Introduction

2020 was a tumultuous year full of surprises, unfortunately mostly not pleasant ones. Most people want it to be forgotten, put behind them and don’t want to be reminded of the pandemic with its implications and ramifications (although it has shown that when faced with crises our scientists, doctors and other professionals can rise to the occasion!). 2021 has started off looking like these concerns and worries will continue for some time but there is plenty else coming down the tracks for tax professionals to be concerned with.

The subject of Brexit has raised many difficult questions and caused many heated discussions sometimes even dividing families into the two separate camps. It caused the postponement of the 2019 Autumn Budget which was initially due to be held on 6 November 2019 which the then Chancellor had said would be the first Budget after leaving the EU on 31 October 2019! He had intended to set out the Government’s plan to shape the economy for the future and trigger the start of our “infrastructure revolution” but Brexit had other ideas and the Autumn Budget was pulled at the last minute as Parliament voted for a delay to the UK’s withdrawal from the EU.

Budget delays

This led to the general election which was duly held on 12 December 2019 and a replacement Budget was then forecast for either January or February 2020. In fact, the 2019 Autumn Budget never took place and the Spring Financial Statement held in March 2020 became the next Budget and had to deal with the serious issues raised by COVID-19. Instead of bringing in expected changes to tax and in particular, Inheritance Tax (“IHT”) and other reforms of CGT it had to deal with tackling the Coronavirus challenges.

In fact, the 2020 Budget was a limited one which launched the Comprehensive Spending Review 2020 (“CSR”) setting out the overall level of public spending within which the CSR was to be delivered. The CSR was due to conclude in July 2020 with detailed spending plans for public services and investment, covering resource budgets for three years from 2021–22 to 2023–24 and capital budgets up to 2024–25. This was, of course overtaken by the unexpected ferocity of the pandemic.

It was also due to demonstrate the Government’s ambitions to reach net zero carbon emissions by 2050 with petrol and diesel engines being a thing of the past. Now, sales of new conventional petrol and diesel cars and vans will be banned from sale in 2030. New hybrids will be given a stay of execution until 2035, on the condition they are capable of covering a “significant distance” in zero-emission mode.

The policy changes set out in the Spring Budget 2020, including the spending totals set for the CSR, were to have been delivered while ensuring the current Budget was in surplus, and public sector net investment did not exceed 3 percent of GDP whilst keeping debt under control. Again, COVID-19 had other ideas. Although we won’t know how big the final bill will be until after the crisis is over it is certain that the Government will have to borrow enormous amounts of money because it is spending more than it is taking in from tax. Indeed, on 25 November 2020, the Office for Budget Responsibility (OBR), which keeps tabs on Government spending, estimated that borrowing would be £394 billion for the current financial year (April 2020 to April 2021) which is the highest figure ever seen outside wartime. In context; before the crisis, the Government was expecting to borrow about £55 billion for the whole financial year meaning that borrowing is eight times the expected borrowings. This will have to be paid back, probably by increasing taxes.

Commentators expected that the Autumn 2020 Budget would outline tax increases and changes to help fund these deficits, but this was also cancelled due to COVID-19 with expected grants and loan facilities being extended at further cost to the taxpayer. The Government recognised the instability and fluidity of the pandemic when a spokesperson for HM Treasury said that given the renewed restrictions on people and businesses, “now is not the right time to outline long- term plans”.

Tax changes

The intended tax changes have been delayed but not forgotten. It was widely expected that CGT rates would, once again, be linked to an individual’s marginal rate of income tax with CGT being due at an individual’s highest marginal rate of tax jumping from potentially maximum 20 percent (28 percent if residential property is disposed of) to 45 percent. A practical impact of this could be a reduction in tax planning schemes to convert income transactions into capital transactions.

Since late last year many business owners were looking to sell and otherwise dispose of their businesses as they feared that Business Asset Disposal Relief (“BADR”) formerly known as Entrepreneurs’ Relief (“ER”) would be abolished. The writer felt then and still does that this is unlikely since ER has undergone many changes in the last few years and is a potential vote loser at an election.

