HomeInsightsBudget 2021: the devil’s in the detail…

Budget 2021: the devil’s in the detail…

Worries of inflation in excess of 4% hung over Chancellor Rishi Sunak as he unveiled his Autumn Budget and spending review for 2021.

On a positive note, he explained that the UK economy is forecast to return to pre-Covid levels by next year, and annual growth is set to rebound by 6.5% this year. Since February 2020 wages have grown in real terms by 3.4%, and unemployment is expected to peak at 5.2% next year.

So here are the highlights of the 200-page Budget Report:

A Budget that raises living standards?

The government is increasing the National Living Wage to £9.50 an hour from April 2022, and is reducing the taper rate in Universal Credit (UC) from 63% to 55%, as well as increasing work allowances in UC by £500 a year 

Recognising that fuel is a major cost for households and businesses, this Budget keeps fuel duty frozen at 57.95 pence per litre UK-wide for 2022-23. This is the twelfth consecutive freeze, saving the average UK car driver a cumulative £1,900, compared with the pre-2010 escalator. 

In addition, the duty rates on beer, cider, wine and spirits will be frozen for another year. The Alcohol Duty system will undergo a major simplification. Drinks will be taxed in proportion to their alcohol content, making the system fairer and more conducive to product innovation in response to evolving consumer tastes. Alongside this, a new relief that recognises the importance of pubs and supports responsible drinking will be introduced, with duty rates on draft beer and cider being cut by 5%.

Reducing the burden of business rates

Following a review, in the Budget the government has promised it will reduce the burden of business rates in England, and make the system fairer, more responsive and more supportive of investment. Up to 400,000 retail, hospitality and leisure properties will be eligible for a new, temporary £1.7 billion business rates relief next year. 

The government is also freezing the business rates multiplier in 2022-23. The multipliers will be kept at 49.9p and 51.2p. From 2023, a new business rates relief will support investment in property improvements so that no business will face higher business rates bills for 12 months after making qualifying improvements to a property they occupy. 

The government will continue to explore the arguments for and against a UK-wide Online Sales Tax, the revenue from which would be used to reduce business rates for retailers with properties in England and with the block grants of the Devolved Administrations increased in the usual way. A consultation will be published shortly.

Business investment promised

The government will support UK businesses by extending the temporary £1 million level of the Annual Investment Allowance to 31 March 2023. This will provide businesses with more upfront support, encouraging them to bring forward investment, and making tax simpler for any business investing between £200,000 and £1 million. 

The Recovery Loan Scheme will also be extended until 30 June 2022 to ensure that lenders continue to have the confidence to lend to small and medium-sized businesses. Finance will be available up to a maximum of £2 million per business, supporting them to recover from the impact of the pandemic and to grow. The government guarantee will be reduced from 80% to 70% to encourage the lending market to move towards normality as the economy continues to recover. 

To help businesses across the UK access the finance they need the government is: 

• Confirming over £1.6 billion for the British Business Bank’s Regional Funds to provide debt and equity finance to SMEs, and to expand the Regional Angels programme.

• Providing funding for Start Up Loans to deliver 33,000 loans to entrepreneurs across the UK looking to start or grow their business.

In addition, the Help to Grow scheme will provide further productivity support to over 100,000 SMEs around the UK through world class management training and support for digital adoption.

Budget taxes at a glance

As announced by the Prime Minister on 7 September 2021, the government has legislated for a new 1.25% Health and Social Care Levy (the Levy), to fund a historic investment in the NHS and social care.

The Levy will apply UK-wide, to the same population and income as Class 1 (Employee, Employer) and Class 4 (Self Employed) National Insurance contributions (NICs), and to the main and additional rates. The Levy will not apply to Class 2 NICs or Class 3 NICs. 

The Levy will be effectively introduced from April 2022, when NICs for working age employees, self-employed people and employers will increase by 1.25% and be added to the existing NHS allocation. From April 2023, once HMRC’s systems are updated, the 1.25% Levy will be formally separated out and will also apply to the earnings of individuals working above State Pension age, and NICs rates will return to their 2021-22 levels. From April 2023, receipts from the Levy will go to those responsible for health and social care across all parts of the UK.

