In this article, the Institute’s UK Tax Specialist Leontia Doran examines the main tax provisions in the UK’s Autumn Budget 2021.

Introduction

Last month’s Autumn Budget merely tinkered at the edges of the UK tax regime. Northern Ireland specific matters also featured in the Budget publications. And buried deep in the Budget Day publications was the announcement that basis period reform is to move to a tax year basis of assessment.

There were no changes to capital gains tax (“CGT”) rates despite the Office of Tax Simplification’s (“OTS”) November 2020 report, nor were there any changes on inheritance tax which were also potentially expected after another OTS review. New green taxes also did not feature.

Basis period reform is proceeding

The Budget publications and an email from HMRC to Chartered Accountants Ireland confirm that the Government is proceeding with basis period reform for taxing sole traders and business partnerships. Chartered Accountants Ireland recently wrote to the Financial Secretary to the Treasury calling for plans to move to a tax year basis to be shelved in light of the clear need for more detailed consultation on basis period reform. The Institute also submitted evidence last month to the House of Lords Finance Bill Sub-Committee inquiry on basis period reform, which has now been recognised as written evidence.

The change to the basis period rules, which it was announced last month would be delayed one year to apply from 2024/25 with a transition year in 2023/24, will amend the way profits are assessed for each tax year. This will move from current year basis (the taxable profits of a 12-month set of accounts ending in the tax year) to tax year basis i.e., the taxable profits arising in the tax year itself.

Northern Ireland

The main Budget document confirms that if an agreement is reached with the EU, the Government will legislate to extend the VAT margin scheme to apply in Northern Ireland on a limited interim basis in respect of motor vehicles sourced from GB for the period until the second-hand motor vehicle export refund scheme is implemented. Amongst other EU exit tax related matters, Chartered Accountants Ireland has and will continue to discuss the VAT second hand margin scheme issue with HMRC and seeks regular updates on progress towards an agreement with the EU.

In accordance with the interim arrangement, second-hand motor vehicles first registered in the UK prior to 1 January 2021 are available to sell under the VAT margin scheme in Northern Ireland during that time period.

Under the second-hand motor vehicle export refund scheme, businesses that remove used motor vehicles from GB for resale in Northern Ireland or the EU may be able to claim a refund of VAT following export. According to the Budget documents, this scheme is designed to ensure that Northern Ireland motor vehicle dealers will remain in a comparable position as those applying the VAT margin scheme elsewhere in the UK.

The main Budget document also announced (page 63) £4.5 billion in additional funding for the Northern Ireland Executive through the Barnett formula across 2020/21 and 2021/22.

The main Budget document (page 131) also refers to supporting “the levelling up of Northern Ireland’s economy with the rest of the UK.” The Institute’s September survey of members on fiscal devolution denotes that two in every three respondents favour the introduction of a devolved corporation tax rate for Northern Ireland, with almost nine in ten of the belief that the rate should be less than the current 19 percent. This has recently been discussed with the Fiscal Commission and the Institute will continue to campaign for a lower corporation tax rate for the region as an important element which would allow the NI economy to “level up”.

The first freeport tax sites in England are expected to begin initial operations from November 2021,however there is currently no news on the potential for a Northern Ireland freeport although the Government has stated that it “remains committed to establishing at least one Freeport in Scotland, Wales and Northern Ireland”.

Business taxes

Changes to the R&D tax relief regime, a further extension to the £1 million annual investment allowance (“AIA”) limit, the removal of cross-border group relief, more information on the new residential property developer tax, enhancements to the creative sector tax reliefs and the transition to global tax reform feature.

The main Budget document (pages 146–147) also contains details of other measures badged under “Other business taxes” which includes an announcement on changes to the banking sector corporation tax surcharge.

R&D tax relief changes

Following consultation and as recommended by this Institute, the categories of qualifying expenditure for R&D tax relief purposes are to be expanded to include data and cloud costs.

The Budget documents also confirm that reforms will be implemented “to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK, and to target abuse and improve compliance.” The Chancellor’s speech referred to this as focusing R&D tax reliefs on domestic activity taking place in the UK.

These changes will be legislated for in Finance Bill 2022/23 and will take effect from April 2023. Further details of these changes and next steps will be set out as part of the Government’s further tax administration and maintenance announcements later in the autumn.

AIA £1 million limit extended

At the 2021 Spring Budget the Chancellor confirmed that the AIA limit which provides 100 percent relief for expenditure on plant and machinery and integral features would remain at £1 million until 31 December 2021 after which it would fall to £200,000. Last month’s Autumn Budget announced there will be no reduction from 1 January 2022 and that the limit will remain at £1 million until 31 March 2023.

It should be noted that the AIA is available to both companies and unincorporated businesses however the super-deduction and 50 percent first year allowance announced at the 2021 Spring Budget which are available until 31 March 2023 are only available to companies.

Removal of cross-border group relief

Finance Bill 2021/22 will abolish cross-border group relief and other related loss reliefs from 27 October 2021. These reliefs were introduced as a result of the CJEU case Marks and Spencer v Halsey, which is heralded as being responsible for the introduction of cross-border group relief in various countries across the EU including the UK, which introduced its provisions in Finance Act 2006.

