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Budget Review 2021

I enclose our normal budget review, based on statements and announcements available on 3rd March 2021, as applicable to our core clients, being small limited companies, landlords and individuals.

Key points today:

  • Corporation Taxes up to 25%
  • No changes on CGT
  • Personal allowances frozen for 5 years

Please appreciate this is written very quickly, and will be updated over the next 24 hours.

James Smith

Chartered Accountant

03 March 2021

 

The Main Changes by Sector

Small Limited Companies

click for further details

Corporation Tax Rate

Corporation Tax up to 25% from April 2023 on profits over £250,000

Small profits rate of 19% for profits under £50,000

‘Tapering’ between the two bands.

It was widely expected to see  Corporation Tax up, (and I quote from my notes a year ago, “I would not be surprised to see this revert to 20% or 21% in the next few years) but this is somewhat larger than anticipated.

This is essentially a return to the system that was in place prior to April 2015.  In that period the thresholds were much higher, the small band was for profits of up to £300,000 and the upper limit was £1.5million, rather than between £50,000 and £250,000 under the proposed rules.  To be clear the whole of your profits are taxed at 25% when over £250,000.  To achieve this, there is a taper computation with an effective marginal tax rate of 26.5% for profits between £50,000 and £250,000.

I should point out for investment businesses (i.e. let property in a company) the full 25% rate seems to apply.   This makes your marginal rate of tax as a higher rate tax payer just under 50% once drawn as a dividend, negating most of the benefits if you have incorporated to avoid the 60% marginal rate of tax which can arise for some higher rate tax paying clients.

For clients with multiple companies, the computations will be painful, with “associated company” rules which last time around divided the bands.  For example if you have 2 businesses, your £50,000 band  becomes £25,000 for each business.  The legislation will be key here.

I will review with affected clients projected tax bills etc with your normal year end work.

 

“Super Deduction” on Capital Allowances

An enhanced capital allowance of 130% for the two years from April 2021 to March 2023.

This is the relief for capital purchases, such as equipment.

This does not apply to cars or any second hand items.

This seems to be entirely designed to ensure that Corporations do not delay investments whilst waiting two years for the Corporation Tax rise to 25%.  The 130% gives tax relief of effectively 24.7% tax rate relief.  However the majority of our clients with profits under £250,000 should hopefully benefit from this change.

Capital Allowances 

The current £1million limit due to end 1st Jan 2021 is extended until 1st Jan 2022.

A perennial ‘kick about’ rule which seems to be changed annually.

Losses Carry Back for 3 years

Corporation Tax losses can be carried back up to 3 years rather than the normal one year.

This applies to the year ending March 21 and March 22.

This allows a business with a large loss exceeding the previous year’s profit to obtain an immediate repayment of Corporation Tax, rather than having to roll the excess loss forward to a future year.   This is a useful cash boost.

IR35 Reforms

No changes, so this will go ahead from 1st April, moving the tax risk of IR35 to the end client away from the contractor.

I think I have spoken to most of our contractor clients recently, but for anyone I have not spoken to with a deemed inside of IR35 contract, please ensure your new contract is direct with you as a temporary employee. There should be no reference at all to your now redundant company.

Landlords

SDLT extended and a few other points

For landlords considering incorporation please see the company section regarding the rate of Corporation Tax

Stamp Duty Land Tax Extension

As widely expected the SDLT discount has been extended until end of June, with all properties under £500,000 exempt from normal SDLT.  The 2% band will be raised to £250,000 for 3 months and reverts to £125,000 from the end of September.  The 3% penal rate will continue to apply for second properties.

This is not much of a surprise and the slow wind out might stop a big “cliff edge” albeit creating a number of “mini cliffs” worth £5,000 and then £2,500.

 

Already Announced

 

Extra 2% SDLT for Non-Resident Landlords

From 1 April 2021 the landlord’s additional rate of 3% SDLT rises to 5% for non-residents.

 

30 Day Payment Deadline for CGT

From April 2020 all sales of residential property have to be notified and CGT paid within 30 days of sale.

This does not apply to losses, but if you have sold a property at a profit since April and not let me know, we need to talk!

 

Covid-19

Brief update

I think most clients know where they are with Covid-19 reliefs.

The only real news today was confirmation that the fourth & fifth self employed grant SEISS grant would (as widely expected) bring in the 19/20 tax year figures. This should open claims to those newly self employed in 19/20 but previously ineligible.  There are some caveats around your turnover having to have dropped by more than 30% to make a full claim, which applies to all claims.

