Old Mill Updates

Autumn statement and budget – initial overview

Old Mill’s tax team take an initial look at how the budget affects both businesses and individuals across the Southwest.

27th October 2021

Budget summary

Having already announced tax increases and frozen allowances both in the Spring budget and then subsequently, it was perhaps not surprising that this was a budget light on taxation matters. Indeed, with the Treasury leaking a succession of proposals in the days leading up to the budget, incurring the Speaker’s wrath in the process, there was some concern that the Chancellor might not have anything new left to say at all.

The Chancellor did of course have lots to say, largely on investment and spending. This was a budget big on positive optimism for the economic outlook for UK Plc, big on growth and big on investment. As the Chancellor laid out a series of investment plans and spending initiatives, one couldn’t help but wait for the inevitable tax measures which would be required to pay for it. That these never came presumably means they had already been costed in from previous announcements.

The fact that there were no major tax increases will come as a relief for both businesses and individuals alike. Indeed, measures such as the extension of the Annual Investment Allowance, and cuts in business rates for the leisure and hospitality sectors, will come as welcome boon to many.

Talking to our clients in the lead up to the budget, we saw the same concerns that had been felt ahead of many recent budgets, namely potential changes to Capital Gains Tax and Inheritance Tax and worries that pensions tax relief could be reined in. None of these received a mention in the budget. That said, these do remain topical areas though, with CGT and IHT, in particular, still under government review.

It was encouraging to see the Chancellor showing an appetite to simplify the tax system. The announcements regarding alcohol duties will provide some succour to those in the food and drink sector. It’s hoped that this desire to simplify may be broadened out to other areas of taxation over time.

So, a positive budget full of optimism for the future. Whilst there were no tax nasties today, there should remain no mistake that the burden of taxation is set to increase significantly. Owner managers trading through companies and employing staff will be particularly affected, with higher Corporation Tax bills, as well as increased costs of employment through changes to the minimum wage and the new health and social levy. And fiscal drag – where allowances and bandings do not rise with inflation – represent Income Tax rises by the back door.

In that environment, it is vital for business owners to mitigate the effects as far as possible through tax efficiency. This is something we will return to in the coming weeks as we digest the budget in more detail and guide our clients through these changes.

Business and corporate taxation

Business Rates

Several reforms are to be introduced to Business Rates, with the intention of reducing the burden of the regime as well as making the system more responsive.

Eligible retail, hospitality and leisure businesses will welcome a new temporary relief from 50% of their bill, capped at £110,000 per business, which will apply for 2022-23. Similarly, the rates multiplier being frozen next year, for a second year, should give bricks and mortar businesses some badly needed savings.  SMEs will also benefit from an extension to transitional relief and the small business scheme, meaning that bill increases will be capped at 15% for properties with a rateable value up to £20,000 (£28,000 in Greater London), and 25% for properties with a rateable value up to £100,000.

From 2023, relief will be available for twelve months from any increases in rateable values on eligible building improvements, and a two-year period of targeted exemptions and relief measures linked to the decarbonisation of non-domestic buildings. The frequency of business rates revaluations will also increase from 2023 – to take place every three years instead of five.

It is also noteworthy that consultation will start shortly on an Online Sales Tax which, if introduced, would be used to reduce Business Rates for retailers in England.

Annual Investment Allowance (“AIA”)

In a popular but largely expected move, the Chancellor announced an extension of the current £1m AIA amount to 31 March 2023.

The AIA amount, which is the amount on which capital allowances can be claimed at a rate of 100% on qualifying capital expenditure, has been changed six times since its introduction in 2008. Prior to the announcement, the amount was due to fall to £200,000 from 1 January 2022.

No changes have been made to the often underclaimed Research and Development Allowances. This too provides a 100% capital allowance on qualifying R&D capital expenditure, but there is no cap on the amount which can be claimed.

Basis period reform

A reform of the way that trading income is allocated to tax years, for Income Tax purposes, was announced earlier in the year.

This will see profits from the trade of self-employed persons and partners of partnerships, amongst others, being taxed on the tax year basis, rather than based on the date that accounts are drawn up.

The changes will take effect for the 2024-2025 tax year with 2023-2024 being a transitional year. Special calculations will be required to take into account relief for both overlap profits – those profits which have been taxed twice in the first years of trading – and also, unless electing out, for the spreading over five years of higher taxable profits created in 2023-24 as a result of the changes.

Creative sector reliefs

The creative sector will receive a boost in two ways. Firstly, the specific regimes for museums and galleries exhibitions, theatres and orchestras will all see an increase in the headline rates of relief, with some changes effective immediately. Secondly, the relief for museum and galleries exhibitions will be extended for two further years until 31 March 2024.

Other announcements

The ability to claim Corporation Tax relief for losses arising overseas, in the form of cross-border group relief, is to be abolished. This relief was a requirement under EU legislation, but following the UK’s exit from the EU, the Chancellor has decided to remove the relief from UK statute.

