The UK may yet have to face the harshest of times if support measures are removed prematurely. The Bank of England is doing its part in maintaining financial stability and commercial viability through its accommodative monetary policy stance and its commitment to be the lender of last resort. It is up to the political establishment to first contain the pandemic and then to accommodate the re-establishment of a fully employed, productive UK workforce and to foster the grounds for economic growth.
The Chancellor must address two key questions. First, have these stimulus and support measures for the UK economy been sufficient? Second, when will they have to end?
Decisions announced by the Chancellor in the 3 March Budget will have far-reaching, long-term effects - extending well beyond the next election in 2024. As we saw after the last existential shock to the economy, the financial crisis of 2008, the longer and deeper the downturn, the greater the likelihood of long-term detrimental effects on employment levels, business investment and potential economic growth. At the time of the Budget it will only be a year since the start of the pandemic’s impact on the UK economy. ‘Only’ a year.
Another consideration for the Chancellor is the build-up in savings by consumers. Uncertainty over jobs and the economy leads to an understandable reduction in overall consumer spending. The eventual release of that pent-up demand, following effective vaccine distribution and the restoration of consumer confidence, may signal the start of a consumer-led economic recovery that will allow the Chancellor more room to manoeuvre. Determining when that point will be reached requires a degree of foreknowledge which is not available to the Chancellor as he prepares his Budget.
There is a fork in the path ahead. In his Budget, the Chancellor must indicate which route he proposes to follow. Should he raise taxes in order to commence rebalancing the deficit now (something that might well take a generation)? Alternatively, should he defer tax rises and continue to support people and jobs until the economy is on a surer footing?
Discover our predictions for this significant Budget below.
What we are confident will be announced
Making tax digital for corporation tax
The Government is currently consulting on the architecture of a more fully digitalised framework for corporation tax, and we expect the Chancellor to confirm that this remains a key element of the strategy for modernising tax administration in the UK. Currently, almost all companies are required to submit their annual corporation tax returns online using the Government’s preferred digital format for business reporting, iXBRL. As part of making tax digital for corporation tax, there would be a requirement to maintain digital records and for most businesses to provide quarterly updates to HMRC in addition to an updated annual tax return. Furthermore, iXBRL tags would be required to be applied at a more granular level, and the consultation also notably explores the idea of aligning the corporation tax return filing deadline (currently one year after the end of the relevant accounting period) with the deadline for filing statutory accounts with Companies House (generally nine months after the end of the accounting period for private companies and six months after the end of the accounting period for public companies). The new regime is not expected to be mandatory before April 2026.
Extend definition of R&D for tax purposes
Incentives for expenditure on qualifying research and development (R&D) are among the most widely used and valuable corporation tax reliefs in the UK and, following a pledge in the Conservatives’ 2019 election manifesto, a consultation has been conducted on expanding the scope of the regimes to provide additional tax relief for, in particular, R&D-related data and cloud computing costs. We expect the Chancellor to announce that the Government intends to proceed with this proposal.
Preventing abuse of the R&D tax relief for SMEs
The Government has consulted on, and published draft legislation in relation to, measures that would cap the payable credit that companies may receive under the R&D tax relief regime for small and medium-sized enterprises (SMEs). The proposed cap is to be based on the amounts of income tax and National Insurance contributions for which the company is required to account to HMRC under PAYE. The measures are intended to help HMRC to combat abuse by companies claiming R&D tax relief in the UK even though their R&D (if any) is not substantively linked to the UK. Based on the draft legislation, the cap will not affect claims to a payable credit worth less than £20,000, and there will be an exception to the cap for certain companies that have employees creating, preparing to create, or managing intellectual property. The Chancellor will confirm that these measures will apply from 1 April 2021.
Notification of uncertain tax positions
A surprise announcement in the 2020 Budget was the Government’s intention to require large businesses to notify HMRC where they submit a tax return based on an interpretation of legislation that is ‘uncertain’. This measure quickly became quite controversial and one point forcefully made during the ensuing public consultation was the problematic nature of the proposal to define an uncertain tax position by reference to the relevant taxpayer’s subjective view of whether HMRC would accept it. The Government has now announced that the implementation of this measure will be delayed until April 2022, pending further consultation, details of which we expect the Chancellor to announce in his Budget statement.