There were also announcements of further grants for shops and other business premises which are currently closed along the lines of the previous rates based relief albeit more targeted, and council taxes waved.

A scaled back loan scheme was also announced, but with 20% liability for banks which suggest lending will be fairly restricted.

As already announced:

  • Any deferred VAT from 2020 will need to be paid by 31 March 2021, or arrange for stage payment.  Link to HMRC guidance
  • Bounce Back Loans repayments have been bounced along a little further.  HMRC guidance
  • Phase IV claims for self employment grants should be open soon.  HMRC guidance
  • Furlough claims are still ongoing and extended until September (at least).  We *can* now claim furlough for company directors who have worked between April and October 2020, but are now working fewer hours.  I should have spoken to everyone this applies to.

Personal Tax Positions

Changes and non-changes for personal taxes

Frozen Personal Tax Allowances from 2022

All bands for NI and Income taxes to be frozen until April 2025/26

The big plan 12 months ago  was that that all personal tax allowances and NI allowances would rise by the rates of CPI automatically.   However in a swift U-turn it seems our Chancellor has instead opted to freeze them for 5 years though the already announced rises for 2021/22 remain.

The reality is a future Chancellor – say right before an election to take a random example – could put them up again.

 

3 year Loss Carry Back

Enhanced loss relief for self employed & partnerships for 20/21 & 21/22

This provides useful relief for clients with losses for 20/21 which exceed their profits in the previous year.   Ordinarily such excess losses would be rolled forward to the future but can now be carried back for a further 2 years  and  so generating an immediate cash flow advantage.

A similar rule will be in place for Limited Companies, but not for landlords.

Capital Gains Tax 

No changes announced.

This is “news” following the Office for Tax Simplification report in November.   It was widely expected that this area would be significantly reformed given the historic low rate of CGT at just 10% for basic rate tax payers, and 20% for higher rate on investments other than property which is at 18% and 28% respectively.

It was widely expected that the rates would be moved up to approaching the normal marginal rates with the potential for the reintroduction of  indexation allowance which adjusts the base cost of the asset for inflation.

Key Allowances and Tax Rates

Click for full details

Some Key Allowances for 2021/22

  • Personal allowance up to £12,570 from £12,500
  • Higher rate threshold up to £50,270 from £50,000
  • Employees NI Threshold up to £9,568 from £9,500
  • Employers NI Threshold up to £8,840 from £8,788

What hasn’t changed?

  • Corporation Tax stays at 19%, but goes up for profits over £50,000 from April 2023
  • Personal CGT allowance frozen at £12,300 until 2025/26
  • VAT threshold frozen at £85,000 to 2023/24
  • Mileage stays at 45p for business use of private car under 10,000 miles, and 25p for additional miles
  • Insurance Premium Tax – stays at 12% (after rapid rises)
  • IHT threshold remains at £325,000
  • £100,000 threshold for loss of Personal Allowance remains (frozen since 2010)

General Review of the Day

click for the cheeky bit

Even before the budget was announced Rishi Sunak was wowing social media (nearly 900,000 views) with a promo video about what a nice lovely guy he is. I have watched it so you didn’t have to, and it seems to be essentially the sugary corporate video you are forced to watch during your induction at Supervillain  PLC about how nice and fluffy they are, and how they appreciate your work life balance, moments before being forced to rip the heads off some chickens with your teeth for 14 hours straight with no toilet break. Or something like that.

Back in Westminster parliament was nice and quiet for once with empty green benches all around. There was not even the normal “donut” of keen MP’s trying to get in the camera shot, just a distant Boris sporting a large facemask behind which he struggled to hide his contempt from the PR smoothie at the dispatch box.  Having listened to far too many of these, it was refreshing to lose the tedious “boys club” atmosphere and all the childishness and actually got to listen to the speech.

As usual Rishi droned on about honesty and trust, and investment and name checked some Northern towns he might have looked up on the map, but it seemed refreshingly bereft of 3 word slogans and all the other playground stuff.

So how has he done in the last 12 months?  He gets good credit for the Furlough scheme (albeit poorly implemented and lots of swearing from our end over the tortuous rules) which has clearly saved a lot of jobs , but got rather carried away with his “Eat out to spread Covid about” scheme.  Direct subsidies to the restaurant sector would seem to have been somewhat more sensible.  That is to say pay businesses to stay closed rather than encouraging people to spread the virus.

