Budget 2021: key policies for private clients
Contrary to some of the speculation, we did not get any announcements on capital gains tax (CGT) or higher taxes for the self-employed. We heard nothing in the speech about fundamental reform of pension tax relief or property tax or a wealth tax (although the latter would have been a big surprise).
Where does that leave us in terms of the future of tax policy? We will learn more on 23 March when the Government publishes a number of tax consultations but the announcements which have been made and the updated fiscal forecast already tell us something.
The Chancellor announced that it was still too early to set out new fiscal rules but he dropped some heavy hints. We should only borrow to invest (so current spending should be paid for out of tax receipts), we should take into account debt interest costs and that debt as proportion of GDP should not grow. This last test, in particular, appears to have influenced his thinking for this Budget.
The fiscal situation is improved since November. The roll-out of the vaccine will enable the country to return to some kind of normality earlier than expected and this has benefits for growth and tax receipts. As a consequence, the fiscal black hole is smaller than expected and, given the tax increases he has announced, the debt to GDP ratio is stabilised from 2024/25. On the face of it, this might suggest that there are no further tax increases in the pipeline and, if the economy performs better than the OBR expects (and that is possible), there could be scope for tax cuts before the next General Election expected in 2024.
Does that mean that the risks of further tax increases can be dismissed? No, for at least four reasons. First, the economy might out-perform expectations, but it might also under-perform, resulting in our debt to GDP ratio growing. Second, if interest rates rise our debt servicing costs would also rise which, again, would result in a deterioration in our debt to GDP ratio. Third, the OBR’s numbers assume that the Government will be able to deliver on a very tight departmental spending round. Given growing pressures on public spending (for example, increasing resilience in the NHS in the event of a further pandemic), it looks more likely than not that spending in future will be higher than the Government currently anticipates. Fourth, there is always scope for fiscally neutral tax reform with some taxes increased as other taxes are cut.
Consequently, taxes left untouched in this Budget may still see revenue-raising reforms in future. CGT, pension tax relief, environmental taxes and, perhaps, property taxes are all possible candidates. We may learn more on 23 March.
Even without further tax rises, this leaves our tax burden at the highest it has been in modern times. The Chancellor has clearly taken the view that the best time to announce painful tax increases is at the same time that he announces substantial further short-term support. He has also decided to focus tax increases on two big measures rather than several, smaller measures. His hope is that he can get the pain of fiscal consolidation out of the way but this is unlikely to be the last we hear of tax rises in the months ahead.
The rates of income tax and national insurance remain unchanged. However, the Chancellor did announce a moderate “stealth” tax on income, as the thresholds for the personal allowance and basic and higher rate tax bands will be frozen from April 2022 until at least April 2026.
The personal allowance (on which no tax is payable for those earning less than £100,000) will increase by £70 from 6 April 2021, such that the personal allowance for 2022/23 - 2025/26 will be £12,570. A corresponding increase to £37,700 in the higher rate threshold (above which tax is payable at 40% instead of 20%) from will also take effect on 6 April 2021, so that the higher rate for 2022/23 – 2025/26 will be paid by those earning over £50,270. Those with taxable income over £150,000 will pay the additional rate of 45% on income above that amount.
Capital gains tax
The rates of CGT also remain unchanged in spite of much speculation about a potential increase, but the annual exempt amount (on which no CGT is payable) will be frozen at the current levels (£12,300 for individuals and personal representatives and £6,150 for trustees) until 6 April 2026.
The Chancellor confirmed today that the nil rate band for inheritance tax (IHT) (last increased on 6 April 2009) will not change again before 6 April 2026, remaining at £325,000. This 17 year freeze will continue to have a significant stealth tax impact, particularly considering the increase in residential property values since 2009.
The lifetime allowance for tax-relieved contributions to pension savings will be frozen at £1,073,100 until 6 April 2026, when the existing system of inflation-linked annual increases will resume.
Taxpayers whose lifetime pension contributions are near the limit may therefore expect to see an increase in their income tax liabilities earlier than they may previously have expected.
As was much anticipated in the run up to the Budget, the headline rate of corporation tax will increase from 19% to 25% from 1 April 2023.
