UK Budget 2021 – corporation tax to increase in 2023 but COVID-19 supports are extended

Mar 03, 2021

Amidst the backdrop of the continuing COVID-19 pandemic and the UK’s departure from the EU, Chancellor of the Exchequer Rishi Sunak’s second Budget today was a balancing act premised on three foundations; supporting the economy and jobs, fixing finances and building the UK’s future economy. Key measures announced included an increase in the rate of corporation tax to 25 percent from April 2023, a new 130 percent “super deduction” for expenditure on plant and machinery by companies and the extension of key COVID-19 supports. More detail on the tax measures in today’s Budget will feature in Monday’s edition of Chartered Accountants Tax News. Read our Press Release reacting to the Budget. Further information on today’s announcements is also available on the HM Treasury and HMRC websites.

COVID-19 supports

Today's Budget gives many businesses the financial support and certainty needed as the Government begins to lift public health restrictions. The continuation of the coronavirus job retention scheme (“CJRS”) and the extensions to both the stamp duty land tax £500,000 zero rate threshold and the 5 percent reduced VAT rate for the hospitality sector will also give businesses a fighting chance of a viable comeback. The announcement that many of the newly self-employed in 2019/20 will also be eligible for the fourth and fifth self-employed income support scheme grants is also welcomed.

Job retention scheme extension

The CJRS is extended for a further five months from the end of April 2021 to the end of September 2021. There will be no employer contributions required beyond employers NIC and pensions in the months of April, May and June. This effectively means no change will be made to the current regime until July.

From July, the Government will introduce an employer contribution towards the cost of unworked hours of 10 percent in July, 20 percent in August and 20 percent in September, as the economy reopens. Employees will continue to receive 80 percent of their current salary, capped at £2,500 per month, for hours not worked.

The CJRS has protected more than 11 million jobs since its introduction last March and had been due to close at the end of April. Approximately 110,000 jobs in Northern Ireland are currently protected by the scheme. The budgeted cost of extending the scheme until September is £6.945 billion.

Self-employed income support scheme

As expected, details of the fourth self-employment income support scheme (“SEISS”) grant were announced. The fourth grant will be worth 80 percent of three months’ average trading profits, paid out in a single instalment and capped at £7,500 in total. The grant will cover the period February to April, and can be claimed from late April.

Self-employed individuals must have filed a 2019/20 self-assessment tax return which, according to the Chancellor’s speech must have been filed by midnight on Tuesday 2 March.

This means the fourth grant can now also be claimed by the newly self-employed in 2019/20, subject to the relevant criteria being met. All other eligibility criteria will remain the same as the third grant.

A fifth and final SEISS grant covering May to September will also be available. The value of the grant will be determined by a turnover test as follows:-

  • anyone whose turnover has fallen by 30 percent or more will continue to receive the full grant worth 80 percent of three months’ average trading profits, capped at £7,500;
  • anyone whose turnover has fallen by less than 30 percent will receive a 30 percent grant, capped at £2,850.

The final grant will open for claims from late July. Further details on both grants will be published in due course.

Stamp duty land tax zero percent threshold

The extension of the stamp duty land tax zero percent rate on residential properties in England and Northern Ireland costing less than £500,000 which was due to end on 31 March is now extended to 30 June 2021. From July the zero percent threshold will reduce to £250,000 until 30 September 2021 before returning to £125,000 on 1 October 2021.

5 percent VAT for the hospitality sector

The temporary 5 percent rate of VAT for goods and services supplied by the tourism and hospitality sector which was due to end on 31 March 2021 will remain at 5 percent until 30 September 2021. To help businesses manage the transition back to the standard 20 percent rate, a 12.5 percent rate will apply for the subsequent six months until 31 March 2022.

Corporation tax

From April 2023, the rate of corporation tax will increase from 19 percent to 25 percent on profits over £250,000. The rate for small profits under £50,000 will remain at 19 percent. According to the Budget documents, there will be relief for businesses with profits under £250,000 so that they pay less than the main rate.

This system of providing a small company rate of 19 percent with a tapering in the rate payable between this and the main rate of 25 percent bears some similarity to the pre-April 2015 corporation tax system, though the threshold at which the main rate of 25 percent will kick in is much lower than the £1,500,000 then in place.

Details of how this will practically operate are awaited including if the number of related 51 percent group companies (or the old associated companies rules) will need to be taken into account in assessing if a company meets the relevant thresholds.

Companies were expecting corporation tax to be reduced to 17 percent in April 2020 however that reduction was put on hold in last March’s Budget with the rate staying at 19 percent from April 2020. 

Today’s announcement of an increase to 25 percent by April 2023 will mean larger companies will be paying 6 percent more in tax in the space of a few years while smaller companies will not see the promised rate reduction of 17 percent materialise and those falling in between will see their corporation tax bill increase the closer they get to profits of £300,000.

Extended loss carry-back for businesses

A recommendation of this Institute in its July 2020 The Next Financial Year position paper, the trading loss carry-back rule will be temporarily extended from the existing one year period to three years. This will allow for much earlier recognition and relief for losses and improved cash flow position with tax refunds.

The extended carry-back will be available to both companies and unincorporated businesses as follows:-

  • Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020/21 and 2021/22;
  • Companies that are members of a corporate group will be able to obtain relief for up to £200,000 of losses in each of 2020/21 and 2021/22 without any group limitations;
  • Companies that are members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020/21 and 2021/22, but subject to a £2 million cap across the group as a whole (currently the cap for such groups is £5 million).

“Super-deduction” for plant and machinery

The Chancellor announced that from 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130 percent first-year capital allowance. More details of the measure together with draft legislation are available.

Investing companies will also benefit from a 50 percent first-year allowance for qualifying special rate (including long life) assets which can include integral features (such as those integral to a building).

This relief will not be available to unincorporated businesses; however such businesses can still take advantage of the extension of the £1 million annual investment allowance limit announced in November 2020 which will remain at this level until the end of 2021 (the limit was due to fall back to £200,000 from 1 January 2021).

Freeports

On a Northern Ireland specific note discussions will continue between the UK Government and the NI Executive to ensure the delivery of Freeports in Northern Ireland as soon as possible. As part of this the Government will legislate in future to create ‘tax sites’ in Freeports which will benefit from a number of tax reliefs as set out in the Budget documents.

Deep freeze treatment for tax allowances and thresholds

The income tax personal allowance (which applies across the UK) and the higher rate thresholds (“HRT”) are increasing as planned to £12,570 and £50,270 respectively from 6 April 2021. These will then be maintained at those levels until April 2026. 

The HRT for savings and dividend income will also apply UK-wide. The HRT for non-savings and non-dividend income will apply to taxpayers in England, Wales, and Northern Ireland.

The current inheritance tax thresholds, pensions lifetime allowance and the capital gains tax annual exempt will remain at their existing levels until April 2026.

As previously announced and legislated for in February 2021, in 2021/22 the national insurance contributions (“NICs”) thresholds will rise with inflation, bringing the primary threshold/lower profits limit to £9,568 and the upper earnings limit (UEL)/upper profits limit (UPL) to £50,270.

The UEL/UPL will then remain aligned with the HRT at £50,270 until April 2026. All other NICs thresholds will be considered and set at future fiscal events.