16 March 2021
It was announced in the Budget 2021 that the government has chosen the fine line between raising taxes to start paying down the massive borrowings and at the same time to stimulate economic recovery and support the Britishers.
Corporation tax rates to increase to 25%
To balance the need to raise revenue with the objective of having an internationally competitive tax system, the rate of Corporation Tax will increase to 25%. The UK corporation tax rate is currently one of the lowest rates of the G20 countries and the government states it is committed to keeping the rate competitive. That is of importance for encouraging companies to remain in the UK or to register here.
To support the recovery, the increase will take effect only from 01 April 2023 where profits greater than £250,000. Where profits do not exceed £50,000 the rate will remain at the current level of 19%, a tapered rate from 19% to 25% will be introduced for businesses with profits above £50,000 but below £250,000.
In the meantime, businesses will be able to take advantages of new tax initiatives to encourage investments.
Super deduction and other investment - led allowances
To encourage companies to invest in new capital equipment a new ‘super-deduction’ of 130% was announced on qualifying plant and machinery investments. This would mean that when a company buys new machinery costing £10,000 it will qualify for a deduction of £13,000 when arriving at business profits. This change lifts the net present value of plant and machinery allowances from 30th in the OECD to 1st. Certain other assets such as fixtures in buildings will qualify for 50% relief in the first year instead of the normal 6% writing down allowance.
Both allowances are available for expenditure incurred from 1 April 2021 until the end of March 2023.
The Budget has also introduced Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments up to its highest ever £1 million threshold. AIA is available until 31 December 2021.
Three year of carry back of tranding losses
Normally trading losses can only be set against profits of the preceding accounting period or previous tax year in case of incorporated businesses. The Budget allows companies to offset trading losses generated in the period 1 April 2020 to 31 March 2022 to carry back for period to 3 years to get a repayment of tax paid. It is supposed that the relief will be applied to the most recent years’ profits before being carried back to set against profits in earlier years.
The relief is capped at £2,000,000 per period (01 April 2020 - 31 March 2021, 1 April 2021 to 31 March 2022) for standalone companies and for groups (unless each group company’s losses are below the de minimis threshold). This means a potential total cash refund of up to £760,000 is available to such businesses in the two years this extended relief is expected to be available. The £2,000,000 cap is not pro-rated for short accounting periods.
This claim will be required to be made in a tax return unless the losses available to be utilized more than one year before the beginning of the relevant period are below a de minimis limit of £200,000. Up to this amount, claims may be made outside of a return, meaning the benefit can be obtained without waiting to submit a company tax return for the period in which the loss is incurred.
The business rates holiday has been extended
The business rates holiday aimed at high street businesses forced to close during the pandemic has been extended for another three months until the end of June.That means 750,000 eligible businesses in retail, hospitality and leisure in England will pay no business rates for this period when combined with Small Business Rates Relief, with further relief available for the rest of the year.
In Scotland, a business rates holiday for retail, hospitality, leisure, and aviation businesses in 2021-22 had already been announced. Wales has also confirmed a business rates holiday for the full 12 months for retail, hospitality and leisure businesses.
There will also be a freeze in duty rates for beer, cider, wine and spirits.
5% VAT rate extended
In order to continue to support businesses and jobs in the retail, hospitality and leisure sectors the reduced 5% VAT rate will continue to apply until 30 September 2021. To help businesses manage the transition back to the standard rate, a 12.5% rate will then apply for a further six months, until 31 March 2022.
The supplies to which the temporary reduced rates will apply remain the same. For example, hospitality businesses are allowed to apply the reduced rate to supplies of food and non-alcoholic beverages from restaurants, pubs, cafés and similar premises across the UK. The reduced VAT are also allowed on supplies of hot takeaway food and hot takeaway non-alcoholic drinks. There are special provisions that establish in which cases attractions, hotel and holiday accommodation businesses can benefit from the temporary reduced VAT rate.
'Restart' grants to help the high street reopen
The government has announced a £5 billion Restart Grants scheme for England to help high street businesses reopen after lockdown. Around 700,000 businesses will be eligible for the grant, including shops, salons, gyms, and restaurants.
As non-essential retail opens earlier, grants to those businesses will be up to £6,000 per premise. With hospitality and leisure businesses, personal care and gyms opening later, individual businesses could receive as much as £18,000.
The government has introduced various grant schemes while restrictions have been ongoing. The headline Local Restrictions Support Grant was initially designed to support businesses suffering reduced demand or forced to close under the ‘tier’ system, but was subsequently updated to cover national restrictions too.
The grant will be paid to businesses directly by the relevant local authority from April and will replace the currently monthly grant. The government will provide support only until 21 June 2021.
R&D tax reliefs update
There are two principal tax reliefs available to companies undertaking R&D in the UK:
Research and Development Expenditure Credit (RDEC)
an ’above the line’ credit equal to 13% of qualifying R&D costs.
Research and Development tax relief for small and medium enterprises (SME scheme)
To qualify for relief, expenditure on R&D must be incurred on particular types of activity, currently limited to staffing costs (employees and agency workers), consumable or transformable materials (such as water, fuel and power of any kind), certain types of software, payments to clinical trials volunteers and, depending on the relief, some subcontracting costs.
