In the past year we have become inured to encountering things that would previously have seemed inconceivable. And so it continues. Who would ever have imagined that a Conservative Chancellor would borrow £355bn in a single year? But needs must when the devil drives; in terms both of what money needs to be spent and how it is to be repaid.
The only ostensible increase in tax rates is in raising the Corporation Tax rate to 25% for companies with profits over £250,000, with effect from 1 April 2023. The 19% rate is retained for trading and (most) property investment companies with profits up to £50,000 – but even for those companies, once profits exceed £50,000, the excess will suffer a marginal rate of 26.5% until profits reach the £250,000 limit. To avoid ‘salami slicing’ profits between multiple companies, the limits are proportionately reduced where a number of companies are under common control.
The effect will mainly be felt by larger companies, of course; but the change will certainly discourage the incorporation of profitable sole trades or partnerships. With no reduction of the dividend tax rates to reflect the additional underlying Corporation Tax, the effective overall rate of tax on profits earned in a company and extracted by way of dividend could now be as high as 54.5% in some circumstances, though more commonly 49.4% (for a higher-rate taxpayer).
For other taxes, increases are less obvious and are achieved by removing indexation and fixing allowances, tax bands, or both for the next five years. The strategy applies to
- Income Tax personal allowance
- Income Tax Basic and Higher Rate bands
- NIC upper earnings and upper profits limits
- Pension Lifetime Allowance
- Inheritance Tax Nil Rate Band
- Capital Gains Tax annual exempt amount
In fairness, Mr Sunak did not try to hide the fact that this represents a tax increase. He was less forthcoming about quite how large a tax increase: for example, by 2025/26 the Income Tax changes alone are expected to have yielded over £19bn.
The rules on setting trading losses against general income are significantly relaxed, with the carry-back period extended to three years (from the current one year).
For companies, the relief applies to losses of accounting periods ending between 1 April 2020 and 31 March 2022. The detailed legislation has not been published, but it appears that a loss for an accounting period ending on 30 April 2020 can fully benefit from the new relief; but that for one ending on 31 March 2020 cannot benefit at all. Similarly, the whole of the loss of an accounting period ending on 31 March 2022 is within the new rules; but, apparently, no part of one ending on 30 April 2022. In any event, companies are restricted to a maximum carry-back of £2m for an accounting period, with provisions to ‘share’ that amount where a group of companies is involved.
Even if the carry-back relief is available, do you want it? Will you carry back a loss to get relief at 19% or could it be better to carry it forward with the promise of relief at 25% (or even, to a limited extent, 26.5%)?
For individuals, the relief applies to losses of the tax years 2020/21 and 2021/22. Again, the maximum loss that can be carried back from each year under the new rules is £2m , and it remains subject to the restrictions that generally apply to this sort of ‘sideways relief’ – including the one that will often restrict the relief for a year to 25% of total income of the year. However, the £2m loss is ‘per individual’ not ‘per business’; this may be especially relevant in the case of a partnership or LLP.
Capital expenditure gets a significant boost – at least, it does if incurred by a company, for it is only companies that are able to claim ‘super-deduction’ capital allowances of 130% of expenditure on plant and machinery that would ordinarily be relieved only at 18% per year (and 50% on plant that would otherwise be relieved at 6% per year). The relief applies to expenditure incurred from 1 April 2021 (but not if the expenditure is incurred pursuant to a contract that was entered into before 3 March 2021).
Regrettably, businesses other than companies will have to make do with Annual Investment Allowance at 100% (if they qualify for it – most but not all do) which – as announced in November 2020 – remains at £1m until 31 December 2021.
As expected, Mr Sunak has yielded to pressure to maintain the Stamp Duty Land Tax residential nil rate band increase a little longer. It remains at £500,000 until 30 June 2021 before dropping to £250,000 until 30 September 2021 and reverting to £125,000 from 1 October 2021. Do not forget, by the way, the introduction from 1 April 2021 of the 2% surcharge for non-resident purchasers of residential property in England or Northern Ireland.
Small changes to accommodate the effects of the pandemic are scattered through the Budget. These include a tax exemption for reimbursement to employees of the cost of buying home office equipment and the ability to grant Enterprise Management Incentive options to employees whose failure to meet the required commitment of working time is attributable to being furloughed.
Finally, it seems that no detail, however small, escapes the watchful eye of Mr Sunak (or perhaps one of his team is a MAMIL). Tax relief under the Cycle to Work scheme requires, unsurprisingly, that the cycle be used mainly for cycling to work. That (unless, perhaps, you have an extremely large garden) is obviously a problem if you are following government advice to work from home. That qualifying condition is therefore being suspended until 5 April 2022.
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