buyers of second homes, corporate buyers and other property investors will remain. As previously confirmed, a 2% SDLT surcharge will also apply to non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021.
Despite some speculation, no changes were announced to the CGT rate or to business asset relief.
The CGT annual exempt amount will remain at its current amount of £12,300 for individuals and personal representatives and £6,150 for most trustees of settlements for the tax years from 2021-22 to 2025-26.
The income tax personal allowance will increase slightly to £12,570 from 6 April 2021 (£12,500 for 2020-21). It will then be frozen at that rate for all years to 2025-26. The basic rate limit will also increase slightly from 6 April 2021 to £37,700 (currently £35,500) and will also be frozen at that rate until 2025-26.
The government will introduce legislation in Finance Bill 2021 so that the inheritance tax nil-rate bands will remain at existing levels until April 2026.
The nil-rate band will continue at £325,000, the residence nil-rate band will continue at £175,000, and the residence nil-rate band taper will continue to start at £2 million.
A consultation will be launched later this year on draft regulations to implement the OECD’s Mandatory Disclosure Rules. This is consistent with the announcement earlier this year when the UK changed its approach to EU DAC6, such that only those hallmarks aligned with the MDR would be reportable. The introduction of rules more fully aligned to MDR should result in closer alignment to the Channel Islands, which have already introduced legislation based on the OECD MDR.
The government will introduce a new power in Finance Bill 2021 which will enable regulations to be made to implement OECD rules that will require digital platforms to send information about the income of their sellers to both HMRC and to the seller themselves. This is designed to help taxpayers in the sharing and gig economy get their tax right, and help HMRC to detect and tackle tax evasion when they do not. A consultation will take place in Summer 2021.
The Government will reform the penalty regime for VAT and Income Tax Self Assessment. The new late submission regime will be points-based, and a financial penalty will only be issued when the relevant threshold is reached.
The government published a summary of responses following the recent consultation ‘Tackling Promoters of Tax Avoidance’. This sets out a package of measures to strengthen existing anti-avoidance regimes and tighten the rules designed to tackle promoters and enablers of tax avoidance schemes.
The government has confirmed that the Finance Bill will be published on 11 March 2021. Additionally, the usual tax consultations and calls for evidence published on Budget day have been pushed back to 23 March 2021, a date being referred to as “Tax Day”, so keep an eye out for further developments over the coming weeks.
If you have any questions, please get in touch with your usual contact to discuss how the Budget might impact you or your business.