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2021 Budget Highlights

The Chancellor, Rishi Sunak, delivered his second budget on 3 March. We have set out below some of the highlights that we think will interest people on our patch. Please feel free to contact us if you have any questions about how the budget provisions will affect you.

Government Initiatives

Freeports

These will be areas which can include airports, with reduced planning restrictions and favourable duty and tax regimes. We will need to see which ports are to be designated in Scotland.

Furlough Scheme

The scheme will now run until 30 September 2021 but the support will start to tail off from June. Eligibility has been extended to include newly eligible employees who were employed on 2 March 2021, as long as a payment of earnings was reported on RTI between 20 March 2020 and 2 March 2021.

Up to 30 June 2021July 2021Aug – Sept 2021
Employee wages covered by grant80% of usual wages70% of usual wages60% of usual wages
Maximum wages per month covered by grant£2,500£2,187.50£1,875
Employer NIC covered by grant?NoNoNo
Employer pension contributions covered by grant?NoNoNo
Employer contribution to furlough wages per month:10% of usual wages up to £312.5020% of usual wages up to £625
Employee should receive at least per month for furloughed periods80% of usual wages up to £2,50080% of usual wages up to £2,50080% of usual wages up to £2,500

Anti-Fraud Measures

To combat fraud relating to Covid-19 support measures, in particular the CJRS and SEISS, and including the Bounce Back Loan Scheme, the Government will invest over £100m in a Taxpayer Protection Taskforce of some 1,265 HMRC staff.

Tax Conditionality – fighting the hidden economy

This will make the renewal of certain licences conditional on applicants completing checks that confirm they are appropriately registered for tax.

This will apply to licences to drive taxis and Private Hire Cars (PHCs) or operate from PHC booking offices, and licences to be a metal dealer.

The measure will be effective from April 2023.

Licensing bodies will have to obtain confirmation that an applicant has completed the check before deciding on their renewal application, making it more difficult for traders to operate in the hidden economy. The Government will consult on how to implement this reform.

Tax and pension allowances and NI thresholds

The personal allowance will increase to £12,570 in 2021/22 but then be frozen along with many other thresholds until 5 April 2026. This is a significant revenue raiser for the Government as wages and salaries recover and everyone ends up paying more tax – a stealth tax.

It will widen the tax base considerably, meaning that more people will pay income tax than before, and it will significantly increase the number of individuals who pay tax at the higher rate.

National minimum wage.

This will increase from the first pay period that begins on, or after, 1 April, so week commencing 5 April for weekly paid employees.

The new top rate of £8.91 will now apply from age 23 so check the ages of your younger employees.

The government’s target is for the top rate of National Living Wage to be two thirds of median earnings, and extended to those aged 21 and over, by 2024.

SEISS grants available.

Self-employed traders will be able claim a fourth SEISS grant from late April and a fifth SEISS grant in late July 2021, but extra conditions will be attached to the fifth grant.

SEISS-4 provides 80% of the trader’s average trading profits, capped at £2,500 per month. It will be paid in one lump sum for three months, giving self-employed traders a maximum financial boost of £7,500. The portal to apply for this grant will be open from late April to 31 May 2021. Eligibility for the fourth SEISS grant will also depend on whether you experienced a significant financial impact from coronavirus between February 2021 and April 2021.

The figure of average trading profits will include profits reported for the tax year 2019/20. The average profit calculation will include profits from all four tax years from 2016/17 to 2019/20. HMRC performs this calculation from the tax return records it holds, and the taxpayer does not have to submit any figures to claim the grant.

As agents we cannot claim this grant for you. You must login with your own government gateway ID to access the claims portal.

SEISS-4 and SEISS-5 grants will only be available to taxpayers who have filed their 2020 tax returns by 2 March 2021. This will allow those who became self-employed after 5 April 2019 to claim a SEISS grant for the first time.

All traders who claim either of these new SEISS grants must still be trading in 2021, or their business must be temporarily closed due to coronavirus restrictions and you must declare, as part of the grant application, that you intend to continue trading in 2021.

To claim the SEISS-4 grant the trader must also declare that they have suffered a significant drop in trading profits due to one or more of:

  • reduced activity
  • reduced capacity
  • Inability to trade

The SEISS-5 grant will be payable for the three months to 31 July 2021, also up to a maximum of £7,500. But only those businesses where turnover (not profits!) have fallen by at least 30% will get the full grant calculated at 80% of average trading profits. Other businesses whose turnover has fallen by less than 30% will receive a grant based on 30% of average profits, capped at £2,850. The portal to claim the SEISS-5 grant will open in late July 2021.

