How will the UK Spring Budget 2021 affect your business?

The UK Chancellor Rishi Sunak has delivered his second Budget in extraordinary circumstances as the UK continues to deal with the impact of the coronavirus pandemic while also establishing itself outside the EU following the end of the Brexit transition period. This Budget comes at a time when there are calls for both further economic support measures and a clear fiscal plan to repair the significant deficit in public finances. How has the Chancellor dealt with these competing demands and what tax measures have been announced that businesses need to be aware of?

In our latest podcast, senior associate Josh Critchlow interviews three London tax partners – Helen Buchanan, Paul Davison and May Smith – on the business tax measures they found most noteworthy in the Spring Budget 2021.

The Chancellor has confirmed that various coronavirus tax support measures will continue, including extending the Coronavirus Job Retention Scheme (CJRS) and Self-Employed Income Support Scheme (SEISS) to provide support until the end of September 2021 and further extending the availability of the temporary reduced rate of VAT on supplies of hospitality and tourism and the SDLT holiday, with these measures being phased out in stages to avoid a ‘cliff edge’ withdrawal of support.

However, with the OBR’s fiscal forecasts showing that the UK has borrowed a record amount of £355bn in 2020-21, the highest level of borrowing since World War II, the Chancellor has clearly recognised the need to begin to fix the UK’s public finances. The podcast considers the announcement that the headline UK corporation tax rate will increase from 19% to 25% with effect from 1 April 2023. It was widely anticipated before the Budget that a corporation tax increase was on the cards as this was one of the only tax revenue raising avenues open to the Chancellor given the manifesto commitments not to increase rates of income tax, NICs or VAT. However, the jump to 25% was a surprise for some following rumours of a more gradual rate increase.

The increase in the corporation tax rate to 25% will have knock-on effects; in particular, the UK government considers that this increased rate plus the 8% bank surcharge, resulting in a combined rate of 33%, will make the UK taxation of banks uncompetitive and has undertaken to review the bank surcharge during 2021 and publish proposals in Autumn 2021 on how it intends to address this issue. The podcast considers possible issues banks should be aware of as a result of the timing of these proposals.

The government is also keen to encourage an investment-led recovery. One of the key measures to support this strategy announced at the Budget is a new “super-deduction”. This will allow companies investing in new plant and machinery to benefit from a temporary 130% first year allowance. This headline grabbing announcement is framed as a taxpayer-friendly measure, but the team highlights that there are some important points to consider for taxpayers seeking to make use of this new tax incentive.

Other measures included in the Budget billed as supporting economic recovery include a temporary extension to the carry back rules for trading losses and a review of research and development (R&D) tax reliefs. However, the devil is as always in the detail and the team discuss key points to be aware of, including how the carry back extension is expected to transform from a tax giveaway to a revenue raising measure over time and how the R&D proposals may result in a different R&D tax relief landscape rather than a broader regime.

This Budget was surprising in including very few Brexit related measures. The podcast highlights that one unexpected measure was the announcement that the UK domestic provisions implementing the EU Interest and Royalties Directive are to be repealed and considers the rationale for this measure.

Finally, prior to the Budget, there had been speculation about a number of other possible tax policies the Chancellor was considering in order to increase tax revenues, but which were not mentioned at this Budget. The team considers some of these proposals, including aligning the UK’s CGT and income tax rates, an excess profits tax and the introduction of an online sales tax, and reflect on whether these measures are completely off the table.  

Our podcast is available here. For more insights on the UK Spring Budget 2021 measures, please see our briefing by Paul Davison and John Tolman available here.