Technical changes to hybrid and other mismatches rules
The hybrid and other mismatches rules were introduced by the Finance Act 2016, in response to work performed by the Organisation for Economic Cooperation and Development (OECD) to combat tax planning and structuring that erodes the tax base and may shift profits to low-tax jurisdictions. Broadly, they operate to neutralise tax mismatch outcomes that arise when taxpayers seek to exploit differences in the tax treatment of entities or instruments (such as funding arrangements) across different tax jurisdictions. However, taxpayers and other interested parties have raised concerns that the UK rules go much further than the OECD recommendations and are having a disproportionate effect in some cases, including situations that do not bear any of the hallmarks of the abusive tax avoidance arrangements that the legislation is designed to tackle. In response, the Government has consulted on certain technical amendments that would mitigate some of these issues and has subsequently pledged to implement a wider range of simplifications and relaxations to ensure that the regime is better targeted and more proportionate. We expect further legislation to be published and for the Chancellor to confirm that these measures will be part of what will become the Finance Act 2021.
Tax treatment of asset holding companies in alternative fund structures
Shortly before Budget day, a second consultation will close on measures to address perceived barriers within the UK tax system to the establishment of asset holding companies (AHCs) in the UK by certain investment fund structures. The Government believes that there is a clear case for reform in this area, as it seeks to encourage funds to locate AHCs in the UK by introducing a new bespoke tax regime for such entities that could include relief for capital gains and exemptions from withholding tax. There are expected to be specific rules for real estate funds, and the second consultation document also explores potential reforms to the UK’s real estate investment trust (REIT) regime. The Chancellor is expected to confirm that draft legislation in relation to these changes will be published during 2021.
Amendments to lease taxation rules to reflect the withdrawal of LIBOR
The UK tax rules for lessors of plant and machinery contain references to the London Inter-Bank Offered Rate (LIBOR) as a benchmark interest rate. LIBOR is to be withdrawn from the end of 2021, so the Chancellor will confirm that, in line with draft legislation that has already been published, these references will be replaced by references to the incremental borrowing rate as determined by generally accepted accounting practice.
Technical amendments to corporate interest restriction rules
The UK’s corporate interest restriction rules impose an earnings-based cap on the extent to which UK companies can obtain relief for finance costs such as interest. The rules were introduced with effect from 1 April 2017, but they are highly complex and a series of technical amendments have been required to ensure they work as originally intended. Based on previous announcements, we can expect the Chancellor to confirm that the next Finance Bill will include further amendments to clarify the application of the rules in the context of REITs and ensure that the regime does not impose penalties where there is a reasonable excuse for a failure to make a required return.
Technical amendments to rules affecting UK property-rich collective investment vehicles
Non-UK residents have been within the charge to UK capital gains tax (or corporation tax on capital gains) where they dispose, directly or indirectly, of interests in UK land. The relevant legislation contains complex provisions as to how this principle applies in the context of UK property-rich collective investment vehicles, and in this regard the Government has published draft secondary legislation intended to remove disproportionate burdens in relation to specified investors and correct minor drafting errors. These regulations are expected to become law shortly after the Budget, if not earlier.
Income tax rates and thresholds
In addition to going against the Conservatives’ 2019 election manifesto promises, increasing income tax rates would be hugely unpopular and risk doing more harm than good to a fragile economy. We expect the Chancellor to confirm no changes in income tax rates and that the higher income tax rate threshold will increase in line with the September consumer prices index (CPI) figure to £50,270 for 2021/22, as previously announced in the Chancellor’s November 2020 Spending Review.
National Insurance contributions (NICs) top rate limit
As with income tax rates, the Conservatives’ 2019 election manifesto promised no increases in rates of NICs. The top rate of NICs for employees (12 per cent) and the self-employed (9 per cent) is payable up to a limit aligned with the higher-rate income tax threshold. It is expected that this threshold will remain in line and the NICs upper earning limit will be increased to £50,270.
National Insurance contributions threshold
At the lower end of the NICs scale, the income tax and NICs thresholds are not currently aligned. With the ambition that the first £12,500 of earnings should be completely free of tax, there may be an announcement of an increase in this threshold for employee and self-employed Class 4 contributions towards alignment with the income tax personal allowance. Such a move would help low earners, but it is thought by some commentators that it would not be as effective in doing so as improvements to the system of universal credit.
