Tax: Budget briefing

As the COVID-19 pandemic continues, the Government delivered a budget focused on alleviating the tax burden on the sectors hardest hit by lockdown and encouraging investment in a stagnant economy. Businesses have welcomed the changes, but it remains to be seen whether they will be enough to kickstart the UK’s economic recovery.

Corporation tax

The Chancellor confirmed that the corporation tax rate will remain at 19% for the time being, rising to 25% from April 2023. The small profits rate will also return, albeit in a much more limited form; only companies with profits of £50,000 or less will be allowed to remain on the 19% rate. Relief will also be available for businesses with profits under £250,000, ensuring that they also pay less than the full 25% rate.

Certain related taxes will also be amended in connection with the planned corporation tax hike. The diverted profits tax rate will rise to 31% from April 2023 to ensure that it still disincentivises profit shifting. The Government also plans to lower the bank surcharge, to ensure that the combined level of bank taxation does not damage the UK banking industry. The new surcharge will be revealed in the 2022 budget.

The new Finance Bill also introduced several enhanced capital allowances, available for companies making investments in plant and machinery. The most generous of these is the “super-deduction” – a 130% first-year allowance available on all assets which would normally qualify for the 18% “main rate”. For assets which qualify for the “special rate”, a lower first-year allowance of 50% will be available. 

This super-deduction is, and is meant to be, a quick injection to help restart the economy, not surgery to reconfigure the UK’s business tax landscape. The enhanced allowances announcement has been welcomed, though it will add considerable complexity to the system as the enhanced allowances will need to be factored in when the assets are subsequently sold.

The Government also intends to extend temporarily the period over which businesses may carry back trading losses from one year to three years for company accounting periods ending between 1 April 2020 and 31 March 2022.

Freeports

The Chancellor has also announced the designation of eight English freeports, with more to follow in the future. Discussions are continuing with the devolved administration for the creation of freeports in Scotland, with the expectation that two will be designated from potential sites including Aberdeen, Dundee, Montrose, Rosyth, and Cromarty. Businesses operating within the freeports will benefit from a number of tax advantages, including a 100% capital allowance on plant and machinery used primarily within the freeport, full business rates relief, and an exemption from LBTT on the transfer of land or property used for a commercial trade. Businesses constructing or renovating non-residential buildings or structures within the freeport site will also benefit from an enhanced 10% rate of structures and buildings allowance.

VAT

In a move no doubt intended to prolong the survival of the industries hardest hit by the COVID-19 pandemic, the Government has chosen to extend the temporary reduced rate of 5% VAT for the tourism and hospitality sectors. This is set to rise to 12.5% on 1 October 2021, with the return to the standard rate taking place on 1 April 2022.

Businesses which took advantage of the VAT deferral scheme last year can now opt into the VAT deferral new payment scheme, which will allow them to make the deferred VAT payment in up to 11 interest-free instalments. Those who wish to take advantage of the scheme must opt in before 1 July 2021, and early adopters will be able to pay in the maximum number of instalments, so it is important not to delay.

Income tax

Scottish taxpayers will continue to pay income tax at the current rates, with all income thresholds except the top rate increasing in line with inflation.

Business rates

It was announced in advance of the UK Budget and after the Scottish Budget that the business rates holiday in Scotland is to be extended for a further 12 months for the retail, hospitality, leisure and aviation sectors until 31 March 2022.

Businesses across the country will be also able to claim an income tax or corporation tax deduction equivalent to any repayment of coronavirus support or relief made to a public authority, including business rates relief repayments.