The 19% rate will remain in place for the year beginning 1 April 2022. A future “small profits rate” set at 19% will also be available to protect smaller businesses from 1 April 2023 for profits up to £50,000, although this will not be available to close investment-holding companies. There will also be a tapered rate for businesses with profits between £50,000 and £250,000, along with various short-term measures aimed at helping businesses as the economy recovers (including in particular more generous loss relief rules and a temporary super deduction for capital investment).
Although it is a significant one-off increase, the Chancellor was at pains to stress that the UK’s corporation tax rate remains the lowest in the G7 – even at the new 25% rate. As Gregory Price, a partner in our corporate tax team, points out however the Chancellor’s changes will introduce a level of complexity that was previously absent, with simplicity being one of the many selling points of the UK’s corporate tax regime.
Those clients with, or considering, a family investment company will be impacted by the announcement today. However, our view is that while such vehicles are less attractive with a higher corporation tax rate, they do retain some benefits as a long term holding vehicle.
As was widely expected, the Chancellor confirmed that the temporary increase to the SDLT nil rate band in England and Northern Ireland announced on 8 July 2020 and due to end on 31 March 2021 will be extended.
The increase of the nil rate band from £125,000 to £500,000 announced on 8 July 2020 was credited with revitalising the housing market after the first lockdown, but it was feared that the volume of agreed but uncompleted sales combined with, in many cases, delays to searches and mortgage offers would lead to thousands of sales falling through if the deadline was missed.
This measure introduces a staged withdrawal of the temporary increase, introducing a nil rate band of £250,000 for the period 1 July 2021 to 30 September 2021 before reverting to £125,000 on 1 October.
Social investment tax relief (SITR) was introduced in April 2014 to encourage individuals to invest in social enterprises – broadly, community interest companies, community benefit societies and accredited social impact contractors (technically an investment in a charity counts; but the legal structure of charities doesn’t allow equity investments to be made which narrows the practical scope of the relief). The incentive to invest derives from income tax and capital gains tax reliefs similar to the EIS scheme – albeit that the relief applies to both equity and debt investments (whereas the EIS applies to equity investments only). A taxpayer who makes a qualifying investment can therefore receive 30% of the amount invested (up to a maximum annual investment amount of £1m) as an income tax deduction. Any gain on the disposal of the SITR investment is exempt from capital gains tax if held for at least three years and income tax relief has been claimed.
SITR has been far less widely used than was anticipated, it seems partly due to the limitations in application to charities, as mentioned above. The relief was due to end next month under sunset clauses contained in the legislation. A consultation document "SITR: call for evidence" was published on 24 April 2019 and the evidence has been used to inform the decision announced today to extend the relief by two years to 6 April 2023.
The 2% additional surcharge on purchases of residential property in England by non-UK residents (including non-resident companies and trusts, as well as some UK companies controlled by foreign ultimate beneficial owners) announced at the 2018 Budget will come into force as planned from 1 April 2021.
Any sales completing on or after that date will be subject to the surcharge, which will be levied in addition to the existing 3% surcharge on purchases of second homes – taking the maximum rate of SDLT payable by non-corporate purchasers of residential property to 17%. Buyers who may be affected should note that the residence test for the surcharge is complicated and differs from the statutory residence test for individuals and should take advice on their individual circumstances.
The Treasury Select Committee published its report entitled "Tax after coronavirus" on Monday. It noted that:
...our expert witnesses said that now is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. However, the public finances are left more exposed to rises in interest rates; and witnesses told us that economic growth, inflation and measures to lower interest rates probably could not on their own be relied upon to stabilise or reduce the public debt.
The Chancellor agreed, commenting that the Government should only borrow to invest and not to meet everyday expenditure. The Budget paper released today itself notes that:
The fairest way to continue to fund excellent public services is with the highest earning households contributing more and companies contributing in recognition of the support they have received from government.
In this context, Tax after coronavirus makes for particularly interesting reading. Although select committee reports are not always good indicators of future government policy, the report’s recommendation to increase the rate of corporation tax has already been heeded by the Chancellor. Two points are worth noting.
The report recognises that “as part of its recovery from the coronavirus pandemic, the UK has an opportunity for a comprehensive review and reform of the tax system”. Although calls for major UK tax reform (or tax simplification) have been around for years, the pandemic might provide the catalyst for reform. Practically, however, parliamentary draftsmen who have been so heavily engaged with legislating for Brexit over the last few years may not have the capacity to carry out tax reform on a meaningful scale.