To qualify for either SEISS-4 or SEISS-5 at least half the trader’s income must be from self-employment) and the trading profits (not turnover!) must also not exceed £50,000. HMRC will initially look at the profits reported for 2019/20 to see if these two conditions are met. If the taxpayer is not eligible for SEISS-4 or SEISS-5 based on income reported for 2019/20, HMRC will look at the average annual profits and income for the four tax years to 2019/20. 

Recovery Loan Scheme

From April 2021, the Recovery Loan Scheme will replace the previous government backed loan schemes (CIBLS, CLBLS and BBLS) which all end on 31 March.

The new scheme will provide lenders with a guarantee of 80% of eligible loans between £25,000 and £10m. The scheme will be open to all businesses including those who have already received support under the existing Covid guaranteed loan schemes.

The Recovery Loan Scheme may be used for “any legitimate business purpose, including growth and investment” and will remain open until 31 December.

Under the new loan scheme, businesses will be able to access term loans and overdrafts between £25,001 and £10m or invoice finance and asset finance between £1,000 and £10m.

Terms are up to six years for term loans and asset finance facilities. For overdrafts and invoice finance, terms will be up to three years.

To be eligible and business must:

  • Be trading in the UK
  • Prove business viability (outside of the pandemic)
  • Prove the business has been impacted by the coronavirus pandemic.
  • Prove that the business is not in insolvency proceedings.
  • Not be in an excluded category, including:
  • Banks, building societies, insurers and reinsurers (but not insurance brokers)
  • Public-sector bodies
  • State-funded primary and secondary schools​​

This new recovery loan scheme will help those businesses who have either not borrowed enough cash under the existing CBIL arrangements or where they depleted their cash reserves over the last 12 months.

Help to Grow scheme: Digital.

This provides £5,000 vouchers to help businesses train up and invest in “productivity-enhancing software”. However, the vouchers are restricted to UK companies and LLPs that have been trading for at least a year and employ between 5 to 249 employees.

Help to grow: Management.

This Help to Grow schemes is focused on upskilling chief executives and finance directors. It is a 90% subsidised 12 week-programme delivered by leading business schools across the country.

Decision makers or senior management within businesses will develop strategic skills on the executive development programme, with modules covering financial management, innovation and digital adoption. 

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.  

Businesses must have been operating for more than one year and have between 5 and 249 employees. 

Universal Credit

The Universal Credit standard allowance and Working Tax Credits basis element were increased by £20 per week for 2020–21 in order to provide extra support for low-income workers during the coronavirus pandemic. A further one-off payment of £500 will be made to cover a six-month period from April to September 2021. These will be tax free.

Enterprise Management Incentive (EMI)

The time-limited easement to the working time requirement for EMI which was introduced for the 2020–21 tax year is extended to the 2021–22 tax year.

Ordinarily, the eligibility conditions of a tax advantaged EMI share option scheme include a requirement to be working at least 25 hours or 75% of normal working time. Where employees are furloughed, they may not be able to meet this condition.

The measure ensures that employees who are either furloughed or taking unpaid leave or have had their working hours reduced as a result of coronavirus will remain eligible for the tax advantages of the scheme. The new measure also includes where new issues of EMI share options are granted until 5 April 2022.

Rishi’s Taxes

SEISS – Taxation

SEISS 1 to 3 will be taxed in full in 2020/21 and SEISS 4 and 5 will be taxed in 2021/22 irrespective of when you prepare accounts.

IR35 – Personal Service Companies

The new IR35 regime commences on 6 April 2021. It has been confirmed that under the new regime there is no 5% deduction for expenses for anyone caught by the new IR35 rules.

R&D PAYE/NIC cap: Further changes

The Government confirmed that the cap on the level of repayable R&D tax credits for small and medium size businesses will apply from 1 April 2021. The annual cap is set at £20,000 plus three times the company’s PAYE and NIC liabilities for the year.

The cap will not now apply until the first full period starting on or after 1 April 2021. The definition of intellectual property will also be extended to include know-how and trade secrets.

VAT – Hospitality VAT rate cut extended.

