UK Budget 2021: tax changes and recommended actions

Jenny Akrigg summarises the key tax changes announced in the UK budget and the impact on both UK residents and non-UK residents with UK interests.

From a tax perspective the UK budget on 3 March 2021 did not hold many radical updates. Many rates and thresholds remained unchanged and even frozen for a number of years. Having said that, there are still implications for UK taxpayers to consider and actions to take.

Below are outlined some of the key changes and what actions are required.

1.    Personal tax thresholds frozen 

The Chancellor announced that the following allowances and thresholds will increase from their current 2019/20 amounts but will remain frozen at their 2020/21 limits until the end of the 2025/26 tax year:
Allowance/Threshold        2019/20          2020/21– 2025/26
Personal Allowance         £12,500                  £12,570
Basic Rate Limit               £37,500                  £37,700
NIC Upper Limits              £50,000                  £50,270

2.    Changes to self-assessment penalties

The changes announced to the self-assessment penalty regime appear to be aimed at encouraging compliance with the recent ‘Making Tax Digital’ changes which require business and property income to be reported quarterly or monthly depending on the taxpayer’s level of income. Initially the new regime will only apply to taxpayers reporting business or property income over £10,000 a year by self-assessment in respect of accounting periods beginning on or after 6 April 2023. For everyone else, the changes will take effect from 6 April 2024.

As a result of the changes, penalties for filing a tax return late will operate on a detailed points system, with one point being incurred for each deadline missed and penalties being issued depending on how many deadlines are missed and how frequently the taxpayer is required to submit tax returns. Penalties start at £200. Late payment penalties will change so that a penalty of 2% of outstanding tax will apply if tax is not paid within 15 days of the due date. A further 4% penalty will be due from day 30, with an annual penalty at 4% p.a. thereafter

ACTIONS TO TAKE: UK resident individuals and also non-UK resident individuals with UK source property or business income should consider whether they expect to fall into the earlier deadline for compliance, and if so, start considering how they anticipate complying with the new requirements. Trustees will also need to consider the position for trusts.

3.    Capital gains tax (CGT)

No changes…for now. Following the publication of the Office of Tax Simplification’s (OTS) first report undertaking a review of capital gains taxes in November 2020, the alignment of CGT rates with income tax rates (a key suggestion of the OTS) was widely anticipated in the budget announcement. However CGT was not mentioned, other than confirming the freezing of the capital gains annual exemption for the next five years from 2021-22 to 2025-26 at the current level of £12,300 (£6,150 for trusts), as well as the clarification of an anti-avoidance rule relating to non-UK residents claiming gift relief on business assets.

Although not introduced this Budget, we consider it highly likely that CGT changes will be on the agenda, maybe as early as the Autumn Statement. Indeed, the second part of the OTS report is due to be published at any time. 

From a practical perspective, based upon current UK tax rates and bandings, and assuming there is a complete alignment of the CGT rates to income tax rates, this could result in those with annual incomes of £50,000 or more becoming liable to CGT rates of 40% and 45%, as opposed to the current rate of 20% on most chargeable gains (UK residential property excepted).

ACTIONS TO TAKE: Individuals and certain trust arrangements should be reviewed in order to consider the potential impact of increased rates of CGT for UK resident beneficiaries. 

4.    Corporation tax (CT)

From 1 April 2023 the main rate of CT will be increased to 25%. Certain companies with profits of £50,000 or less will not be subject to the higher rate, with marginal relief applying for companies with profits of between £50,000 and £250,000. The 25% rate will automatically apply to any company which meets the definition of a ‘close investment holding company’ (‘CIHC’), regardless of profit levels. Broadly, this covers any ‘close company’ (i.e. if it is privately owned and controlled by five or fewer individual participators) other than those that carry on trading or commercial property activities.

ACTION REQUIRED: Companies subject to CT in the relevant periods, including any currently transitioning from the Non-resident Landlord regime to Corporation Tax regime will be impacted by this change. Directors should start considering whether any of these companies could be close investment holding companies as the financial impact on those will be greater. It may also be appropriate to consider the impact on structures and whether they continue to be fit for purpose or if alternative structuring may be required.

5.    Extended loss carry back rules

The budget announcements included the introduction of an extension, from the current one year to three years, of the period over which company trading losses can be carried back to offset earlier years’ profits. This will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022.

The one year carry back remains without restriction, however a £2m cap applies to the amount of losses that can be carried back under the extended period. This cap applies to the year in which the losses arose, rather than the year to which they are carried back. In a corporate group scenario this cap must be shared between entities, subject to a de minimis of £200k per entity, which is not subject to the cap.