Tax relief on pension contributions for higher rate taxpayers
Further reductions to tax relief on pension contributions are likely as a means of raising revenue and resolving perceived unfairness in the system. The Chancellor could address this in a number of ways, including reducing the annual and lifetime allowances and limiting carry-forward of unused annual allowances, but the simplest would be to apply a single flat rate of relief, perhaps set at the level of basic rate income tax.
Tax relief on pension contributions for non-taxpayers
The Conservative Party election manifesto promised to fix a ‘loophole’ whereby certain non-taxpayers (ie employees earning between £10,000 and just above the £12,500 personal income tax allowance) saving into ‘net pay pension schemes’ do not receive tax relief on pension contributions (including those required by auto-enrolment), making their pension savings up to 25 per cent more expensive when compared to similar workers contributing to ‘relief at source’ pension schemes. An HMRC consultation seeking to address this issue, ‘Pensions tax relief administration: call for evidence’, closed in October 2020 and it is expected that proposals will be announced to address the issue.
Inheritance tax (IHT)
Following reports by the Office of Tax Simplification and its recommendations regarding the interaction of IHT and capital gains tax (CGT), it is likely that further consultations will be announced covering IHT business property relief (BPR) and agricultural property relief (APR) and their interaction with the rebasing of asset values for CGT purposes on death.
National living wage (NLW)
Currently the NLW of £8.72 per hour applies only to employees aged 25 and over. The Conservative Party election manifesto pledged to raise the NLW to £10.50 per hour by 2024 and to lower the age threshold from 25 to 21. An increase to the NLW to £8.91, applying from April 2021, was announced in the Chancellor’s November 2020 Spending Review. No further announcements are expected.
Employers’ NICs holiday
On 21 July 2020, HMRC launched a consultation entitled ‘Supporting veterans' transition to civilian life through employment'. This was followed in January 2021 by draft legislation enabling employers to apply zero-rate secondary Class 1 National Insurance contributions on the salaries of veterans during their first year of civilian employment. It is expected this provision will be confirmed in the Budget.
Off-payroll working (OPW) in the private sector
At Budget 2018, the Government announced that the reform of OPW rules would be extended to engagements in the private sector. Although originally intended to be effective from April 2020, the introduction of these rules was deferred in the Spring 2020 Budget due to the effects of the coronavirus pandemic. The Government has already announced its intention to make a technical change to the legislation relating to the OPW rules, to correct an unintended widening of the definition of an intermediary. Other than this proposed amendment, it is likely the changes will go ahead as planned from April 2021 and we do not expect any further announcement.
VAT and indirect tax
Extension of temporary reduced rate of VAT on hospitality and leisure
In July 2020, the Chancellor’s Summer Economic Statement included a targeted temporary VAT cut for supplies of hospitality, hotel accommodation and admission to attractions, with the intention of supporting those sectors during the coronavirus emergency. It was initially announced that a wide range of supplies, which are normally subject to VAT at the standard rate of 20 per cent, would be eligible for the reduced VAT rate of 5 per cent between 15 July 2020 to 12 January 2021. This was later extended to 31 March 2021. Since then, successive lockdowns have meant that the travel, leisure and hospitality sectors have barely been able to trade for much of the period covered, so have not yet received any significant benefit from the reduced rate. It seems likely that the Chancellor will extend the period of the temporary reduced rate again, possibly leaving it in place until an unspecified date in the future when the worst of the coronavirus pandemic is over and businesses have had more time to recover from the impact.
Stamp duty land tax (SDLT) non-resident surcharge
Draft legislation has been published in relation to a 2 per cent SDLT surcharge when residential property in England or Northern Ireland is purchased by a non-UK resident. The proposed surcharge was first mooted by Theresa May in 2018 and we expect the Chancellor to confirm that it will apply from 1 April 2021. The governments of Scotland and Wales have not, to date, indicated that they intend to introduce similar rules in relation to their devolved property stamp taxes.
New reliefs for housing co-operatives
Non-natural persons purchasing residential property are generally required to pay a higher rate of SDLT (if the property is in England or Northern Ireland) and/or an annual charge under the annual tax on enveloped dwellings (ATED) unless an exemption applies. The Chancellor will confirm the introduction of new reliefs to ensure that housing co-operatives are not subject to these charges.