Until 30 September 2021, the temporary 5% rate will be maintained. From 1 October 2021 to 31 March 2022 the new rate will be 12.5%.

The last time we had a 12.5% rate of VAT was 1979.

The VAT fraction for 12.5% is 1/9 so if a restaurant sells a meal for £45 including VAT in October, it’s VAT liability will be £5.  For flat rate scheme users, new rates will be issued to coincide with the introduction of the 12.5% rate.

A temporary reduced rate of 5% VAT was introduced, from 15 July 2020, in relation to certain supplies of:

  • hospitality;
    • hotel accommodation;
    • holiday accommodation; and
    • admission to visitor attractions.

The scope of the relief will remain unchanged.

VAT deferral new payment scheme and deterrent

As part of the Government’s support during Covid-19, businesses were given the option to defer their VAT payments due between 20 March and 30 June 2020.

A new payment scheme has been available since February that allows businesses that deferred their VAT to spread their payments over a series of up to 11 equal monthly instalments on an interest-free basis from March 2021.

Businesses can also pay the full deferred amount by 31 March 2021 or contact HMRC to arrange an alternative payment schedule.

The Government intends to introduce a penalty for late payment of deferred VAT. If businesses have not paid in full, opted into the new payment scheme, or made an alternative arrangement to pay the deferred VAT by 30 June 2021, a penalty of 5% of the deferred VAT that is outstanding could become chargeable.

The normal default surcharge approach will not apply to deferred VAT.

VAT Registration and deregistration thresholds frozen again.

The £85,000 threshold will remain in place until at least 2024. 

This means that the threshold has been frozen at this figure since 1 April 2017. If it had risen with inflation it would now be £93000. Many small businesses that have limited their turnover to keep below the threshold of £85,000 may find that in order to continue to trade, they will have to register for VAT.

HMRC estimates that 19,400 extra businesses will need to register for VAT by March 2024 because of the threshold being frozen for another two years. 

The deregistration threshold will also be frozen at £83,000 until at least 2024. A business can deregister if it expects taxable sales will be less than £83,000 in the next 12 months. This figure includes zero-rated sales but excludes those which are either outside the scope or exempt from VAT.

MTD for voluntary registrations

MTD for businesses that registered voluntarily for VAT voluntary will take effect from the first period starting on or after 1 April 2022. This MTD extension will affect 1.1m registrations, although 25% have already registered voluntarily.

New VAT penalty system

The replacement to the default surcharge system for late VAT returns and payments is scheduled to apply for VAT periods beginning on or after 1 April 2022. The new regime will be based on a points system for each offence.

Corporation Tax Rates

The Corporation Tax regime abolished in 2015 is back. Complexity and tax planning!

There is a small profits rate of 19% up to profits of £50,000 unless you have more than one trading company.

Marginal relief for corporation tax, will apply where a company’s profits fall between £50,000 and £250,000 and the effective rate between these limits is 26.50%.

The top rate of Corporation Tax will be 25% for profits above £250,000 unless you have more than one company.

The thresholds will be divided by the number of companies so in a group with 5 companies, the thresholds become £10,000 and £50,000 for each separate company. The companies to be considered will be the 51% related companies.

Similarly, if you have more than one company under common control, the limits will be reduced.

One way or another there will be a lot of planning going on to avoid these higher rates of Corporation Tax, such as equalising profits between group companies to make use of the small profit limit and preserving capital allowances where they can be used in a subsequent year against the 26.5% rate instead of 19% in the current year.

You may be wondering why the Chancellor is waiting 2 years before introducing the new rates. There is method in his approach. During this 2-year period there are going to be enhanced capital allowances. He is an economist. He wants businesses to spend money to get the economy moving again. In that same period, they will be getting cash back because they can throw losses back up to 3 years and access tax they paid pre-pandemic.

Loss Relief – Companies

This is a new short-term provision for loss making companies, many of whom will have suffered losses due to the COVID lockdown and related restrictions to trade. There will be a three year carry back for up to £2m of losses incurred in each of the financial years 2020/21 and 2021/22. The losses are set off in later years first.

This £2m cap applies only to the extended carry back, i.e. there is no change to the normal unlimited carry back of losses for 12 months. 

There are some special rules that apply to groups of companies.

Loss Relied – Self employed

Unincorporated business can currently claim to offset losses against their net income of the current or previous year, or both years.

For trading losses made in 2020/21 and 2021/22,  the loss can now be carried back for a period of three years, with losses being carried back against later years first.