From a practical perspective, struggling businesses may want to consider carrying back losses to reclaim tax paid in earlier years to improve their cash position. However, in this circumstance, those losses will be relieved against profits taxed at 19%, compared to potential relief at 25% if carried forward against future profits post April 2023.

ACTION TO TAKE: Directors of companies subject to corporation tax should start considering the impact of this legislation and whether they may be able to make additional loss relief claims, and where relevant whether their priority will be cash flow or maximising relief from the use of losses.

6.    Capital allowance

For qualifying capital expenditure incurred between 1 April 2021 and 31 March 2023, a deduction of 130% (compared to 18% writing down allowance following the reduction of the AIA from 31 December 2021) can be claimed in respect of the majority of plant and machinery investment. A first year allowance of 50% is also available in respect of capital expenditure which would have only qualified for writing down allowances at 6% under current rules. 

There is also an extension to the temporary annual investment allowance limit of £1m for expenditure incurred on the provision of plant and machinery until 31 December 2021.

ACTION TO TAKE: If there is an intention to invest in qualifying capital expenditure (particularly relevant to UK property owning individuals or trading entities) then the timing of this may need to be considered to take advantage of the super-deductions for capital allowance purposes.

7.    VAT & stamp duty land tax (SDLT)

The VAT registration threshold will remain at the current limit of £85,000 until 31 March 2024. Likewise, the threshold of £83,000, which determines whether a person may apply for deregistration, will remain constant at £83,000 for the same period.

ACTION TO TAKE: If close to the threshold, VAT advice is recommended.

8.    Reduced VAT rate for hospitality and tourism related business to continue

In July 2020 the Chancellor reduced VAT to 5% to protect jobs in the hospitality and tourism industries (including restaurants, pubs, coffee shops, as well as staycations and tourist attractions). This reduced rate has been extended until 30 September 2021. This will be followed by the introduction of a new reduced rate of 12.5% from 1 October 2021 that will be in effect until 31 March 2022 at which point it will revert to the 20% standard rate.

ACTION TO TAKE: The extended period should be noted and the change in rate from 1 October 2021.

9.    Stamp Duty holiday extended

The present £500,000 threshold for paying Stamp Duty Land Tax (SDLT) was increased on a temporary basis and was due to end 31 March 2021. However, it was announced that the nil rate band will continue to be £500,000 until 30 June 2021. From 1 July 2021 until 30 September 2021, the nil rate band will be £250,000. The nil rate band will then return to the standard amount of £125,000 from 1 October 2021. 

NO ACTION REQUIRED: Awareness purposes only for anyone purchasing property in the UK.

10.    Non-resident SDLT

A 2% SDLT surcharge, above existing rates, for non-UK residents purchasing residential property in England and Northern Ireland is to be introduced from 1 April 2021. 

NO ACTION REQUIRED: Awareness purposes only for anyone purchasing property in the UK or Northern Ireland.

11.    Extension of Making Tax Digital (MTD) for VAT

From their first VAT period starting on or after 1 April 2022, VAT registered businesses (including self-employed and landlords with taxable turnover under the VAT registration threshold) that are not already required to operate MTD under the requirements applying from 1 April 2019 will have to:

• keep their records digitally (for VAT purposes only)
• provide their VAT return information to HMRC through Making Tax Digital compatible software

Importantly, VAT registered businesses with a taxable turnover of more than £85,000 must follow the rules for ‘Making Tax Digital for VAT’ and comply with the forthcoming compliance requirement starting from 1 April 2021 and put in place digital links between the source data (digital records) and the VAT return to create an end-to-end digital process. HMRC can visit businesses to inspect record keeping and charge penalties if records are not in order.

ACTION TO TAKE: Seek tax advice if unsure whether entities fall into the above categories.

12.    VAT deferral new payment scheme

The VAT deferral new payment scheme was announced on 24 September 2020 and gives businesses the opportunity to make monthly payments of deferred VAT from March 2021. Businesses that deferred VAT payments - which would otherwise have been payable with (or in connection with) VAT returns - due between 20 March and 30 June 2020 will now have the option to pay them in up to 11 interest-free instalments between 2021 to 2022.

Businesses that do not choose this option must pay deferred VAT by 31 March 2021. Businesses may opt-in between February and June 2021 but with fewer instalments where take-up is in April (up to 10 instalments), May (up to nine instalments) and June (up to eight instalments), to ensure that full payment is received by the end of the financial year.

ACTION TO TAKE: Seek tax advice to discuss any entities eligible for the above deferral.

If you have any questions regarding any of the above announcements, please contact Jenny Akrigg at jennyakrigg@equiomgroup.com.

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Equiom to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.