The Coronavirus Budget 2

Thanks to Kathy Hills, Leonie Byers and Olivier Jacquelin who have helped in putting together this note.

Let’s start with an easy one. What do Boris Johnson, Matt Hancock, Professor Chris Whitty, and Fergus Walsh (the BBC’s medical editor) all have in common? Yes, they all contracted Covid right at the start of the pandemic. The people who tell us what to do cannot do it themselves. 

Now for a more difficult one. Whose Covid diagnosis was announced on Budget Day last year? That was Nadine Dorries, then a junior health minister (now a senior health minister). She was the first MP to catch Covid and the Daily Mail sent a reporter to interview her about it.

So, who has not had Covid? Of course, it’s Rishi Sunak. Nothing bad seems to attach itself to the Chancellor. He introduced the Eat Out to Help Out campaign, which was an enormous success (for the virus). His Covid measures look set to increase the UK’s national debt to 100% of GDP – roughly the same as Argentina’s. And yet he is the favourite to become the next Prime Minister. So far, he is smelling of roses.

And what did he have in store for us this time? Well, nothing on capital gains tax rates, or business asset disposal relief, contrary to the rumours. (So that’s a lot of wasted weekends and nights, eh chaps?) And no immediate tax rises of any kind. Mr Sunak is still in full-blown survival mode and was throwing away money like it was going out of fashion. A few billion here, a few billion there. So we start with a summary of the Covid-related hand-outs announced today. 

Continued Support for Jobs

The Chancellor confirmed that the furlough scheme will be extended until the end of September, with the government paying 80% of salary.  However, from July, the employer must contribute towards the cost of unworked hours.  This will amount to 10% in July, 20% in August and 20% in September.

For the Self-Employment Income Support Scheme, the Chancellor confirmed that the fourth grant will be worth 80% of three months’ average trading profits, paid out in a single instalment and capped at ￡7,500 in total.  It will cover the period February to April.  To apply, a 2019-20 Self-Assessment tax return must have been filed. 

A fifth grant to support self-employed people later this year was also confirmed.  It will involve a turnover test.  People whose turnover has fallen by 30% or more will receive the full grant worth 80% of three months’ average trading profits, capped at ￡7,500.  Those whose turnover has dropped by less than 30% will receive a 30% grant, capped at ￡2,850.

￡5 billion of New Restart Grants

The Chancellor announced ￡5bn of new grants worth up to ￡6,000 for non-essential retailers and ￡18,000 for restaurants, pubs, personal care and gym businesses.

New Recovery Loan Scheme

A new Recovery Loan Scheme to replace the existing loan schemes will be introduced on 6 April 2021 and will remain open until 31 December 2021.

Businesses will have access to term loans and overdrafts of between ￡25,001 and ￡10 million per business as well as invoice finance and asset finance of between ￡1,000 and ￡10 million per business.

The Government will guarantee 80% of the finance to the lender.

Extension to Business Rates Holiday

The Government will maintain 100% business rates relief from 1 April 2021 to 30 June 2021 for eligible retail, hospitality and leisure properties in England.  The relief will decrease to 66% from 1 July 2021 to 31 March 2022.

Extension to Reduced Rate of VAT

The temporary 5% reduced rate for hospitality, holiday accommodation and attractions introduced last year will be extended until 30 September 2021.  A new 12.5% reduced rate will subsequently come in to force on 30 September 2021 until March 2022.

Still on Holiday

The Government will maintain the residential Stamp Duty Land Tax Nil Rate Band at ￡500,000 in England and Northern Ireland until 30 June 2021.  From 1 July until 30 September 2021, the Nil Rate Band will decrease to ￡250,000.  Finally, the Nil Rate Band will go back to ￡125,000 on 1 October 2021. 

I am told by a member of the team that this is actually disappointing news because, having sold, she is waiting for the price to drop before buying. It doesn’t look as though she will have to wait very long, though.

In conclusion, that is a lot of hand-outs. The Chancellor suggested the total package now stands at ￡400 billion, though I confess I have lost count. It was only when he got to corporation tax that the Chancellor suddenly seemed to remember there is an economic crisis going on. Of course, there may be a reason for this. Companies don’t vote.

Corporation Tax Rate Increase

Apparently the Chancellor’s main measure to recover the UK’s lost ￡400 billion is an increase in the corporation tax rate from 1 April 2023. It is going to go to 25% from 19%, though companies with profits of ￡50,000 or less will continue to pay at the existing rate, and companies with profits between ￡50,000 and ￡250,000 will pay at a sliding rate between 19% and 25%. The measure is expected to raise about ￡16? billion a year from 2024, so a back of a fag packet calculation suggests that the ￡400 billion will be all paid off by 2048.

Banks currently pay an 8% surcharge on top of corporation tax and the Government intends to reduce this by an as yet unspecified percentage to take account of the future increase in corporation tax. 

Super-Deduction

The above tax hike is partly offset by the announcement of a “super deduction”. For apparently the first time in history (we haven’t checked), the general capital allowance rate is going to be set at a rate in excess of the amount spent by a business. You had better try and understand this as it is costing you ￡25bn over the next two years! When a business incurs expenditure on plant it can claim tax relief on a percentage of the purchase price – that percentage is going to be increased to 130% (from 18%) from 1 April 2021 until 31 March 2023 for many types of plant, such as computers, manufacturing equipment, white goods and sanitary ware. For “integral features” such as electrical and water systems the relief will be increased to 50% (from 6%). This is probably the most eye-catching announcement of the day.