Modernisation of stamp taxes on shares
The Government has sought views on the principles and design of a new framework for stamp duty and stamp duty reserve tax (SDRT), with the existing framework considered archaic. In particular, the outdated nature of a stamp duty regime which requires paper documents to be physically stamped has been exposed by the rapid acceleration of digital working during the coronavirus lockdowns. Although the replacement of stamp duty and SDRT with a new, unified stamp tax on share transactions, based on the principles of self-assessment, is likely to require further consultation, we expect the Chancellor to announce that this project will proceed and that, as a stopgap, he may bring forward legislation to resolve areas of uncertainty within the virtual stamp duty processes that have been temporarily introduced to allow the system to function during the periods of lockdown.
Tax administration and collection
Changes to tackle abuse in the construction industry scheme (CIS)
Following the HMRC consultation, ‘Tackling Construction Industry Scheme abuse’, draft legislation was published in November 2020. These changes include making the rules around deductions of materials costs clearer, giving HMRC more powers to correct errors in setting off deductions against PAYE, changing the rules for determining which entities operating outside the construction sector need to operate the CIS as deemed contractors and extending the cope of penalties. We expect these proposed changes to be confirmed.
Raising standards in the tax advice market
The Government conducted a consultation during the summer of 2020 on raising standards in the tax advice market. Options considered included requiring all tax advisers to maintain professional indemnity insurance cover. As a further step towards this, the Chancellor will announce a second consultation to establish how such a requirement should apply, including: the definition of ‘tax advice’ for the purposes of the rules; the impacts and burdens on tax advisers, taxpayers and the tax advice market; options for enforcement; and how the policy will operate in practice.
Tax avoidance and evasion
HMRC civil information powers
A consultation regarding HMRC’s civil information powers took place during 2019, and draft legislation has now been published which would, in certain circumstances, require financial institutions to provide HMRC with information about specific taxpayers, if requested to do so. The Chancellor will confirm that this legislation will be included in the Finance Bill.
Tackling the hidden economy
Following an earlier consultation, draft legislation was published during 2020 that would make access to certain licences, that are granted by public bodies and are required in order to do business, conditional on compliance with tax obligations. The rules would affect licences to drive taxis and/or private hire vehicles in England and Wales, and the licensing body would be required to remind first-time applicants of their tax obligations and check with HMRC that renewal applicants have complied with a new requirement to obtain a ‘tax check’ (ie provided relevant information to HMRC’s satisfaction). The Chancellor will confirm the introduction of these new rules.
Mandatory disclosure rules
Following the end of the EU withdrawal transition period, the UK Government is applying the EU’s mandatory disclosure rules on a limited basis, so UK intermediaries and taxpayers are now only required to report details of cross-border arrangements that would be reportable under the OECD’s mandatory disclosure rules. HMRC is understood to have confirmed that new legislation will replace the existing regulations that borrow from EU directives, and a formal announcement in this regard may be expected on Budget day.
New follower notice penalty regime
Follower notices are a tool used by HMRC to encourage users of tax avoidance schemes to settle tax liabilities which HMRC believes are due. Follower notices are issued to users of tax avoidance schemes when HMRC believes the relevant scheme has already been found not to work by a court or tribunal, and they give rise to a penalty of up to 50 per cent of the disputed tax if the taxpayer continues to contest the position. Following criticism by the House of Lords suggesting that such penalties are draconian and may restrict affected taxpayers’ access to justice, the next Finance Act will contain amending measures to make the regime more proportionate. Under the new rules, penalties will be no more than 30 per cent in most cases, with a 50 per cent penalty applied only where a court or tribunal decides that: a taxpayer’s appeal stands no reasonable prospect of success; there has been an abuse of process; or the taxpayer has acted unreasonably in bringing or conducting the proceedings.
The Conservative Party election manifesto promised to cut the burden of tax on business by reducing business rates for retail businesses and extending the discount available to grassroots music venues, small cinemas and pubs. A consultation ran from July to October 2020 and represents the first step in a fundamental review of the business rates system. The Chancellor is expected to announce the next step in the review, which is likely to be further consultation on the detailed design of a new system.
