Chancellor Rishi Sunak delivered his 2nd budget on Wednesday 3rd March. Mr Sunak’s task was to establish how he proposes to support the economy through the rest of the pandemic, which mercifully appears to be close to the end. And secondly, to chart a course out of a financial crisis which it is estimated to have permanently wiped out 3% of our GDP. Not an easy conflict to resolve, however, on balance his response was hard to fault. He chose to extend the various pandemic support packages until September, long after the last of the lockdown restrictions are due to be lifted. That made it essential for Mr Sunak to outline his measures to reduce the deficit and to bring the UK borrowing under control.
Pandemic Support Packages
Having originally been introduced in March 2020 as a 2 month emergency measure, the Coronavirus Job Retention Scheme (Furlough) has been extended to September 2021. The scheme will run at its current level where the Government will fund the full 80% paid to the employee until June. In July the employer will contribute 10% whilst in August and September this will increase to 20%. Employees will become eligible as long as they were employed on 2nd March 2021 and an RTI submission had been made to HMRC between 20th March 2020 and then notifying a payment of earnings for that employee.
For the self-employed, the Budget has confirmed details of the 4th and 5th SEISS grants. The first of these will be 80% of average trading profits (similar to the previous 3 grants) and can be claimed from late April 2021. The fifth and final grant can be claimed from late July 2021 and will be turnover related, with a larger grant being paid to those whose income has fallen the most.
Whilst the existing government-guaranteed coronavirus loan schemes, such as Bounce Back and CBILS, are due to come to an end on 31st March 2021, it has been announced that these will be replaced by the Recovery Loan Scheme. These loans can be between £25,000 and £10 million and the government will provide the lenders with a guarantee of 80%. This scheme will be open to those who have already received support under the existing loan schemes.
The temporary 5% reduced rate of VAT for certain areas of the hospitality sector was due to end on 31st March 2021. This has now been extended to 30th September 2021. For those relevant businesses, the rate will then rise to 12.5% before reverting back to the standard rate of 20% in April 2022. This is a most welcome announcement for restaurants, hotels, takeaways, caravan parks, etc. which can hopefully start to generate meaningful revenues again soon in order to benefit from this support.
Having been re-elected in December 2019 with a manifesto which committed to not increasing income tax, national insurance or VAT rates, the Chancellor may have felt that he was working with one hand tied behind his back in his quest to reduce the annual deficit. As far as raising more tax revenue was concerned he was very much backed into the “Corporation Tax” corner and will raise the basic rate from 19% to 25% in April 2025. This reverses a very long trend of reductions in corporation tax stretching back several decades. The last time this tax was increased in the UK was in 1974, before many of our staff and clients were born! For those companies with profits of less than £50,000 the rate will remain at 19%, whilst for those making between £50,000 and £250,000 the rate will taper up from 19% to 25%. Only those companies (estimated to be less than 10% of all companies in the UK) will pay corporation tax at the full 25%. This increase is expected to bring the Treasury an additional £17 billion per annum.
Whilst he felt unable to increase income tax rates due to the manifesto commitment, the Chancellor has chosen to freeze all significant tax thresholds from next year until the end of this parliament. It is estimated that this will result in 1.3 million more people being drawn into income tax with a further 1 million finding themselves paying the higher rate of tax for the first time – the so-called Fiscal Drag. This “hidden tax” is estimated to bring an extra £8 billion a year to the Treasury in due course.
As we know, many companies have suffered losses over the last year. To support these businesses, they will be allowed to carry back up to £2 million of these losses for up to 3 years (rather than the standard 1 year) in order to obtain a repayment of tax paid. This can be a welcome cash flow boost to those businesses which have suffered the most during the pandemic.
The biggest and most welcome “surprise” in the budget was the announcement of the “Super-deduction”. This applies to limited companies which invest in new plant & machinery between April 2021 and March 2023. This will allow companies to claim allowances of 130% on new plant & machinery investments which would normally qualify for 18% allowances. This is a genuine benefit to companies and, of course, is intended to stimulate investment over a period when we need the economy to get back on its feet again.
Other announcements (and “non” announcements)
The new rates of National Minimum Wage were confirmed with the hourly rate for workers aged 23 and over increasing to £8.91. This takes effect from 1st April 2021, only a few weeks away now.
We have assisted many clients in recent years to make claims under the R & D tax credit scheme and with the corporation tax rate due to rise in 2023 these will become even more valuable. There were a few amendments to the scheme which had been announced previously and which are now confirmed. However, the Chancellor also mentioned that there will be a more widespread consultation process on the current R & D schemes to ensure that they remain fit for purpose and that the UK remains a scientific and technological superpower. He also hinted that the government are not comfortable with how some of the R & D tax “specialists” who prepare claims for companies are conducting their business and so we may see some welcome policing being introduced into this area.
After much speculation on potential changes to Inheritance tax and, in particular, to Capital Gains Tax, none of any significance were announced. This is one area where the government should consider the impact of treasury leaks in advance of future Budgets. We saw many people rush through transactions on business and property sales in advance of anticipated (and leaked) tax changes which did not materialise and which, in hindsight, they may have preferred not to undertake.
You will find more details on the above as well as many other relevant matters in the Drummond Laurie budget report which can be found here.
Please do contact your usual DL advisers to discuss and to get further clarity on any matter which you believe may be of relevance to you and your business.