On finance he has certainly done well in getting cash out to business fast, but much less well in getting it back. Specifically on Bounce Back loans which have been widely abused due to the banks having no risk at all of default.  Over £45bn has been lent to 1.5 million businesses, and its completely disrupted the lending market with small business essentially paying off any other debt (which will almost always carry a personal guarantee) in order to get the very generous terms on offer.  The Bank of England suggests recovering even half would be an achievement.

This all stems from the very loose lending terms. Within the banks having even a 2-4% liability they would have been incentivised to check the borrower’s credentials properly, albeit slowing the pace of lending.  The new schemes announced today are no longer 100% underwritten by government so Sunak seems to have learned from this expensive lesson.

Government debt is clearly colossal. £400bn  has spent on Covid so far, ignoring the tax losses from lower activity, so the big question then is “how is he going to pay it back?”    Rishi’s answer was quite an elegant statement that it would be “the work of many governments over many decades to pay it back”.  Or in other words “don’t look at me pal”.

His starting point was Corporation Tax.  Up to 25% from 19% in 2 years.  Just as he said this he seemed to turn around and look at Boris.  Boris if you recall was blustering about Laffer curves before getting elected in 2020 under a widely debunked idea that lowering Corporation Taxes would increase the tax take.  However the basic facts remain.  Those that pay Corporation Tax have little choice about it, and higher rates mean more UK taxes.  International businesses which seem to be given the choice of where to pay will always prefer an ultra low tax jurisdiction unless forced to pay them here by legislation and proper enforcement.  This is backed up by the “red book” which shows this will raise £17BN annually, so 1/6th of HS2 or about 4% of the spending on Covid support.

The next hit is the general public with a freeze on personal tax allowances for 5 years. This feels more than a little like a return to the ‘austerity’ policies post 2008. This is known in tax and economic circles as  ‘fiscal drag’ which means as inflation goes up (assuming your wages rise with it) your tax bill goes up proportionately.   This is set to raise £7bn a year by 2026.   What amused me somewhat is rather than freeze the rates for 20/21 (and they are at nice ’round’ numbers too) he went ahead with the CPI linked increased announced 12 months ago, probably not helped by the fact HMRC issued them recently.  Anyone would think he didn’t fancy the round of “U-turn” headlines in the morning.

In all of this the biggest news apart from Corporation Tax seems the lack of reform of CGT.  He has an ‘open goal’ here with wide consensus across the tax profession and politically on all sides that the current rates (introduced by George Osbourne) are too low.  Non-property investments face only a 20% rate of tax for an additional rate tax payer usually paying 45%, which leads to “game playing” to turn income into capital gains and the resulting ‘catch up’ legislation of HMRC trying to stamp down on it.   There was not even a whisper about this in his speech and one does wonder what thought process exactly resulted in such a significant tax raising opportunities being left untouched.  I am sure there is no connection at all with the fact that this relief tends to be mainly utilised by only the wealthiest in our society.  Clearly the sort of Chancellor who tell us he is honest and upfront sort of a chap would be not be influenced by his own wealth (reputed to be worth £200 million) or his wife’s who is worth over a billion.

On the Red Team, the shadow Chancellor Dodds was ditched and replaced by Mr Starmer, and quite frankly didn’t have anything very much to say.  The key take away was that this budget did nothing at all for inequality, in fact the reverse with what looks like austerity MKII in terms of long term fiscal drag with personal allowance all frozen and no increase in the headlined rates for higher earners.

Appendix One

Key Data for Running a Limited Company

click for the usual tables of profit extraction

I normally publish the following tables to give typical extraction strategies undertaken by small Limited Companies. These give the maximum director’s bonus and dividend combinations for company directors to each key “stop” point, of (a) staying basic rate; (b) preserving child benefit; and (c) loss of personal allowance at £100,000 gross income.

This is getting more complex as time goes on, so please treat this as a “loose guide” as your circumstances may of course be different.

The standard salary amount for single director firms for 2021/22 will be £8,840, or £9,568 if you have two directors, or one director and an employee.  The comps are all based on single director set ups.

Directors Wishing to Stay Basic Rate

2020/21 2021/22
Threshold Income Tax Threshold Income Tax
Director’s Bonus £8,788 Nil £8,840 Nil
Tax Free Dividend £5,712 Nil £5,730 Nil
Basic Rate Dividend £35,500 £2,662 £35,700 £2,678
Total Extraction £50,000 £2,662 £50,270 £2,678

Increase in tax: £16 for £270 more drawn.

