UK Budget 2021 Tax Changes to be aware of

3 March 2021

We’re keeping you ahead of the latest UK 2021 Budget Changes, ensuring you have all information you need to prepare yourself and keep ahead. So, what were the announcement highlights from a tax perspective?

Against a backdrop of hope that it may be possible to resume a more normal way of living in the coming months and the need to stimulate the economy back into growth and protect jobs, the Chancellor of the Exchequer, Rishi Sunak, today set out his Budget.

After many differing views on what was likely to be announced, the first inkling of the likely direction of any changes was the report of the Treasury Committee issued on Monday and which strongly recommended that now was not the time for tax rises although it stated that it was clear this would be necessary in the longer term.

Some interesting UK Budget 2021 outcomes

They interestingly expressed the view that moderate increases in corporation tax could raise revenue without damaging growth and made the following recommendations:

• UK Government should prioritise reforming stamp duty land tax;
• Government should introduce a temporary three-year loss carry-back for trading losses and increase investment incentives for business;
• Government should also set out a tax strategy for what it wants to achieve from the tax system and identify high level objectives.

With this in mind, it is perhaps no surprise that what we got in today’s announcement in terms of tax changes was as follows…

Increase in Corporation Tax Rates from April 2023

UK corporation tax is currently levied at a flat rate of 19%. However, the Chancellor announced in his Budget Speech that this would be increased effective from April 2023.

• Under the proposals, corporation tax on profits in excess of £250,000 will be subject to tax at a rate of 25% from 1 April 2023
• Profits of £50,000 or less will still be eligible for the existing 19% tax rate, and
• Profits between £50,000 and £250,000 will be charged at tapered marginal rates

It is worth noting that close investment holding companies will be subject to the main rates regardless of profit levels.

Interestingly, for US citizens operating a business via a UK limited company treated as disregarded or as a partnership for US tax purposes, this increase in corporation tax might not be a significant concern (in fact, it might even help).

This is because of the way the US foreign tax credit system has operated since 2018, treating income derived from a foreign branch operation as falling within a different category to other earnings. This means that US citizens with carried forward foreign tax credits from, say, a former employment, cannot use those credits to offset the tax on their business operations.

By way of a very simplified example:

Let’s assume our American entrepreneur has elected to treat their UK company as a “disregarded entity” for US tax purposes, and that company is making a profit of £500,000.

• Under the existing rules, the UK corporation tax due would be £95,000 (£500,000 @ 19%)
• The individual entrepreneur would then pay US tax at a marginal rate of, say, 37% resulting in a US tax charge of £185,000, less credit of £95,000 for the corporation tax due
• So, net US tax due of £90,000, and a total tax exposure of £185,000

Of course, that example £90,000 US tax bill would have to be paid by the entrepreneur personally, not by the company, so they might need to declare a dividend (subject to some more UK tax) in order to fund the US tax bill.

Under the proposed rules, assuming a 25% corporation tax rate, the UK corporation tax due would be £125,000, with the US tax due being £60,000 (i.e. £185,000 total exposure, less credit for the £125,000 corporation tax due).

Therefore, the total tax bill remains £185,000 (total exposure), but the amount of tax payable out of the entrepreneur’s personal bank account is now £60,000, not £90,000.

“Super-deduction”

In an attempt to stimulate investment by business, the Chancellor announced a “super-deduction”, available for two years from 1 April 2021. This super deduction applies to companies subject to UK corporation tax making an investment in ‘plant or machinery’ during the two-year window.

Where that investment would previously have been allowed as a deduction at a rate of 18% per annum on a reducing balance basis, a special 130% first year allowance will be allowed provided that certain criteria are met.

Where the investment would previously have qualified only for the special capital allowance rate of 6% per annum, the first year deduction will be allowed at 50%.

Personal Tax Changes from 2021

From a personal tax perspective there was:

• a freeze on the personal allowance
• higher rate bands
• capital gains tax annual exemption
• pensions lifetime allowance and
• IHT exempt threshold at previously announced levels for 2021/22 until April 2026

Regarding IHT, as this is beyond the life of the current parliament and the next scheduled general

election whether the allowances remain frozen for that entire period will depend on any change in Government.

There were some minor amendments to holdover relief and the off-payroll working provisions, but neither make significant changes, nor ensure that the rules operate as intended. Possible changes to pensions relief, capital gains tax rates and inheritance tax did not materialise no double to the relief of many.

Other measures to be aware of

There was more money for IT for HMRC, and more money to combat fraud in connection with the various coronavirus support schemes.

There was also the announcement of Government guarantees on 95% mortgages to help the next generation get on the property ladder and reduce reliance on the “Bank of Mum and Dad” which no doubt will be welcomed by many!

In general the focus was clearly on encouraging and being careful not to take any steps which may harm economic growth and focus on reducing unemployment. Is this just a temporary postponement of the more significant tax changes previously being talked about to the Autumn Statement? Perhaps a slightly longer-term stay of execution may become clearer in the coming months.

In any case, we will be sure to share our expert insights and what this could mean for you. If you have any questions, please don’t hesitate to contact our team.