Budget 2021: Tax, But Only Half the Story

On March 3, 2021, the U.K. government announced its 2021 Spring Budget (the “Budget”) which contained a number of extensions to measures designed to support the country even after our expected emergence from lockdown.  However, whilst the Budget set out some headline changes relating to U.K. tax, very little was revealed as to how the government expects to get the country’s finances back on track, with reports suggesting that it is highly unlikely that an increase in the corporation tax rate and the freezing of income tax thresholds alone will be sufficient. 

In a change to usual practice, certain tax consultations and calls for evidence traditionally published on Budget day will instead be published on March 23, 2021, dubbed ‘Tax Day’, which should provide a clearer picture of the direction of U.K. tax policy.

Budget 2021

It is evident that Wednesday’s Budget did not provide the full picture for the U.K.’s future tax landscape but some notable announcements are highlighted below.

Corporation Tax – Corporation tax rates will rise to 25 percent in April 2023 for companies with profits greater than £250,000.  Companies with profits of up to £50,000 will continue to be taxed at 19 percent, with a tapered increase of the corporation tax rate up to 25 percent for profits between £50,000 and £250,000. Policy papers published alongside the Budget suggest that a company will be taken together with its associates when assessing whether its profits meet the relevant threshold.

Additionally, the 19 percent ‘small profits’ rate will not be available to close investment-holding companies.  These are close companies (companies controlled by five or fewer participators or participators who are directors) that do not exist for the purpose of trading or investing in land for letting.

Diverted Profits Tax – The diverted profits tax rate will increase from 25 percent to 31 percent from April 2023.

Tax Losses – New loss relief rules are available for trading losses arising in company accounting periods ending in the 2020/21 and 2021/22 tax years.  Existing rules that allow a company to carry back unlimited losses to the previous accounting period remain in place, but losses of up to £2 million (for each relevant accounting period in which a loss is made) can be carried back two further years.  These rules are also available for companies within the oil and gas ring fence regime.  However, in group contexts, the £2 million cap will apply across the group as a whole.

VAT – The value-added tax registration threshold will remain at £85,000 until 2024.

Super Deduction – For the next two years, companies can benefit from a new ‘super deduction’ for investments in qualifying new plant and machinery assets by way of a 130 percent first year capital allowance.

Income Tax – The U.K. government announced that there would be no increase in income tax, national insurance and VAT rates.  The Budget also included an increase in the personal allowance to £12,570 and the higher rate taxpayer threshold to £50,270, but noted that these would remain frozen until 2026.

Her Majesty’s Revenue and Customs (HMRC) Funding – The Budget also included an additional £180 million investment into HMRC.  The Chancellor noted this would support HMRC in tackling tax avoidance which could see HMRC opening more enquiries now that they have both greater resources and added pressure to pursue investigations.

‘Tax Day’ 2021

‘Tax Day’ is when the Treasury has stated it will publish a number of consultations including many that relate to tax policy.  Jesse Norman explained to the Treasury Select Committee that several of these consultations relate to the government’s 10-year tax administration strategy, but did not specify the issues they address.

It is likely that ‘Tax Day’ will be used as an opportunity to announce or show a strong intent for further tax changes that may not have sat so easily alongside the generous measures set out in the Chancellor’s Budget speech.  Given the absence of discussion on capital gains tax (other than the annual allowance remaining unchanged), it is possible that a consultation could be announced on the future of this tax and the potential aligning of its rates to income tax rates.

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