On 3 March 2021, UK’s Chancellor Rishi Sunak announced the 2021 Budget, outlining the state of the economy and the government’s fiscal plans for the near to medium term. As expected, the chancellor’s speech focused on changes to tackle the economic impacts of COVID-19 and to protect jobs going forward. However, the 2021 Budget documents issued immediately after his speech contain some less well-publicized measures that will be of interest to larger businesses. Further legislation to implement yesterday’s announcements will be published later in the month, alongside consultation documents.
- The UK corporation tax rate for large businesses will increase from 19% to 25%, taking effect from 1 April 2023.
- Consistent with the government’s pre-election promises, there will be no increase to the headline rates of income tax on individuals, capital gains tax or value-added tax (VAT), although the thresholds for such taxes will be frozen at the 2021 amounts.
- In a move to increase listings of special purpose acquisition companies, or “SPACs,” on the London Stock Exchange, the government plans to remove barriers to listing these blank-cheque companies.
- A new bank headquartered in Leeds will provide financing for renewable and clean energy infrastructure projects across the UK to help achieve net-zero emissions by 2050.
In general, the UK is providing some short-term relief and incentives to invest in the UK in exchange for a more long-term tax hike to take effect in two years. The short-term relief includes temporary “super deductions” for UK plant and machinery investments, a temporary loss carry-back provision, and sweetened R&D incentives.
As justification for the corporation tax hike, the Chancellor recited that it is “fair and necessary” for businesses to contribute to the UK’s economic recovery. The increase will apply only to companies’ annual profits in excess of £250,000. With the backdrop of the highest level of government borrowing since World War II, and the Conservative Party’s pre-election promise not to increase the rates of income taxes on individuals, capital gains tax and VAT, the corporation tax increase is not surprising. However, whether the short-term incentives will be enough to encourage businesses to keep investing in the UK may depend on how the future tax increases are projected to affect the bottom line compared to if profits were earned in competitor jurisdictions (after accounting for any new measures in those countries to recoup the cost of the pandemic).
Reading the tea leaves, the UK may be an early mover in what is expected to be a trend toward higher taxes across the globe. For example, in the US, President Biden wants to raise the corporate income tax rate from 21% to 28%. But the UK’s increase in the corporation tax rate does not take effect for two years, so perhaps the 25% rate is a statement of intent rather than a firm policy, as there is time to change it before 2023.
Here’s a breakdown of some of the significant tax provisions in the 2021 Budget of interest to UK businesses and individuals and non-UK multinationals.
Business Tax Provisions
- Corporation tax: The rate of corporation tax payable by UK companies on profits exceeding £250,000 will increase to 25% from 19%. This change will go into effect in two years, from 1 April 2023. According to the chancellor, following the increase, the UK corporation tax rate will still remain among the lowest in the G7. Companies with profits of £50,000 or less will continue to pay corporation tax at 19% and companies with profits between £50,000 and £250,000 will pay a tapered rate between 19% and 25%. There will be no change to the rates applying to companies taxed on ring-fence profits.
- Diverted profit tax: To maintain its current differential with the main UK corporation tax rate, the diverted profit tax rate will also increase by 6%, from 25% to 31% from 1 April 2023. This tax is aimed at companies that enter into business arrangements that divert profits from the UK.
- Temporary “Super Deductions”: Companies which invest in plant and machinery between 1 April 2021 and 31 March 2023 may be able to benefit from “super deductions”. A “super-deduction” is where 130% or 50% of qualifying capital expenditure may be claimed as a relief in the first year of ownership where the plant or machinery in question would ordinarily have qualified for the 18% or the 6% writing down allowances rate, respectively. Investments in plant and machinery used in a ring-fence trade are excluded from this measure. The upfront super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive. However, where such plant or machinery is disposed, a balancing charge must be brought into account. Legislation will be introduced in Finance Bill 2021 to maintain the current temporary £1,000,000 Annual Investment Allowance limit until 1 January 2022.
- Interest and Royalties Directive (IRD): The government will repeal domestic legislation so that from 1 June 2021 the IRD will no longer be available to eliminate UK withholding taxes on payments of interest and royalties to connected companies in the EU. This is the case even where exemption notices have been issued with an expiry date extending beyond 1 June 2021. Following 1 June 2021, payments that would previously have benefitted from the IRD may now be relieved from UK withholding taxes only if so provided in the double tax treaty between the UK and the relevant EU member state. This change will put additional pressure on analysis of treaty requirements, such as limitation-on-benefits provisions.
- Extension of loss carry-back rules: For accounting periods ending between 1 April 2020 and 31 March 2022, the time period for carrying back trading losses will be extended from one year to three years, with such losses off-set against profits of the most recent years first. The amount of losses that can be carried back to the preceding year remains unlimited. After carry back to the preceding year, a maximum of £2,000,000 of unused losses will be available for carry back against profits of the same trade to the earlier two years. The £2,000,000 cap will also be subject to certain group-level restrictions and requirements to apportion losses between group companies.
- Research and development (R&D) tax reliefs consultation: The government has published a consultation that will focus on the nature of investment in R&D by private enterprises and the manner in which such investment is supported by R&D relief schemes. The consultation, which will close on 2 June 2021, will consider all elements of the two R&D tax relief schemes (the ‘Research and Development Expenditure Credit (RDEC)’ and ‘the small and medium-sized enterprise (SME) tax credit scheme’).
Individual Tax Provisions
- Income tax/NICs: As previously announced, the personal income tax allowance and the income tax higher rate threshold (and upper earnings limit/upper profits limit for National Insurance contributions (NICs)) will increase to £12,570 and £50,270, respectively, from 6 April 2021. Following today’s announcements, these thresholds will now remain at such levels until April 2026.
- Capital gains tax: Despite rumors in the press, the rate of capital gains tax for individuals has not changed, and neither has the annual exempt amount of capital gains tax (i.e, £12,300).
- Registration and de-registration thresholds: In an effort to give businesses certainty, VAT registration and de-registration thresholds which are £85,000 and £83,000, respectively, will remain fixed until 31 March 2024.
- Hospitality and tourism sectors: The temporary reduced rate of 5% VAT will be extended for the tourism and hospitality sectors until 30 September 2021. A 12.5% rate will apply for the subsequent six months until 31 March 2022, with the full 20% rate being reinstated thereafter.
Important Non-Tax Provisions
- UK listing review: The UK’s Finance Minister welcomed the review into lifting barriers that apply to UK listing. These reforms would facilitate and incentivize the listing of SPACs on the London Stock Exchange.
- UK Infrastructure Bank: A new bank headquartered in Leeds will provide financing in respect of private and public authority infrastructure projects across the UK in order to meet the government’s “net-zero” emissions target by 2050.