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What we reasonably expect to be announced
Corporation tax rates
The Chancellor is reportedly considering increasing corporation tax rates as he looks to mitigate the increase in the fiscal deficit caused by the coronavirus pandemic disruption and the measures that the Government has been compelled to take in response, together with other recent economic developments. The corporation tax rate when the last Labour government left office in 2010 was 28 per cent, but this was progressively reduced by Rishi Sunak’s predecessors, George Osborne and Philip Hammond, to 19 per cent by 2017-18. At the last Budget, Mr Sunak scrapped a planned further cut to 17 per cent for 2021/21, but the rate of tax on corporate profits in the UK is still low relative to those in other G20 countries, and particularly the G7. It is thought that, at such a current low start point, each percentage point increase could add around £3bn to Government revenues. Given the Conservatives’ 2019 election manifesto pledge not to increase rates of income tax, National Insurance contributions, or VAT, the corporation tax rate appears to be an obvious place to start for a Chancellor keen to take steps towards balancing the books. However, many will feel that an immediate increase in taxes on businesses that are still dealing with the ongoing disruption caused by coronavirus, and still adapting to life outside the EU, is not the right way to go about jump-starting the economy and getting GDP back to pre-pandemic levels.
Utilisation of corporation tax losses
Many businesses will incur losses in years when trading has been affected by the coronavirus pandemic and its economic fallout. For companies, excess current year trading losses are allowed to be carried back for up to 12 months or carried forward to set against profits of future years, subject to certain restrictions. In practice, this means that there might be a significant delay between incurring a loss and obtaining tax relief for it. Part of the response to the global financial crash of 2008 involved extending the loss carry back period to 36 months, and this may have made a real difference to some viable businesses that suffered a short-term hit due to the adverse economic circumstances at the time. The impact of the coronavirus pandemic could prompt the Chancellor to introduce a similar measure now, as loss-making companies will find it difficult to obtain tax relief for losses suffered, through ‘carry back’ claims, unless the rules are relaxed.
Online sales tax
The UK’s digital services tax (DST) was introduced with effect from 1 April 2020, and generally operates as a 2 per cent tax on the turnover of groups of companies providing certain digital services. However, the relevant de minimis thresholds are set such that the tax only applies to the largest digital businesses, and only a narrow set of activities are in-scope. DST (which will be disapplied once an international consensus is reached regarding the fair allocation of taxing rights among nations) is generally perceived to be targeted at US tech giants such as Google, Facebook and Amazon that generate significant revenue from UK users but do not have a correspondingly large taxable presence in the UK under existing corporation tax rules. Notwithstanding this, some media outlets are reporting that the boom in online shopping due to the coronavirus pandemic, and the corresponding difficulties suffered by ‘bricks and mortar’ retailers, is tempting the Chancellor to consider introducing a more wide-ranging surcharge on online sales. This would be intended to ‘level the playing field’ somewhat, given that online retailers don’t generally suffer significant business rates and other property charges. It would be a surprise if legislation to implement an online sales tax was introduced at Budget 2021, but a consultation on the potential design of such a regime is certainly a possibility.
Annual investment allowance
The annual investment allowance (AIA) is a form of first-year capital allowance that provides businesses with 100 per cent relief for expenditure on qualifying plant and machinery, up to a prescribed limit, in the year of acquisition. The relevant limit was due to reduce from £1m to £200,000 from 1 January 2021, but the Government has announced that the reduction will be delayed for twelve months, in order to incentivise investment in the face of ongoing economic uncertainty. Given that this economic turbulence is unlikely to have calmed down by the end of 2021, it would be no surprise if the Chancellor announced a further deferral of the reduction in the AIA.
High income child benefit charge (HICBC)
For the first time since the HICBC was introduced in 2013, the £50,000 threshold will be lower than the income tax higher rate threshold from April 2021. This would mean basic rate taxpayers becoming liable to pay the charge, which was not the aim of the policy when it was introduced, it being intended to only target higher rate taxpayers. The Low Incomes Tax Reform Group has called for the HICBC threshold to rise to avoid it hitting basic rate taxpayers. It would therefore be reasonable for the Chancellor to announce that the start point for the HICBC will be raised to at least £50,270 in line with the new income tax higher rate threshold.
