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Markel Tax

05 Mar 2021

“Whatever it takes”: a summary of 2021’s Budget and its implications

We have to remind ourselves that Rishi Sunak has just delivered what is only his second Budget. Throughout the fiscal assault of Covid, the likes of which have not been seen since the Second World War, the Chancellor has become a familiar, almost friendly figure to the UK public, with his assurances on furlough and various support schemes.

When he stood up in Parliament today however, proclaiming the Government’s honesty and the UK’s need for fiscal resilience, he certainly had an air of authority and command as he introduced an array of policies which promised recovery on every front. Whilst at first glance, the Budget did seem to be delivering whatever the desired recovery would take, we want to delve into the detail to understand the implications for our clients.

What do those policies really mean for business? What do they mean for many of our hard-working, risk-taking clients who have hung on in there throughout the pandemic? We examine the practicalities below.
The support of individuals, particularly the self-employed, was expected. However, Rishi needs to balance the books, and there will have been an understandably sharp intake of breath from business leaders across the land at the mention of corporation tax rising to 25% by 2023. Taking this as our starting point, we have summarised the key points below for businesses.

Corporation Tax

  • The rate of UK corporation tax will rise from its current 19% to 25% with effect from 1 April 2023. This will apply to profits of £250,000 and above.

  • A “small profits rate” of the current 19% rate will apply from 1 April 2023 to companies with taxable profits of £50,000 or less.  

  • For companies with taxable profits between £50,000 and £250,00, an gradually increasing corporation tax rate will apply.

  • A temporary extension of the loss carry back scheme will be introduced. This will allow businesses to carry back corporation tax losses of up to £2m for the previous three years, instead of the one-year rule currently in place.

Companies will be able to group relieve losses of up to £2m in each of 2020/21 and 2021/22, subject to a £2m cap across the group as a whole. Further details on this will be in the Finance Bill 2021.
Whilst these new rates have been introduced as those of a ‘pro-business tax regime’, they will certainly have made owners of small and medium-sized companies sit up and look twice. Whilst more details will undoubtedly follow, it is worth noting at this stage that the return to more than one corporation tax rate will make tax planning all the more vital for companies, especially those who may be eligible for corporation tax reliefs.

Research & Development Tax Relief (R&D Tax Credits)

At first glance, there was no particular detail to report on R&D from today’s announcement – the relief received a fleeting mention with regard to a forthcoming consultation. However, when combined with the Chancellor’s ambition for the UK to become a ‘scientific superpower’, and visa reforms to attract the best and brightest in the world to the UK marketplace, there is no doubt that R&D tax relief will continue to be a key part of the corporate tax regime in the coming years.

The new consultation will explore further with stakeholders 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 examine:

  • 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 currently conducted.

  • How well the reliefs are operating for businesses and HMRC, and whether this could be improved.

  • How the two R&D relief schemes support R&D in the UK, including how they operate, how they interact with the way modern R&D is undertaken, and the main differences in design between the two schemes.

  • Whether the schemes should be amended to remain internationally competitive, with the aim of keeping the UK at the forefront of innovation.

  • Whether the definition of R&D and the scope of what qualifies for relief remain fit for purpose.

  • Whether current rates of relief, and the difference in rates between RDEC and the SME scheme, remain appropriate.

Innovation was emphasised at several points within the Chancellor’s Budget speech, with digital growth clearly highlighted as particular focus. With companies being urged to register today for the UK-wide Help to Grow schemes, it could not be clearer that innovation is seen by this government as the way forward. The R&D tax relief regime will no doubt continue to support that aim.

R&D changes with effect from 1 April 2021 which we have already highlighted to our clients and accounting partners are those concerning the PAYE/NIC cap, and are outlined below:

Anti-fraud measures will limit the amount of R&D tax credit a company can claim – the new amount of any such claims can be no higher than:

  • £20,000 plus

  • 300% of the claimant company’s total PAYE and National Insurance contributions (NICs) liability for the period.