Where losses have been identified, you will be able to claim the set off, and therefore get the tax refund, without having to wait for your relevant tax return to be submitted.

Capital Allowance Super Deduction – Companies Only

A new “super deduction” of 130% of capital expenditure on new qualifying plant and machinery will apply for expenditure between 1 April 2021 to 31 March 2023, the run up to the new Corporation Tax Rates.

The 130% deduction applies to assets which would be eligible for the main pool capital allowances rate of 18% i.e., most new plant and equipment. Expenditure on new special rate pool assets, such as integral features in buildings, will benefit from a 50% first year allowance. The temporary £1M limit on AIAs will also be extended and last until 31 December 2021. 

Plant and machinery must be acquired new, and expenditure on intangible assets is excluded.

Key features are as follows.

  • Certain expenditure will be excluded, e.g., cars, and there will be exclusions for used and second-hand assets and expenditure on contracts entered into prior to 3 March 2021 even if expenditures are incurred after 1 April 2021.
    • Assets used wholly within a ring fence trade will be excluded from the super-deduction, as they already have a 100% allowance, with assets used partly in a ring fence trade temporarily qualifying for a 100% first-year allowance.
    • Plant and machinery expenditure incurred under a hire purchase or similar contract will have to meet additional conditions to qualify.
    • The rate of the super-deduction will be time apportioned if an accounting period straddles 1 April 2023.
    • New disposal rules will apply to assets for which these allowances have been claimed.
    • For assets that have been claimed under the super-deduction, the disposal value for capital allowance purposes will take the disposal receipt and apply a factor of 1.3, except where disposals occur in accounting periods straddling 1 April 2023, resulting in a factor lower than 1.3. This rule does not apply to the 50% first-year allowance for special rate expenditures.
    • Anti-avoidance provisions will counteract arrangements which are contrived, abnormal, or lacking a genuine commercial purpose

Income Tax

The personal allowance will increase from £12,500 to £12,570. The Scottish Income Tax rates d bands for 2020/21 are set out below.

Non-savings and non-dividend incomeEffective rates for band %Tax in band £Cumulative tax £
2021/22 0–2,097 2,098–12,726 12,727–31,092 31,093–150,000 Over 150,000  19 20 21 41 46  398.43 2,126.00 3,856.23 48,715.87 –  398.43 2,524.43 6,380.66 55,132.53 –

National Insurance Contributions

The upper earnings threshold will be aligned with the tax personal allowance at £12,570; and the upper earnings limit aligned with the non-earnings basic rate band limit at £50,270.

Inheritance tax bands unchanged

The nil-rate band of £325,000 and residence nil rate band of £175,000 will also remain unchanged.

This will also be frozen until 2028 by which time the nil-rate band will have remained unchanged for 16 years. Another stealth tax.

Capital gains tax

The CGT annual exemption will remain at £12,300 until 2025/26.  

ISAs and Child Tax Funds

The 2020–21 adult ISA annual subscription limit of £20,000, junior ISA annual subscription limit of £9,000 and Child Tax Fund annual subscription limit of £9,000 will all remain unchanged for 2021–22.

Benefits-in-kindCycle to Work Scheme

The availability of the exemption is subject to the associated conditions being met. One of these conditions is that the employer-provided cycles must be used mainly for journeys to, from or during work.

The Covid-19 pandemic has meant that many employers have been working from home and, as a result, are not using employer-provided cycles to commute to work. The requirement that the cycles must be used mainly for journeys to, from or during work will not apply to employees who joined a cycle to work scheme on or before 20 December 2020, until 5 April 2022.

However, employees who join a cycle to work scheme on or after 20 December 2020 will need to meet the main use condition from the date of joining to qualify for the exemption.

Benefits-in-kind – Covid 19 tests

A retrospective tax exemption is to be introduced to remove the tax charge that would otherwise arise where an employer reimburses an employee for the cost of a coronavirus antigen test in the 2020/21 tax year. A corresponding disregard for National Insurance purposes already exists for 2020/21.

The exemption will be extended so that it also applies for the 2021/22 tax year.

Benefits in kind – Company Vans

From 6 April 2021, the van benefit charge is reduced to zero for company vans that produce zero carbon emissions i.e., electric powered, and which are available for an employee’s unrestricted private use. For 2020/21, electric vans were taxed at 80% of the full charge, equivalent to £2,792. This is a major change to the benefits charged.