Inheritance tax (IHT) reform
The Office of Tax Simplification (OTS) reports published in November 2018 and July 2019 set out their proposals for reforming IHT. The first report concentrated on reducing the paperwork and heavy administration burden associated with IHT. The second report focused on updating certain reliefs and exemptions, but not a wholesale abolition of the tax. A report by the all-party parliamentary group, ‘Inheritance and Intergenerational Fairness’, issued in January 2020, favoured radical reform and abolition of many of the current IHT reliefs. The Budget may include proposals adopting some of the recommendations of the OTS, including:
- abolishing the exemption for normal gifts out of income, the scope of which is often disputed, and which requires extensive record keeping; and
- replacing some of the smaller exemptions and allowances with a higher overall personal gift allowance.
Both of these proposals would be relatively simple to introduce in the short term.
Capital gains tax (CGT) rates
The Conservatives’ 2019 pre-election manifesto ruled out increases in the rates of income tax, NICs and VAT – but CGT rates were not included in this pledge. At a time when the Chancellor needs to raise funds to pay for the costs of the coronavirus pandemic and other recent economic developments, a rise in CGT rates cannot be ruled out. The recent Office of Tax Simplification (OTS) report on CGT suggested CGT was complicated by having four rates of tax and that simplification might include reducing the number of rates by, for example, abolishing the two lower rates currently applicable to basic rate taxpayers. As a means of addressing the distorting effect the difference in tax rates that apply to income and capital gains may have on taxpayer behaviour, the Chancellor might consider aligning CGT rates with income tax rates, or perhaps the higher rate of income tax. This has the potential to raise significant amounts of additional tax, although setting the CGT rate(s) a few percentage points below the relevant income tax rate(s) may mitigate the effect of tax that would otherwise be charged on inflationary gains on holding capital assets. We are unlikely to see a general alignment of CGT rates with income tax rates; however, consideration could be given to aligning the rates for specific types of gain, such as those from employment related securities, while retaining lower CGT rates for investment gains.
Capital gains tax (CGT) business asset disposal relief (BADR)
the scope of BADR (formerly entrepreneur’s relief) was restricted in the March 2020 Budget to cover only up to the first £1million of lifetime gains. It is possible that a wider review of BADR and investors’ relief (IR) will be announced in line with recommendations made by the Office of Tax Simplification (OTS) that the Government should consider replacing BADR with a relief more focused on retirement and should also consider abolishing IR. Such a review might also consider how entrepreneurship may be best incentivised within the tax system.
Capital gains tax (CGT) and inheritance tax (IHT) interaction
Following recommendations by the Office of Tax Simplification (OTS), it is possible a review of reliefs on the disposal or gift of business assets in general will be announced, with a view to aligning the CGT and IHT rules more closely and potentially removing CGT rebasing on death where IHT reliefs are available, thereby avoiding assets falling outside the tax net altogether and encouraging lifetime giving where appropriate. It is thought that the current rules encourage the long-term holding of business assets beyond retirement, which potentially adversely affects business decisions and the longer-term success of businesses in the hands of subsequent generations.
Self-employment income support scheme (SEISS)
The SEISS was introduced in March 2020 as part of a package of measures to support the self-employed through the coronavirus pandemic. The scheme aims to help those who are adversely affected by the coronavirus pandemic and who cannot run their business and earn as normal. Qualifying individuals have been able to claim up to three taxable support payments, the latest of which is worth up to £7,500. Given recent announcements regarding a prolonged period of lockdown, it is hoped the Chancellor will announce a further extension to the SEISS.
The Good Work Plan, the Government’s response to the Taylor Review of Modern Working Practices, was published in December 2018 and a number of changes came into effect in April 2020. However, since then we have heard little more, despite the continuing growth of the ‘gig economy’ and the ongoing unsatisfactory uncertainty for individuals whose status is not clear cut and for businesses who engage such individuals. It is widely believed that the tax status of ‘workers’ (an employment law categorisation not recognised in tax legislation for certain individuals who are not employees) needs to be addressed, and many would argue for more wide-ranging reforms to tackle this notoriously complex and uncertain area of tax. It is hoped that announcements will be made regarding further detailed consultation on options for the codification of an employment status test for tax purposes which addresses ‘workers’ and others with uncertain tax status, and on whether and how tax status should be aligned with employment rights.
