Autumn Budget 2021: Tax and spend. For now

This was another Budget of high spending supported by high levels of taxation. But the Chancellor appeared to draw a line in the sand, announcing that he wanted to end the expectation that the government (and therefore the taxpayer) would be responsible for solving every problem in the future. His plan for the rest of this Parliament, he said, is to reduce taxes and move to a more traditional Conservative low tax, low spend model.

For now however, there were substantial spending plans and no plans (yet) to U-turn on the corporation tax hike announced in the Spring. There was even a handful of populist tax cuts. Cutting air passenger duty and freezing fuel duty were unexpected given the government’s commitment to net-zero, but perhaps they, along with the cuts to alcohol duty were seen as ways of softening the blow of 4% inflation and continuing supply chain issues.

Innovation

R&D

Following a consultation announced at Spring Budget 2021, the reform of R&D tax reliefs has been confirmed to include data and cloud costs in scope. However, the wide gap between R&D tax relief actually claimed and R&D carried out in the UK is to be addressed by refocussing the reliefs towards innovation in the UK. The changes will be legislated for in the Finance Bill 2022-2023 to take effect from April 2023.

Online Sales Tax

With the Government committed to the repeal of Digital Services Tax following the implementation of Pillar 1 of the OECD international tax rules (see here), a consultation has been announced on the pros and cons of introducing an Online Sales Tax.

Media, Entertainment & Sport

Creative industries

To aid recovery from the pandemic a number of changes to the creative industry tax reliefs have been announced:

  • the Museums and Galleries Exhibition Tax Relief is extended for a further two years to 31 March 2024;
  • a temporary increase in the rates of relief for Theatre Tax Relief, Orchestra Tax Relief and Museums and Galleries Tax relief for expenditure from 27 October 2021 to 1 April 2024;
  • greater flexibility in claiming Film Tax Relief for films initially intended to be released in cinemas, but which are instead put on streaming services, so long as they meet the criteria for High-End TV Tax Relief.

Gaming Duty

The gross gaming yield bandings for gaming duty will be raised in line with RPI and must be used for accounting periods beginning on or after 1 April 2022.

Business Tax

Banking surcharge

Banks will have been pleased by the Chancellor’s announcement that the banking surcharge has been reduced to 3% following the Spring 2021 announcement of the planned increase in corporation tax rates. This means that banks, which currently pay corporation tax at 27% (ie 8% surcharge over the standard corporation tax rate of 19%), will be paying corporation tax at 28% when the rate increases. However, challenger banks will have been even more relieved that the £25million surcharge has been increased to £100million, taking a significant proportion of new banks outside the surcharge completely.

Asset holding companies (AHCs) regime

Draft legislation was published in the summer to introduce a new regime for the taxation of qualifying asset-holding companies (QAHCs) in alternative fund structures. This legislation has been amended to reflect input provided by stakeholders. The new regime will apply from April 2022 and is intended to make the UK a more attractive asset holding regime.

Abolition of cross-border group relief

Following the UK’s departure from the EU, the government has announced the repeal of the cross-border group relief rules. This will be seen as a simplification of the tax rules, although may frustrate some businesses which fought for years for the ability to use the losses of their overseas subsidiaries and branches to offset their UK tax liability (most famously, Marks & Spencer, who took the UK government to the ECJ and won!). Interestingly, the government does not expect this to raise significant revenue (£5m per year) so appears to be more of a “post-Brexit statement of intent” than an income generator.

AIA extension

The Annual Investment Allowance (AIA) gives businesses a 100% deduction for capital expenditure for qualifying expenditure on plant and machinery up to a specified annual limit, and is designed to accelerate relief, aiding cashflow. The AIA was increased from £200,000 to £1,000,000 temporarily in 2018, and this increase will be extended until April 2023 aligning it with the end of the super deduction (which was announced at Spring Budget 2021).

Freeports

Specific VAT amendments will be introduced affecting Freeports. With effect from 3 November 2021, a VAT exit charge for goods will arise where they have been supplied by a business with the benefit of zero-rating within a free zone but where, after the goods are declared to free circulation, there is no onward taxable sale of the goods to a customer outside the free zone within a three-month time limit or where there is a breach of rules relating to free zone customs procedures. The objective is to prevent businesses, that might otherwise seek to locate in a free zone solely to avoid irrecoverable VAT, from gaining an unintended tax advantage. Amendments will also ensure the UK’s VAT warehousing regime rules and free zone rules are mutually exclusive.