 

Directors Wishing To Retain Full Child Benefit

2020/21 2021/22
Threshold Income Tax Threshold Income Tax
Director’s Bonus £8,718 Nil £8,840 Nil
Tax Free Dividend £5,712 N/a £5,730 Nil
Basic Rate Dividend £35,500 £2,662 £35,430 £2,657
Total Extraction £50,000 £2,662 £50,000 £2,657

Decrease in tax: £5

 

Directors Wishing To Preserve Personal Allowances

2020/21 2021/22
Threshold Income Tax Threshold Income Tax
Director’s Bonus £8718 Nil £8,840 Nil
Tax Free Dividend £5,717 n/a £5,730 Nil
Basic Rate Dividend £35,500 £2,662 £35,700 £2,668
Higher Rate Dividend £50,000 £16,250 £49,730 £16,162
Total Extraction £100,000 £18,912 £100,000 £18,830

Decrease in tax: £82

 

Alternative Way of Looking at Extractions for Your Limited Company

Your gross income (dividend+salary+other income) should be:

£50,000 if you want to keep all your child benefit

£50,270 if you want to stay basic rate

£100,000 if you want to preserve all your personal allowance

£150,000 if you want to avoid the additional (45%) rate of tax

You can then use the following rules of thumb for how much tax to keep back:

Personal Tax Arising
First £14,570 Nil
Next £35,700 (to £50,270) 7.5% (Basic Rate)
Next £49,730 (to £100,000) 32.5% (Higher Rate)
Over £100,000 Calculator time

 

Appendix Two

Making Tax Digital Difficult Diabolical

Afraid so - its back, and not just for VAT registered businesses

Long term readers of these missives will know my ever so slight aversion to the “Making Tax Digital” system which replaced one perfectly functional digital way of filing your VAT returns online with another digital system from April 2019.

After a phenomenal amount of time, effort and cost, the only differences that really exist between the new and old systems are:

  • You (or I) have to pay for software to file it, rather than HMRC supply that for free
  • HMRC interfaces are considerably poorer than before with lower functionality
  • Setting up a DD is much harder
  • HMRC have a new back end they could have built anyway

Did it meet any of its key aims or reduce processing time for you? No. For me? No.  Did it raise any more tax?  Well HMRC have not published any figures to say it has (and you can bet they would have if it did), and anecdotal evidence suggests that the increased in digitisation can lead to an overclaim of more VAT as software often auto-populates VAT on a whole category of expenses.

So faced with such a blistering success HMRC have of course canned the whole thing sorry, expanded this further.

So:

  1. For VAT clients under the threshold for VAT, you will need to use the new system from April 2022.

We will deal with this if we file your VAT.  If you file it, talk to me.

2. The scheme is extended to unincorporated traders and landlords from April 2023.

So in practice this means ordinary self-assessment clients are dragged into the net.

For any business with a turnover over £10,000 you will be expected to:

  • Keep your records digitally (excel is digital for this purpose)
  • File records quarterly (in year) for every business stream you have
  • Still file a version of the normal tax return at the year end

This draws in (say) a consultant who bills £1,000 a month alongside a day job, or a landlord with rents of £950/month. It will also mean multiple returns if you have more than one business stream. For example if you are a landlord and a sole trader then you have two returns per quarter.  And it gets worse if you have property held in different ratios as each combination is a new return.

So what do I need to do?

Well right now, not a lot.  This was announced originally back in December 2017, and was supposed to start from April 2018 and this latest deadline is just one of a series of slippages now measuring 5 years.    I would imagine any launch from April 2023 would be a very soft launch indeed and quite frankly if there are no penalties arising there is no real reason to change how you keep your records until fines start popping up.

The main action point is to ensure all your business banking flows through a dedicated bank account, rather than muddling it up with private finances.  Bank feeds (your bank sending data to software of some kind) seems to be the main way we can make this an efficient process.

 

From our side we hope to be able to set up a system to push low quality data towards HMRC but it’s unclear at this stage how that will look.   As you won’t (initially) be taxed on this data the quality of the data can be very low indeed without any of the normal accounting adjustments.  To be clear this is not a quarterly tax return, it’s just “some data” needs to be filed every for reasons which are not readily apparent, other than “we will fine you if you don’t”.   I remain deeply unimpressed at having to facilitate this farce rather than spending time with clients developing something actually useful for their business.