Coronavirus job retention scheme and job retention bonus
The job retention scheme was introduced in March 2020 as part of a package of financial support for employers during the coronavirus pandemic. The scheme provides grants to cover a proportion of the costs of staff who have been furloughed due to the pandemic. Although the rules are complicated and have changed several times throughout its availability, the job retention scheme has provided a lifeline for many employers and their employees. Given recent announcements regarding a prolonged period of lockdown, it is hoped the Chancellor will announce that the scheme will be extended once again. The job retention bonus was originally intended to be a £1,000 one-off taxable payment for employers, payable for each employee furloughed but kept continuously employed until 31 January 2021. Following the extension of the job retention scheme to 31 March 2021 (subsequently extended further to 30 April 2021), the job retention bonus was withdrawn. It is uncertain what the Government’s intention is regarding the job retention bonus, but given the continued pandemic it is reasonable to expect that the Chancellor may make some announcement regarding its future.
Tax and NICs exemption for employer reimbursed coronavirus antigen tests
This exemption from income tax and NICs for employer-reimbursed coronavirus antigen tests, was previously introduced to cover the period 25 January 2021 to 5 April 2021. Prior to that date HMRC exercised its collection and management powers to refrain from collecting NICs or income tax on these reimbursements. This means no income tax or NICs are payable on either the provision of a relevant coronavirus antigen test or reimbursement of the cost of such a test to an employee. Given the continued prevalence of the coronavirus it would be reasonable to expect that this exemption be extended to the 2021/22 tax year.
VAT and indirect tax
EU withdrawal related changes
Now that the EU withdrawal transition period is over, the UK has left the EU’s VAT system and the Chancellor is no longer bound by the limits of EU VAT legislation and case law when considering his Budget. This means that the playing field for predicting VAT changes has widened considerably and that, in the medium term, VAT may feature more prominently in Budget announcements than it has in recent years. However, the effects of the UK’s withdrawal from the EU must be considered alongside the impact of the coronavirus pandemic, which has put an enormous strain on public funds, so it seems unlikely that there will be more than one or two headline measures to cut indirect taxes. Any concessions on VAT are likely to be confined to very unpopular aspects which the Chancellor has previously been unable to change due to EU law. Media reports suggest that the Government has already ruled out abolishing the 5 per cent reduced rate of VAT applicable to domestic fuel and power. However, the Chancellor may decide to reverse the changes made in 2019 which restricted the scope of the 5 per cent reduced rate so that it did not apply to energy saving products, including insulation and solar panels. These changes resulted from a Court of Justice of the EU (CJEU) ruling that, under EU law, relief must be restricted to certain social groups (eg the over-60s or people receiving state benefits) and cannot be applied to all sales of such products. The Government may change the law to reintroduce the reduced rate of VAT for energy-saving materials for all private homes. The UK’s departure from the EU also allows the Chancellor to impose brand new indirect taxes. He may decide to take the opportunity to expand the current range of environmental taxes, perhaps to include a new carbon tax.
Alongside immediate VAT and indirect tax changes, the Government is likely to launch or update existing consultations on possible future reforms to the tax system. This year we may reasonably expect to see announcements of the outcome of important VAT consultations held recently on partial exemption and the option to tax land and property, alongside firm proposals for changing the law in response. The Government may also use the Budget as a launching point for its review of the VAT treatment of financial services, which was pre-announced in last year’s Budget. The Treasury has recently released a call for stakeholder input on its review of the UK funds regime, which was promised at the same time, so the associated VAT review could follow on Budget day.
Extension of SDLT holiday for residential property
The fiscal response to coronavirus has included a temporary increase in the threshold for paying SDLT on residential property situated in England and Northern Ireland. The increase in the threshold from £125,000 (or £300,000 for first-time buyers) to £500,000 seems to have played a role in keeping the housing market buoyant despite wider uncertainty. Property stamp taxes are devolved to the governments of Scotland and Wales, which have applied similar albeit smaller temporary increases. The SDLT bands and rates are due to revert to their normal levels on 1 April 2021 and the Government has previously indicated that there will be no extension. However, opinions on next steps are divided. Some people take the view that the temporary increase in threshold has achieved its intended effect with the result that the holiday can end on 31 March 2021 as intended. Other people contend that, because the economic emergency is far from over, ending the temporary increase in the threshold risks another jolt for the property market. It is also noted that Boris Johnson appeared to support scrapping SDLT on homes worth less than £500,000 as part of his campaign for the leadership of the Conservative Party.