There have already been significant changes, bearing in mind that CGT has already been changed to bring non-residents into its charge from 2015 for residential property and 2019 for commercial property and accelerating when CGT is due by submitting a return and making payment within 30 days otherwise penalties may apply.

UK residents disposing of residential property which is not a main residence were also brought into the same regime from April 2020 and the writer considers it very likely that IHT will be the next main target for the Chancellor, perhaps in the Budget due on 3 March 2021. Whilst the changes to be introduced are still shrouded in secrecy it is likely that IHT changes will, at least be seriously considered, if not actually made.

IHT is a very antiquated system and HMRC is keen to digitise the process. This has been accelerated by the pandemic when HMRC said in April 2020 that it was temporarily accepting printed signatures on inheritance tax (IHT) returns and scrapping cheques for the payment and repayment of IHT. It will be interesting to see if this is made permanent.

Additionally, it is widely believed that the Potentially Exempt Transfer (“PET”) regime will be simplified. It is expected that the period for making a PET will be shortened from 7 years to 5 years but also that the taper relief which applies between years 4 to 7 will be removed. Thus, if someone makes a PET and dies within 4 years and 364 days of the gift the value of the gift will be included in their death estate. Conversely if death occurs after 5 years it falls completely outside of the donors estate.

It is also expected that the current range of IHT exemptions (e.g., £3,000 per annum to an individual which can be carried forward for one year, unlimited gifts not exceeding £250 to any person provided they do not also qualify under another head, exemptions for gifts on marriage etc.) will be consolidated into one lifetime amount after which the gifts are included in the death estate. A lifetime amount of £30,000 has been mooted.

Another valuable gift exemption and one which the writer believes has not been used to maximum potential is the gift out of income regime. As long as a gift is regular and a pattern of such giving has been established then, provided it can be demonstrated that it is made out of surplus income rather than reducing the capital of the donor, these gifts are exempt and not included in the donor’s death estate. HMRC has a policy of challenging such gifts but provided the conditions have been met it is a very useful relief. This is believed to be very much at risk with the potential IHT reforms.

Other changes which are thought to be very likely include the removal of the CGT free uplift on death if an asset (e.g., assets qualifying for Business Property Relief or Agricultural Property Relief) is included in the estate. Currently, the beneficiary automatically gets the acquisition cost of the asset rebased to market value at the date of death effectively getting relief twice for the same asset. If this is removed it is unlikely to be a vote loser and with Covid costs spiralling upwards such measures must be lead contenders for reform.

Another two important measures which have been delayed but the Government has confirmed are going ahead are the VAT Domestic Reverse charge for Construction sector in March 2021 and the introduction of IR35 reforms in the private sector from April 2021. The Reverse Charge measure was originally due to be implemented in October 2019 but due to Brexit and a lot of pressure from the House of Lords and public opinion, it was rescheduled for October 2020. With the onset of Covid it was further rescheduled to March 2021.

The personal service company legislation commonly called IR35 was applied to the public sector in April 2017. These measures will be extended from April 2021 where the contractor is in the private sector and is a medium sized or large contractor.

As you can see these measures have been delayed but not forgotten. Other measures to be delayed but will be implemented include that VAT registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax Digital (“MTD”) rules for their first return starting on or after April 2022 and self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023. The Government has also published a consultation for MTD for Corporation Tax and have promised not to mandate its usage before 2026.

Upcoming deadlines

We have discussed effects of Brexit and Covid above but as a reminder the July self-assessement 2^nd payment on account for 2019–20 must still be paid by 31 January 2021 along with the balancing payment for 2019–20 and first instalment for 20/21. If you have any difficulties you should consider a Time to Pay arrangement and contact HMRC, if necessary, before 31 January 2021. Additionally, at the time of writing, there have not been any extensions to filing deadlines announced but remember that the pandemic should be grounds for reasonable excuse.

Finally, you should also ensure that claims for the Job Retention Scheme, self employed income support scheme grants and subsidised and guaranteed loan facilities are made as soon as possible and by the relevant deadlines. Tax measures may have been delayed but they have certainly not been forgotten!

Author

Tom Penman

Tax Consultant, Baker Tilley Mooney Moore