HMRC has published a policy paper setting out more detail on this change. The measure also amends legislation that limits the amount of losses that an EEA resident company trading in the UK through a UK permanent establishment can surrender as group relief.

These changes will take effect for company accounting periods beginning on or after 27 October 2021. Transitional arrangements will apply for accounting periods which straddle this date.

Residential property developer tax

More information was provided on the new residential property developers tax (“RPDT”) for corporates announced in February 2021 for which draft legislation was published last month. The RPDT applies to profits arising in accounting periods ending on or after 1 April 2022.

It is confirmed that the tax will be charged at 4 percent on profits exceeding an annual allowance of £25 million.

Creative sector tax reliefs enhancements

A number of changes were announced to the various creative sector tax reliefs.

• The museums, galleries and exhibitions tax relief (“MGETR”) which had a sunset clause of 31 March 2022 is now extended a further two years and will now end on 31 March 2024;
• From 27 October 2021, the headline rates of relief for theatre tax relief (“TTR”), orchestra tax relief (“OTR”) and MGETR will temporarily increase from 20 percent (for non-touring productions) and 25 percent (for touring productions) to 45 percent and 50 percent, respectively;
• From 1 April 2023, these rates will be reduced to 30 percent and 35 percent and will return to 20 percent and 25 percent on 1 April 2024. MGETR will expire on 1 April 2024 and no expenditure from this date will be eligible for relief;
• Also from 27 October 2021, OTR rates will temporarily increase from 25 percent to 50 percent, reducing to 35 percent from 1 April 2023 and returning to 25 percent on 1 April 2024;
• From 1 April 2022, “changes will be made to better target MGETR, TTR and OTR and ensure that they continue to be safeguarded from abuse.”; and
• From 1 April 2022, production companies will be able to switch between claiming film tax relief and high-end TV tax relief during production, so that relief is not lost should a company decide to change their distribution method.

Transition to global tax system

The UK has also agreed a route forward to transition away from its digital services tax (“DST”) towards a new global tax system aimed at ensuring multinationals pay their fair share in the countries where they do business.

The deal struck by the UK, US and other European countries outlines a DST-credit system which will bridge the gap between the UK’s DST and the start of the new system – which is due to be implemented in 2023.

On 8 October 2021, OECD-led discussions resulted in 136 countries agreeing a plan for a new system where multinationals pay their fair share of tax in the countries they do business (known as Pillar One), whilst countries operate a minimum 15 percent corporation tax rate (known as Pillar Two).

Corporate re-domiciliation

The Government also intends to make it possible for companies to re-domicile and therefore easier to relocate to the UK and is seeking views via a newly opened consultation on how best to do this. This is designed to allow companies to take advantage of the UK’s infrastructure and skills, while promoting jobs, innovation and investment in the UK.

Online sales tax consultation (“OST”)

The Government will also continue to explore the arguments for and against a UK-wide OST and will publish a consultation shortly. If introduced, the revenue from an OST would be used to reduce business rates for retailers in England. The block grants of the Devolved Administrations would be increased in the usual way.

Capital gains tax

The time limit for making a CGT return and the associated CGT payment on a disposal of UK land and property is now extended from 30 days to 60 days. This takes into consideration feedback from stakeholders, including this Institute, in respect of problems experienced with the 30 day reporting and payment system. It was also announced that the Government will be legislating to assist with the expansion of the dormant asset scheme.

Broadly this will ensure that a disposal for capital gains purposes doesn’t arise simply because a dormant asset has been moved into the scheme. Instead, a capital gain or loss, where there is one, arises only at the point that a person exercises their successful right to a reclaim.

Under the changes to the CGT reporting and payment regime for disposals of UK land and property, taxpayers with a completion date on or after 27 October 2021 now have 60 days to report and pay any tax due on the disposal The reporting and payment date remains at 30 days for transactions completed up to 27 October 2021.

Additionally, according to an email from HMRC, changes have been made to the legislation to help clarify the mixed use property rules. This is to ensure that where a gain arises to UK residents in relation to a mixed use property, that only the portion of the gain that is the residential property gain is to be reported and paid in line with these deadlines.

Conclusion

The above is a summary of key measures and a number of other announcements were also made in the areas of personal taxes, energy and transport taxes, indirect taxes and duties and investment in HMRC.

Our coverage above is based on the Budget Day announcements and documents published on the HM Treasury and HMRC sections of GOV.UK and various emails and communications from HMRC directly to Chartered Accountants Ireland. The supplementary document ‘Overview of Tax Legislation and Rates’, published alongside the Budget documents, provides a more detailed explanation of tax measures. As always, the devil is in the detail of the legislation with Finance Bill 2021/22 published in early November.

The Government is also bringing forward a further set of “tax administration maintenance announcements” later in the autumn which is expected to include the opening of several new consultations and the publication of responses to closed consultations including the consultation on Making Tax Digital for corporation tax. This follows a similar set published on 23 March 2021 after the 2021 Spring Budget on 3 March.