Tax avoidance and evasion
New law on tax avoidance and tax evasion
The Conservative Party election manifesto for the 2019 general election promised to introduce a new law on tax avoidance and evasion which would: double the maximum prison term for tax fraud to 14 years; create a single HMRC anti-evasion unit covering all duties and taxes; consolidate various existing anti-evasion and anti-avoidance measures and powers; and introduce various new measures to end tax abuse in the construction sector, crack down on illicit tobacco packaging and combat profit-shifting by multinational companies. The Chancellor may announce one or more consultations on the design of new legislation to address these issues.
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What could be announced at a stretch
Impact of EU law on UK tax legislation
The UK’s tax legislation contains various references to EU law and various provisions implementing EU directives. Following the end of the Brexit transition period, the Chancellor may now wish to amend or scrap some of this legislation as he seeks to ‘take back control’ of the UK tax system. Potential changes that could be made include, among many others:
- scrapping the legislation implementing exemptions from withholding tax on interest and royalties paid to recipients in EU member states, so that the UK is able to collect tax on such payments in the same way that UK recipients might suffer tax when receiving similar payments originating from EU member states (where allowed under the relevant double tax treaty);
- amending the definition of an SME for certain UK tax purposes so that exemptions and reliefs are better targeted in line with the Government’s intentions; for example, the scope of the R&D tax relief for SMEs could be extended, although the Government would need to have regard to certain obligations in relation to subsidy control imposed by the Free Trade and Cooperation Agreement between the UK and the EU; and/or
- the removal of ‘sunset clauses’ to extend the availability of the enterprise investment scheme (EIS) and venture capital trust (VCT) reliefs (under EU rules, those reliefs were due to be withdrawn from 6 April 2025).
Pensions tax relief
The tapered pension annual allowance means that for every £2 of income above £240,000 per annum, £1 of annual allowance is lost. Anyone earning over £312,000 will have their annual allowance capped at £4,000. Pension contributions in excess of the reduced annual allowance are taxed at 45 per cent. The current pension rules are complicated and abolishing the annual allowance taper would simplify the tax system at little long-term cost. It would also remove any disincentives to save in pension arrangements. The Chancellor may take the opportunity make these simplifications.
There has been plenty of speculation about the possible introduction of a wealth tax as a means of funding expenditure resulting from the coronavirus pandemic and other recent economic developments. While any wealth tax would be hugely unpopular with traditional Conservative voters, there is no doubt that this controversial option could be considered. A ‘one-off’ charge on property-based assets could make a welcome reduction in the budget deficit and be perceived as addressing growing inequality in the UK. The Chancellor may take the opportunity to consult on how a wealth tax might be introduced and what form it might take.
VAT and indirect tax
Remote Gaming Duty (RGD)
With the closure of betting shops and sports venues for much of the last year, many gamblers have moved from trackside betting and gaming machines to online games of chance. RGD, which applies to gambling via the internet, telephone, television, radio or any other communication technology, is currently payable at the rate of 21 per cent of a gaming provider’s profits from remote gaming with UK customers. Although the RGD rate rose from 15 per cent as recently as 2019, it is still possible that the Government may seek to raise more revenue through this route.
Tax administration and collection
Interest harmonisation, sanctions for late payment and late submission penalties
Previous announcements indicated that the Government was working towards the goal of implementing unified regimes across income tax, corporation tax and VAT for late payment and overpayment interest, late payment penalties and late submission penalties. Draft legislation in this regard was published in July 2018, but the Government subsequently announced that it was postponing these changes and the rules have not reappeared in subsequent Finance Bills. With no recent announcements on these proposals, it appears that the Government is not currently pursuing them, and they may be indefinitely delayed. However, an announcement confirming when they will be rescheduled is a possibility.
Following the publication in October 2018 of an OTS report on the published HMRC guidance used to provide practical support for taxpayers and outline HMRC’s interpretation of tax legislation, it is possible that the Chancellor will announce a more detailed review into how HMRC guidance is prepared, the nature of its content and its form of presentation.
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