The benefit charge for vans (which are not electric) that are available for the employee’s unrestricted private use is increased to £3,500 for 2021/22. Where fuel is provided for private journeys in a company van, the fuel benefit charge is set at £669 for 2021/22.

Benefits in kind – Company Cars

The appropriate percentage for zero-emission cars increases to 1% regardless of the date on which the car was first registered.

The appropriate percentages for cars first registered before 6 April 2020 remain unchanged for 2021/22. However, the appropriate percentages for cars first registered on or after 6 April 2020 are increased by one percentage point (subject to the maximum charge of 37%) for 2021/22 as part of the process of bringing them into line with those applying to cars first registered before that date. The appropriate percentages will be aligned from 2022/23.

The diesel supplement remains at 4% for cars not meeting the RDE2 emissions standard. Again, this is subject to the maximum charge of 37%.

A separate benefit-in-kind charge arises where fuel is provided for private motoring in a company car. This is found by multiplying the appropriate percentage used to work out the company car benefit by the multiplier for the year. The multiplier is set at £24,600 for 2020/21.

National Insurance and PAYE

Employee contributions remain payable at a notional zero rate on earnings between lower earnings limit and the primary threshold to preserve state pension and benefit entitlement. Contributions are payable at the main rate, unchanged at 12%, on earnings above the primary threshold up to the upper earnings limit, and at the additional rate of 2% on earnings in excess of the upper earnings limit. The rate payable by certain married women on earnings between the primary threshold and the upper earnings limit remains at 5.85%.

The employment allowance which covers employer’s class 1 NIC remains at £4,000 for 2021/22.

The rate of Class 1A National Insurance contributions, payable by employers on taxable benefits in kind and taxable termination payments and sporting testimonials remains at 13.8%, as does the rate of Class 1B National Insurance contributions payable by employers on items included within a PAYE Settlement Agreement (PSA) and on the tax due on the PSA.

The self-employed continue to pay two classes of contribution – class 2 and class 4. Class 2 NI remains unchanged at £3.05 per week.

Class 2 contributions are payable where profits exceed the small profits threshold, set at £6,515 for 2021/22.

Class 4 contributions are payable by the self-employed on profits in excess of the lower profits limit. This is set at £9,568 for 2021/22. Contributions are payable on profits between the lower profits limit and the upper profits limit, set at £50,270 for 2021/22, at the main rate of 9% and on profits in excess of the upper profits limit at the additional rate of 2%.

The upper profits limit will remain at £50,270 for five years until April 2026.

The statutory sick pay (SSP) rebate scheme, which allows smaller employers to reclaim up to two weeks’ SSP per employee for covid-related absences, is set to continue for the time being. The government will set out steps for closing the scheme in due course.

Pensions

No changes have been made to private pensions taxation. The Lifetime Allowance (LTA) will remain at its current level of £1,073,100, the Chancellor has confirmed that it will remain unaltered until April 2026.

Working from home

If you have been working from home, you can claim a £6 per week allowance against your tax. You can claim tax relief for additional household costs if you have to work at home on a regular basis, either for all or part of the week. This includes if you have to work from home because of coronavirus (COVID-19). A claim for £6 per week requires no calculations in support.

Generally, employers can pay up to£6 per week and this is tax free in the hands of the employee. However, many employers do not pay this because of the administrative difficulties. If they do not pay it, you can still claim the tax deduction on your tax return.

The Chancellor has also announced an extension to the temporary exemption which applies where an employer reimburses an employee for costs incurred in purchasing equipment specifically to facilitate working from home. The measure will now apply for both 2020–21 and 2021–22 tax years.

To be eligible for relief, three conditions must be met:

  • reimbursement must be generally available to all employees on similar terms;
    • the equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak; and
    • provision of the equipment would have been exempt from income tax if it had been provided directly to the employee by or on behalf of the employer.

Essentially, this means that the equipment is needed to perform the work and that any private use is insignificant.

Note that this special provision is an exemption which applies if the employer provides or reimburses the cost of equipment. If the employer does not provide or reimburse the cost of equipment so that the employee incurs the costs, there is no deduction available to the employee unless the normal ‘wholly, exclusively and necessarily’ conditions apply or that capital allowances are applicable, though this will be rare.

Questions

If you have any questions about the budget and how it will affect you, get in touch.

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