There are some exemptions to this restriction, and these are concerned with Intellectual Property and the amount of qualifying R&D expenditure which is spent on sub-contractors, externally provided workers or connected persons.

Implications of the corporation tax increase for our clients and their R&D claims:
SME Claimant Companies

The increased rate of corporation tax will mean that R&D claims may well have more value than before. A 130% deduction at 25% is now a 32.5% benefit.

The difference between a payable credit and a loss carried forward for a company with future profits of £250k or over will now be greater - 14.5% v 25%. This is a factor which could influence business decision-making from this point onwards, despite the higher rate not coming into effect until 2023.

RDEC Claimant Companies

The value of an RDEC claim will be reduced for companies with profits of £250k and over, and remain the same for smaller firms. The effective ‘take-home’ rate of RDEC will be worth between 9.75% and 10.53%. Whilst this is not a huge difference overall, it effectively reverses the previous RDEC increase for large companies from 2023 onwards.

Patent Box

This will become more valuable for companies paying the highest rate of corporation tax, as the deduction will increase relative to the profits.

In other news…..

Furlough (CJRS)

The Coronavirus Job Retention Scheme, or Furlough, is extended until 30 September 2021. It will remain in its current format until 30 June of this year, and thereafter, employer contributions will be required.

Employees will continue to receive 80% of their salary for hours not worked. There will be no employer contributions required beyond NICs and Pensions in April, May, or June. From 1 July, employer contributions of 10% of the cost of unworked hours will be required, increasing to 20% from 1 August until the scheme ends on 30 September of this year.

Staff who have not worked cannot be classed as undertaking any R&D activity either, which may sound obvious but does need to be considered. Many companies’ R&D claims will have lower salary costs, contributing to lower overall claims for accounting periods covering the years 2020 and 2021.

Read our full furlough extension update here. Our fee protection schemes not only have 24/7 access to the business and legal helpline provided by Markel Law but also our legal portal, Law Hub, which includes templates and guidance around furlough to support you and your clients.

An ominous note for individuals and businesses alike was struck when the Chancellor slipped in his comment about the HMRC Taskforce. Over £180m has been set aside to invest specifically in a clampdown on tax avoidance and evasion. In the coming year, the government will invest in additional resources and technology for HMRC, forecast to bring in over £1.6bn of additional tax revenues by 2025-26.

This will enable HMRC to recruit additional compliance staff,  increasing its capacity to target non-compliance occurring through illicit financial flows. Whilst R&D tax relief was not specifically mentioned in connection with this commitment, but increased scrutiny of R&D claims may well be a result. We can be left in no doubt that, whilst recovery is the key goal of this Budget, the commitment of such a large sum to HMRC indicates compliance to be its watchword. Transgressors, however unintentional, will surely be identified and duly reprimanded.

And for his last trick…                                                       

So far, so fairly unremarkable. Rishi’s rabbit out of the hat moment came shortly after the 25% corporation tax rate was unveiled, perhaps a case of potentially bad news followed extremely promptly by some good news to sweeten the pill! The super deduction was trumpeted as the ‘biggest tax cut in modern business history’, and it certainly took those business leaders’ minds off the rate of corporation tax, at least at first glance.

From the financial year 2021 onwards, businesses are to be encouraged into helping the UK’s investment-led recovery by receiving a huge boost to their spending. A ‘super-deduction’ will be in place for companies who invest in business assets. The Chancellor provided the example of a construction company spending £10m on equipment, and usually receiving capital allowances of 25%, ie £2.5m. No longer – with the super deduction, this expenditure is to be enhanced (much like R&D expenditure), meaning that the £10m would be grossed up 130% and the company in question would have a £13m tax deduction in the year of purchase.

Next steps

We have partnered with Alvarez & Marsal, one of the leading names in the industry to produce a webinar which will go into detail of what these changes mean for you and your clients and how Markel Tax can support you. Pre-register here to be the first to know when this is live. Please do contact us on 0333 305 3667 to discuss any queries you have in the meantime.
Next article in series

05 Mar 2021

Budget 2021: Furlough extended until October 2021