Real Estate

Large residential property developers will be subject to a residential property developer tax ("RPDT"), known as the “cladding tax”. The RPDT will apply to large companies or corporate groups that generate profits from residential property development activities in the UK on or after 1 April 2022 that exceed a £25 million annual allowance. Profits that exceed the allowance will be subject to a 4% tax rate. Funds raised are to be used to replace unsafe cladding.

The deadline to report and pay capital gains tax after selling UK residential property is to be increased from 30 days after completion to 60 days. When a mixed-use property is disposed of by UK residents, the 60 days payment window will only apply to the residential element of the property.

Retail & Consumer

Several changes were announced to business rates in England to reduce the burden on businesses, including introducing a new temporary business rates relief of 50%, up to a £110,000 per business cap for eligible retail, hospitality, and leisure properties for 2022-23. From 1 April 2023 until 31 March 2035 targeted business rates exemptions will be introduced for eligible plant and machinery used in onsite renewable energy generation and storage.

Alcohol duty rates on beer, cider, wine, and spirits will be frozen for another year, as will fuel duty for the 2022-23 year. From 2023, alcohol duty will be restructured so that all beverages will be taxed in direct proportion to their alcohol content with the number of main rates reducing from 15 to 6. A small producer relief will be introduced, duty rates on draft beer and cider will be cut by 5% and the duty premium on sparkling wines will end. The government is publishing a consultation on the details of these reforms which will close on 30 January 2022.

From 1 April 2022, a new green tax on plastic packaging with less than 30% recycled plastic that is manufactured in, or imported into the UK, is to take effect – the Plastic Packaging Tax (“PPT”). The PPT aims to incentivise businesses to use more recycled plastic within plastic packaging and is expected to have a significant impact on retail and consumer supply chains. The government today announced some further technical changes to the PPT legislation including some administrative changes which will affect when PPT becomes chargeable, and ensuring businesses below the de minimis threshold do not have to pay PPT.

Anti-avoidance

In a bid to increase transparency and crackdown on economic crime, the government has introduced new tougher measures:

  • From 2023, companies subject to Money Laundering Regulations will have to pay an annual levy. The Economic Crime (Anti-Money Laundering) Levy will be based on the size of a company’s UK revenue.
  • To deter the promotion of tax avoidance schemes, promoters may see their assets frozen and offshore promoters will see penalties imposed on their UK entities. Companies or partnerships promoting tax avoidance may see their businesses shut down.
  • Large businesses must notify HMRC when they adopt “uncertain” tax treatments of which HMRC is not aware. Corporation Tax, VAT and income tax (including PAYE) are deemed uncertain if they meet one of the following criteria: 1) a provision has been made in the accounts for uncertainty, or, 2) the tax treatment applied is not in accordance with HMRC’s known position. The legislation will take effect April 2022.
  • For Income Tax Self-Assessment (ITSA) sole traders and landlords with more than £10,000 of income have a further year, until April 2024, to prepare for Making Tax Digital (MTD). New penalties for late submission and late payment for ITSA will come into effect 6 April 2024 for those required to submit payments through MTD and 6 April 2025 for all other ITSA taxpayers.

Personal Taxation

Two tax rises were announced in September 2021: the new Health and Social Care Levy which will result in an increase of 1.25% on both employer and employee national insurance contributions (NICs), and an increase in the rates of income tax applicable to dividend income, both of which come into force in April 2022. The new levy will eventually be separated out into a separate charge and will apply to income from employment or self-employment of all workers, whether they are working age or above the state pension age. The ordinary rate, upper rate and additional rate of income tax on dividends are currently 7.5%, 32.5% and 38.1% respectively. These will increase by 1.25% to 8.75% 33.75% and 39.35% from April 2022.

Partners in trading partnerships, as well as self-employed traders, will be affected by the basis period reform. Affecting businesses that draw up annual accounts to a date different to 31 March or 5 April, the change is intended to ensure that a business’s profits and losses are subject to income tax in the tax year in which they arise regardless of the business’s accounting date.

Concern had been expressed since the draft legislation was published in the summer that the transition would result in significant complexity and potential double taxation. The government announced today that the change will be delayed by a year, so the transition year will be 2023-24, and with the new rules coming into force on 6 April 2024. Additional changes were also announced to broaden the availability of overlap relief and to reduce the impact of the transition on certain allowances and benefits.

And finally...

If you feel like rushing to the pub, if the alcohol duty reform is implemented as currently intended, the cost of a bottle of sparkling wine will fall by around 62p and the cost of a pint by around 3p.

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