Legislation will also be introduced in the Finance Bill 2021-22 to increase the rates of income tax applicable to dividend income by 1.25%. The dividend ordinary rate will be set at 8.75%, the dividend upper rate will be set at 33.75% and the dividend additional rate will be set at 39.35%. The dividend trust rate will also increase to 39.35% to remain in line with the dividend additional rate. 

The changes will apply UK-wide and will take effect from 6 April 2022. In England, revenue from this increase will help to fund the health and social care settlement announced in September with the Barnett formula applying in the normal way. This change will ensure those with dividend income make a contribution in line with that made by employees and the self-employed on their earnings.

The government will use the September CPI figure of 3.1% as the basis for uprating National Insurance limits and thresholds, and the rates of Class 2 and 3 NICs, for 2022-23. This excludes the Upper Earnings Limit and Upper Profits Limit which will be maintained at current levels in line with the higher rate threshold for income tax.

As announced in February 2021, the government will introduce a new tax from April 2022 on the profits that companies and corporate groups derive from UK residential property development, to ensure that the largest developers make a fair contribution to help pay for building safety remediation. The tax will be charged at 4% on profits exceeding an annual allowance of £25 million.

From 27 October 2021, the deadline for residents to report and pay Capital Gains Tax (CGT) after selling UK residential property will increase from 30 days after the completion date to 60 days. For non-UK residents disposing of property in the UK, this deadline will also increase from 30 days to 60 days. This will ensure that taxpayers have sufficient time to report and pay CGT, as recommended by the Office of Tax Simplification.

Indirect taxes

Duty rates on all tobacco products will increase by RPI + 2%. The rate on hand-rolling tobacco will increase by RPI + 6% and the minimum excise tax will increase by RPI +3% this year. These changes will take effect from 6pm on 27 October 2021.

Tax administration and non-compliance

The government will legislate in Finance Bill 2021-22 to reform income tax basis periods so businesses’ profit or loss for a tax year will be the profit or loss arising in the tax year itself, regardless of its accounting date.

This removes the complex basis period rules, the need to charge tax on profits twice and the need for overlap relief. The transition to the new rules will take place in 2023-24 and the new rules will come into force from 6 April 2024. 

As announced on 23 September 2021, the government will give sole traders and landlords, with income over £10,000 an extra year to prepare for MTD. MTD for ITSA will now be introduced from 6 April 2024. General partnerships will not be required to join MTD for ITSA until 6 April 2025.

As announced on 23 September 2021, the new regime of penalties for the late filing and late payment of tax for ITSA will now come into effect on 6 April 2024 for those taxpayers required 148 Autumn Budget and Spending Review 2021 to submit digital quarterly updates through MTD, and 6 April 2025 for all other ITSA taxpayers. The new regime of penalties for VAT will come into effect for VAT taxpayers from periods starting on or after 1 April 2022, as announced at Budget 2021.

The government will legislate in Finance Bill 2021-22 for further measures to clamp down on promoters of tax avoidance. The package of measures, which will take effect following Royal Assent, will: 

  • Allow HMRC to freeze a promoter’s assets so that the penalties they are liable for are paid. 
  • Deter offshore promoters by introducing a new penalty on the UK entities that support them. 
  • Provide for the closing down of companies and partnerships that promote tax avoidance schemes. 
  • Support taxpayers to steer clear of avoidance schemes or exit avoidance quickly, by sharing more information on promoters and their schemes.

Research & Development changes

Reforms to R&D tax reliefs available to companies put the emphasis on modernisation, clamping down on abuses, and the better targeting of reliefs to effectively capture the benefits of R&D funded by the UK taxpayer.

Headline announcements in the Budget included:

  • Expanding qualifying expenditure to include data and cloud computing costs, recognising that the nature of R&D has evolved since the reliefs were originally introduced.
  • Refocusing the reliefs towards innovation in the UK, targeting domestic R&D expenditure from April 2023. The Government believes this will bring the UK into line with other countries, including Australia and the USA, who do not offer relief for R&D activities performed overseas.
  • Plans to better tackle abuse of and improve compliance with the R&D tax reliefs, with more detailed announcements to be made later in the autumn.

You can read the full Budget Report on the government website.

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