It was confirmed that the new Residential Property Developer Tax – previously announced earlier this year – will be introduced from April 2022. The tax will be charged on UK residential property development companies and groups at a rate of 4%, on profits exceeding an annual allowance of £25m.

The UK’s shipping tax regime – Tonnage Tax – will see a package of reforms from April 2022 including flagging requirements, the regime ‘lock-in’ period, and qualifying secondary income levels.

A consultation is to take place on making it easier for companies to re-domicile to the UK, in line with regimes currently in place in countries like Canada, Australia and Singapore.

Recovery Loan Scheme extended to 30 June 2022

The Chancellor confirmed recent speculation that the state-backed Recovery Loan Scheme for UK businesses would be extended for a further six months.

Originally launched last April as a ‘bridge’ between previous schemes (the Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme) and regular bank lending the December deadline was always subject to review.

Finance will be restricted to a maximum of £2 million per business and the government-backed guarantee will be reduced from 80% to 70% to encourage the lending market to move towards normality as the economy continues to recover.

Research & Development and tech reliefs

Whilst the Chancellor majored on the government’s commitment to a world class R&D programme, there was very little in terms of specific changes to the R&D regimes.

Qualifying expenditure will be expanded to encompass data and cloud computing costs. This is good news as it will only increase the tax relief available to companies.

Also announced was a refocus on support towards innovation in the UK rather than abroad. Currently, there is no requirement for sub-contractors, externally provided workers or staff to be based in the UK for these to form qualifying costs for R&D.  It looks as if this is about to change.  No details have been released yet, so we don’t know what form this restriction will take.  It could be an all or nothing approach – whereby only costs incurred in the UK will qualify – or it could be more staggered where a certain percentage of the R&D must take place in the UK to enable the foreign expenditure to qualify for relief.  We hope to see more details emerge over the coming weeks.

The detailed notes to the budget confirm that the government will be setting out plans this autumn to tackle abuse of, and improve compliance with, the R&D tax credit regime.  This doesn’t come as a surprise, and we know that HMRC are ramping up their compliance teams to provide increased scrutiny of R&D claims.  As a result, we are expecting to see many more HMRC enquiries into R&D claims.

There is no better time than now to review your R&D arrangements. If you have an R&D adviser, we recommend ensuring that they are appropriately qualified and regulated by a professional body. Firms that are regulated are required to conduct their business following certain professional and ethical guidelines. It is often assumed that all tax advisers, including R&D advisers are regulated, but unfortunately this is not always the case.

These changes are anticipated to take effect from April 2023. We anticipate that further detail will be released before Christmas.

Individual taxation

While many changes to the taxes which affect individual taxpayers had been anticipated, this budget was practically silent on many of the capital and personal taxes.

The Chancellor did however announce an increase to the national living wage applicable to individuals aged 23 and over from £8.91 to £9.50, starting in April 2022. The minimum wage for those under 23 will also increase. These announcements had already been made prior to the budget announcement on 27 October but the Chancellor confirmed this change.

Income Tax

As outlined in the Spring budget, Income Tax bands and the Personal Allowance will remain frozen. When coupled with a higher minimum wage, rising inflation and predicted growth, this will help the Chancellor fund his spending announcements and, in real terms, equates to a tax rise as incomes increase relative to the bands, and so more income is taxed at the higher rates.

National Insurance & Health and Social Care Levy

The new Health and Social Care Levy was announced recently to help fund the NHS. As of 1 April 2022, NIC will increase by 1.25% for employees, employers and the self-employed, before becoming a separate Levy from April 2023. Income Tax on dividends will also increase by 1.25% on each band from 1 April 2022 to reflect the Health and Social Care Levy on wages.

No further changes to either National Insurance Contributions (NIC) or the new Health and Social Care Levy were announced.

Capital Gains Tax

The most significant change to CGT will be an extension of the deadline for submitting a return and making a payment on account when disposing of residential property – this will increase from 30 days to 60 days. This comes following a recommendation by the Office of Tax Simplification (OTS) back in May 2021. This is a welcome change as it will ease the time pressure on taxpayers and agents to submit the return and pay the tax.

Whilst there had been talk of potential changes to CGT leading up to the budget, including removing or restricting relief, removing the probate value uplift on death, or increasing the rates payable, potentially to be in line with Income Tax rates, these did not materialise. There is always the possibility that these proposals may be implemented in a future budget, but for now there are no changes.

Inheritance Tax

Again, Inheritance Tax changes have been discussed for a couple of years as more estates are now paying Inheritance Tax as property values increase and the nil rate band remains frozen. However, there were no changes to Inheritance Tax announced. The OTS report recommendations included restricting Business Property Relief or removing certain small exemptions in favour of a gift allowance, these recommendations are yet to be acted upon. A response to the OTS report is anticipated towards the end of autumn.

Stamp Duty Land Tax

Further to the recent Stamp Duty Land Tax holiday coming to an end on 1 October 2021 and given the raft of announcements in the Spring Budget, it is perhaps not surprising that there were no changes to Stamp Duty Land Tax announced.

For a more detailed analysis of the autumn statement and budget

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