After a challenging 12 months, Chancellor Rishi Sunak has delivered the much anticipated 2021 Budget (documents are available here). A summary of the proposed measures and potential impacts for the Banking and Capital Markets sector are detailed below.
- As has been widely anticipated, the UK corporation tax rate will increase from 19% to 25% on 1 April 2023 for companies with profits over £250,000.
- The loss carry back provisions for corporate entities which have suffered losses in 2020-21 and 2021-22 has been extended from one year to three years.
- A 130% “super deduction” capital allowances rate has been announced for main pool additions with a 50% “First Year Allowance” for special rate pool additions for two years.
- The Diverted Profits Tax rate will also increase from 25% to 31% from 1 April 2023.
- A review of the banking surcharge has been announced, intended to assist the banking industry maintain its competitiveness. No insurance-specific surcharge has been announced.
- There are no proposed changes to indirect taxes such as VAT and IPT for the Financial Services sector.
- The R&D tax credit for SMEs relief will be capped at £20,000 plus three times the company’s total PAYE and NIC liability per annum.
Employment taxes / Income taxes
- There will be an extension to the Coronavirus Job Retention Scheme or “Furlough” scheme to 30 September 2021.
- There are no new proposed increases for income tax, national insurance tax and capital gains tax rates.
- A number of announcements were made, including in relation a new UK green infrastructure bank and a new retail green savings product (see below for further details)
- The inheritance tax and pension lifetime allowance thresholds will remain unchanged.
- The Government has announced various measures to boost high-skilled migration including a simplified VISA process for highly skilled workers.
- The Stamp Duty Land Tax nil-rate band will remain at £500,000 until 30 June 2021, and then will decrease to £250,000 until 30 September 2021.
- The Government has introduced further legislation in respect of the UK Hybrid Mismatch regime and UK loss relief rules and has repealed the EU Interest and Royalties Directive.
In more detail:
Change in corporation tax rate
- From 2023, the rate of Corporation Tax will increase to 25%. There will be no staggering of this increase.
- Businesses with profits of £50,000 or less will continue to be taxed at 19%. A tapered rate will also be introduced for profits above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate.
- In a stated aim to ensure the banking industry remains competitive, the government will review the banking surcharge. The outcome of this review is intended to be announced in the Autumn and legislated in the Finance Bill 2021-22.
Extension to trading loss carry-back rules
- The trading loss carry-back rule will be temporarily extended from the existing one year to three years.
- Companies will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22.
- The £2 million cap will also apply across a corporate group as a whole.
- Companies that are part of a group will be able to obtain relief for up to £200,000 of losses in 2020-21 and 2021-22 without any group limitations.
- This will be legislated in the forthcoming Finance Bill. Further detail on the group cap will be announced in due course.
- From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance.
- Investing companies will also benefit from a 50% first-year allowance for qualifying special rate (including long life) assets.
- Companies with an accounting period end date which is not 31 March will be required to identify the date of expenditure to benefit from these “super deductions”.
- The Budget documents do not indicate an upper limit to the new deductions.
Other corporate tax measures
- Repeal of the Interest and Royalties EU Directive - Draft legislation has now been published (for introduction in Finance Bill 2021) which will repeal the UK legislation which implemented the EU directive into domestic law with effect from 1 June 2021. Payments of interest and royalties made by UK companies will therefore be subject to UK withholding tax unless treaty relief is available, mirroring the position for payments of interest and royalties (as well as of dividends) to the UK.
- Hybrids - Following a second technical consultation on draft legislation published on 12 November 2020, the government is introducing changes to the Corporation Tax legislation containing the rules for Hybrids and other mismatches. The changes, which will be introduced in Finance Bill 2021, are intended to ensure the legislation operates proportionately and as intended. They effect, inter alia, the definition of “dual inclusion income” (which may be of particular interest to US headed groups), and clarify that counteractions will not apply to the CATA and companies within the securitisation regime.
- Loss relief reform - Following the change in loss relief rules from 1 April 2017, some groups may have been prevented from accessing an allowance to which they are entitled following an acquisition or demerger. This was deemed to be an unintended consequence of the legislation and the proposed changes seek to improve a number of areas including transfers of trade following a change of ownership and the computation of loss restrictions.
Employment taxes and personal taxation
- Coronavirus Job Retention Scheme: The furlough scheme will be extended until the end of September 2021. There will be no change to the existing terms; employees will continue to receive 80% of their salary for hours not worked, up to £2,500 until July. From July, the government will introduce an employer contribution towards the cost of unworked hours of 10% in July, 20% in August and 20% in September.
- Income tax: The personal allowance will rise to £12,570 next year as originally planned, with the basic rate threshold and the higher rate threshold increasing to £37,600 and £50,270 respectively. These will stay frozen until April 2026 thereafter.
- National Insurance Contributions: As previously announced, the NIC primary threshold and Upper Earnings Limit will rise in 2021-22 to £9,568 and £50,270 respectively. Both will remain frozen until April 2026.
- Capital Gains Tax Annual Exempt Amount: The exempt amount, currently £12,300, is to be maintained until April 2026.
- Employers in England who hire a new apprentice between 1 April 2021 and 30 September 2021 will receive £3,000 per new hire. This is in addition to the existing £1,000 payment for all new 16-18 year-old apprentices and those aged under 25 with an Education, Health and Care Plan.
Environmental, Social, and Governance
- The government announced the establishment of a new UK Infrastructure Bank, to be headquartered in Leeds, and operating across the whole of the UK from later in Spring 2021. The bank will offer a range of financing tools including debt, hybrid products, equity and guarantees to support private infrastructure projects. The Bank will have £12 billion of equity and debt capital, as well as the ability to issue £10 billion of guarantees.
- The government will issue a sovereign green bond this summer, with total green gilt issuance for the financial year of a minimum of £15 billion. Further details on the planned expenditures will be set out in the green gilt framework to be published in June, but we note the UK government has indicated this will include spending towards social benefits such as job creation and levelling up, as well as environmental initiatives.
- A new working group will be established with the aim of positioning the UK and the City of London as the leading global market for high quality voluntary carbon offsets. The expertise of the UK’s financial sector is expected to be drawn upon in order to ensure the success of this proposition.
- R&D: There will be a consultation to explore further the nature of private-sector R&D investment in the UK, how that is supported or otherwise impacted by the R&D relief schemes, and where changes may be appropriate. It will look at:
- Definitions, eligibility and scope of the reliefs, to ensure they are up-to date and competitive, and that they reflect how R&D activity is conducted now;
- How well the reliefs are operating for businesses and HMRC, and whether this could be improved
- Targeting of the reliefs.
A summary of the responses to the 2020 R&D consultation has also been published here.
- EMI schemes: The government is publishing a call for evidence on whether and how more UK companies should be able to access EMI schemes to assist with recruitment and retention of key talent.
- Review of tax administration for large businesses: Discussions will be initiated with businesses, advisers and other stakeholders over the coming months, to solicit views and build an understanding of the perceived challenges in this area, with a view to considering what improvements can be made as HMRC continues to progress its 10-year Tax Administration Strategy and wider Tax Administration Framework Review.