Despite much lobbying from interested parties the Budget on 3 March did not contain any measures to legislate for an increase in the R&D tax relief available under either the SME scheme or RDEC scheme. However, the government has an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027. At Budget 2021 it announced a review of the reliefs, supported by a consultation with stakeholders.
To qualify for relief, expenditure on R&D must be incurred on particular types of activity, currently limited to staffing costs (employees and agency workers), consumable or transformable materials (such as water, fuel and power of any kind), certain types of software, payments to clinical trials volunteers and, depending on the relief, some subcontracting costs.
Despite much lobbying from interested parties the Budget on 3 March did not contain any measures to legislate for an increase in the R&D tax relief available under either the SME scheme or RDEC scheme. However, the government has an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027. At Budget 2021 it announced a review of the reliefs, supported by a consultation with stakeholders.
The new cap on the sme R&D tax credit scheme
The new rules have been designed to prevent fraudulent claims on the scheme that are ultimately preventing SMEs and start-ups from accessing funding designed to encourage them to innovate.
There is a threshold of £20,000, below which R&D tax credit claims will be allowed in full, subject to meeting the usual qualifying conditions. Claims for amounts in excess of £20,000 will be capped at three times the company’s total PAYE and NICs liability for that year. The NIC total includes both employer and employee contributions for all staff – not just those who work in R&D. Similarly, companies are able to include ‘related party’ PAYE and NIC liabilities that are attributable to a R&D project when calculating the cap.
Claims of any size – from genuine companies – will be permitted as long as they meet two tests:
the employees of the claimant company are creating, preparing to create or performing a significant amount of management activity in relation to relevant intellectual property; and
no more than 15% of their overall qualifying R&D expenditure is paid to a related party in respect of contracted out R&D or externally provided workers.
The cap applies for accounting periods beginning on or after 1 April 2021. Where a company has an accounting period beginning before and ending on or after that date, they will be treated as two separate periods and the cap will apply to the period from 1 April 2021.
Help to grow scheme to support business
There are two possible options in the Help to Grow scheme:
Help to grow: Digital
The digital prong of this initiative was inspired by the pandemic forcing many businesses to move online and has been designed to help 100,000 SMEs adopt “productivity-enhancing software”. The businesses may receive a voucher covering the costs of an approved software up to a maximum of £5,000 and free expert training.
Businesses can use this voucher on software that can build customer relationships and increase sales, make the most of selling online; or manage their accounts and finances digitally.
Help to grow: Management
The second set of the Help to Grow schemes is focused on upskilling chief executives and finance directors. The Help to Grow: management is 90% subsidized 12 week-programme delivered by leading business schools across the country. The scheme is open for 30,000 businesses over three years. The government is picking up 90% of the cost, leaving the participants to pay £750.
For businesses to be eligible for any of the scheme, they must have been operating for more than one year and have between 5 and 249 employees.
Stamp duty land tax thresholds extended
To stimulate the housing market the government announced a temporary cut in Stamp and Duty Land Tax for homebuyers that is of 15% rate for property costing £500,000 or more.
This cut introduces a staged withdrawal of the temporary increase to the amount that a purchaser can pay for residential property before they pay Stamp Duty Land Tax (SDLT), byextending to 30 June 2021 the nil rate band of £500,000, which was due to end on 31 March 2021 and introducing a nil rate band of £250,000 for the period 1 July 2021 to 30 September 2021.
5% mortgage schemes extended
To ease the pressure on Bank of Mum and Dad an additional measure announced to stimulate the housing sector is a new 95% mortgage scheme guaranteed by the government. This scheme enables all UK homebuyers to secure a mortgage up to £600,000 with a 5% deposit.
Future fund: breakthrought is a new £375M UK- wide scheme
The UK-wide ‘Future Fund: Breakthrough’ that launches in early summer 2021will invest £375 million in highly innovative companies working in life sciences, quantum computing, or clean tech, with the minimum investment round size of £20million. The main focus of the Fund is on UK based R&D intensive companies that accelerate the deployment of breakthrough technologies.
Such companies typically require more capital than other technology companies to fuel the later stages of their growth. The announcement of the new Future Fund: Breakthrough, will help UK tech organisations scale up to the next stage of development and allow the UK to continue to enjoy the reputation as a tech innovation hotspot that it deserves. The Fund will be delivered by the British Business Bank, via its commercial subsidiary British Patient Capital.
This new scheme is separate from the government’s Future Fund, now closed to new applications. Participation in the Future Fund will have no bearing on eligibility for, or affect the likelihood of obtaining funding from, Future Fund: Breakthrough.
COVID-19 recapture
To tackle possible Covid frauds, the government will provide £100 million to crack-down on fraudsters who have exploited UK Government support schemes. We strongly recommend a review of what claims were made and whether you consider appropriate action should be taken (discount may be available for early admission).
For further information on any of the points above contact
Mikita Makayou at mikita@lexefiscal.com, or
Dr. Frank at clifford.frank@lexefiscal.com.
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