Extension of Tax Losses

Again, this is a further tax saving measure. In general both individuals and companies can carry tax losses arising in their businesses back and set them against profits made in the previous year – resulting in a repayment of tax. For periods broadly between April 2020 and April 2022, the Government has extended this carry back period to 3 years. The additional carry back will be limited to ￡2m of losses.

Freeports

New Freeport sites are created which will benefit from special tax reliefs. Companies within the Freeport sites will benefit from enhanced capital allowances of 100% on qualifying plant and machinery for use within the sites. These new measures will apply to expenditure incurred on or after 1 October 2021 (and up until 30 September 2026).

Companies within the Freeport sites will also benefit from an enhanced rate of structures and buildings allowances of 10% on a straight line basis. The allowance will be available on the construction of new, and renovation of existing, non-residential structures and buildings within Freeport sites on or before 30 September 2026. This is a significant increase in the usual allowance rate of 3%.

Companies within Freeport sites will benefit from full relief from any stamp duty land tax on property purchases within the site and full business rates relief. Additionally, the Government intends to make an employer national insurance contributor relief available for employees within Freeport sites from April 2022.

IR35/ Off payroll working rules

Though there was some last minute tinkering with the detail, no further delay has been announced to the introduction of the new IR35/ off payroll working rules which will come into force as planned next month. These are the rules under which people contracting with an intermediary (such as a company) for the provision of the services of an individual may have to deduct PAYE and NIC from their payments to the intermediary. 

This is on balance probably a good thing because, after all that client training, I would fear for Kathy’s state of mind if they had postponed it again. The new rules apply to medium and large sized clients in the private sector (small companies are exempt) but public sector clients will also be affected by a number of changes made to the current rules.

EMI

A furlough-related minor change was made to the Enterprise Management Incentive (EMI) scheme. An EMI option may only be granted to an ‘eligible employee’.  When the furlough scheme was introduced, there was widespread concern that an individual who had been eligible (working for their employer for at least 25 hours per week or, if less, 75% of their committed working time) would lose the income tax and capital gains tax benefits from holding an EMI option. HMRC announced that a technical change would be made to ensure that a furloughed employee would not be disadvantaged and fortunately for us, the Chancellor is ‘honest’ (we know this because he mentioned it several times during the Budget speech) and therefore a formal change will now be made to the EMI rules to ensure that anyone who is furloughed or who has their working hours reduced below the EMI threshold mentioned above as a result of Covid, will remain eligible to be granted EMI options and to continue to benefit from EMI treatment for existing options.

A consultation was also announced for the EMI scheme. Prior to Brexit, the EU had to approve any changes to EMI because it is a “State Aid”. Now they don’t, so the Government is keen to change it all. Not because they want to – just because they can. The EMI consultation has been opened to consider whether the scheme should be expanded to allow more companies to access it. Currently in order to be eligible to grant EMI options, there are limits on a company’s size in terms of number of employees (250) and gross assets (￡30m). Additionally, there is a limit on the value of options that a company can grant - ￡250k of unexercised options per individual and ￡3m of unexercised options in total (these values being considered at the date of grant, so not taking into account the growth in value of the shares whilst under option).

A consultation has also been announced into the workings of the R&D Tax Credits scheme.

Withholding Tax on Interest and Royalties

In line with EU law the UK did not charge withholding tax on payments of annual interest or royalties to connected companies resident in an EU member state. That law survived Brexit but it has been announced that it will be repealed from 1 June 2021. From that date, whether withholding tax is charged will depend on the terms of the double tax treaty between the UK and the particular EU country. For instance payments of annual interest to Italian, Portuguese and Belgian companies will need to be made under deduction of UK income tax. Recipients of interest in all EU countries may have to claim treaty relief before 1 June 2021 to ensure tax is only deducted in accordance with the relevant treaty.

Frozen

A lot of things did not change today.

The threshold at which businesses have to register for, and charge, VAT will be frozen at ￡85,000 until April 2024

The inheritance rate nil-rate bands shall remain at the existing levels until April 2026.

The income tax personal allowance and income tax thresholds will each rise as planned in April 2021 (to ￡12,570 for the personal allowance, ￡37,700 for the basic rate threshold and ￡50,270 for the higher rate threshold) before these are frozen until April 2026. Similarly, national insurance contribution thresholds will rise in line with the CPI, but again will then be frozen until April 2026.

The value of gains a tax payer can realise before paying capital gains tax (the annual exempt amount) will be frozen until April 2026 at ￡12,300 for individuals and ￡6,150 for trusts.

Other measures include freezing the pensions lifetime allowance (￡1,073,100), the nil rate band for savings income (￡5,000) and the ISA limits (￡20,000 for adults and ￡9,000 for children).

Likewise the duty rates on beer, cider, wine and spirits will be frozen for another year, as will fuel duty.

Just when you thought it was safe

We have been told to expect “tax day” on 23rd March when a number of tax consultations will be announced (as if the Budget was not excitement enough). Watch this space.

So is the Chancellor likely to retain his popularity after this Budget? Who can tell? He certainly didn’t raise taxes, and that is what people don’t like about Chancellors. 

But is his failure to raise taxes going to plunge the country into an inflation-ravaged, high interest, loan default, the like of which we have never seen before? Again, who can tell? You couldn’t rule it out. 

A popular Chancellor is a rare thing, rather like a popular referee. In football, if a referee walks off at the end of the game and no-one boos, they have probably had a bad game. I wonder whether it’s the same with Chancellors?