More significantly, the report does not rule out a one-off wealth tax (although it does not recommend an annual wealth tax). It also highlights the “compelling case for the reform of capital taxes”. This, together with the possibility of rate rises for taxes other than income tax, national insurance and VAT, is likely to concern families and their advisers planning for the longer term. No doubt they, like the Treasury Select Committee, will “await with interest the Government response to the OTS reports on inheritance tax and capital gains tax”, which may well be published as early as 23 March 2021.
The off-payroll working rules are targeted at individuals who provide their services through their own company (often known as a personal services company or PSC). Broadly, where an individual would have been treated as an employee had they provided their services directly, these rules try to ensure that they are taxed in a similar way to employees (i.e. they pay the same amount of income tax and National Insurance Contributions).
As part of Finance Bill 2021, previously announced changes to these rules will finally come into force. These changes will shift the responsibility for administering the off-payroll working rules, and crucially deciding whether the rules apply to a particular individual, from the individual’s PSC to medium and large-sized organisations in the private and voluntary sectors that engage their services. Public organisations have been responsible for administering these rules since 2017. Small organisations outside the public sector will remain exempt from administering these rules.
Unsurprisingly, the Government is also removing the 5% allowance currently available to PSCs that recognises the costs of administering the off-payroll working rules in situations where the PSC is no longer responsible for administering the rules.
Given that the Government estimates that there are 180,000 individuals who provide their services through a PSC, this may significantly increase the compliance burden for many medium and large-sized organisations.
Also included are a number of technical changes to the rules that are aimed to clarify the scope of the rules and otherwise improve their operation.
The new measures will apply to contracts entered into, or payments made for work carried out, on or after 6 April 2021.
HMRC can require taxpayers to provide information in order to check their tax position. They can also obtain information from third parties. However, in order to do so, they must get the approval of the First Tier Tax Tribunal. This is an obvious safeguard where a third party is being required to provide confidential information.
This will, however, change when the Finance Bill 2021 becomes law (likely to be in July 2021). From then, HMRC will be able to require financial institutions to provide information about taxpayers without having to get approval from the Tax Tribunal. For example, they will be able to ask banks to supply bank statements relating to a particular taxpayer.
The most worrying aspect of the new regime is that there will be no right of appeal against the information notice. The only safeguard is that, unless HMRC get authorisation from the Tax Tribunal not to do so, they must tell the taxpayer that they are seeking the information and the reason why they are doing so. In theory, this would allow the taxpayer to bring a claim for judicial review of HMRC's decision but that is a complex and expensive process which is unlikely to be a realistic remedy in most cases.
The financial institution can appeal against any penalties which are imposed for failure to comply with the notice but that is hardly an adequate replacement for an ability to appeal against the notice itself.
The justification which is given for the new regime is to enable the UK to comply with its obligations to provide information to overseas tax authorities when requested to do so. However, the new rules will apply in exactly the same way in a completely domestic context and so it is likely that financial institutions will see a very significant increase in the number of requests which they receive for information about UK taxpayers.
Although HMRC already has significant weapons in its armoury to combat tax avoidance schemes, given the continued prevalence of schemes which purport to reduce tax on income from work, this year's Finance Bill will confer further powers on HMRC.
These powers will enable HMRC to investigate schemes of which they become aware but which have not been notified to them under the existing disclosure rules. They will be able to approach anybody who is involved in promoting, marketing or advising in relation to the scheme and, if they believe that the scheme should have been notified, to publicise the scheme and the names of those involved with it with a view to deterring taxpayers from getting involved.
Further changes will make it easier for HMRC to stop promoters from marketing schemes which HMRC believe do not work and to target promoters who try and avoid the rules by setting up new businesses.
There is general agreement that these sorts of abusive tax schemes should be stamped out. HMRC have had significant success over the last few years in reducing the number of schemes which are promoted and in reducing the number of people promoting such schemes. These further powers should allow them to continue that work and to protect unsuspecting taxpayers.
The risk, as ever, is that responsible advisers dealing with straightforward tax planning arrangements may fall within HMRC's net. Only time will tell whether HMRC use their powers appropriately.
The Government has confirmed that the penalties that may be charged to people receiving Follower Notices and failing to take corrective action (i.e. by continuing their litigation) will be reduced from 50% to 30%. The additional 20% will be charged if the Tribunal decides that it was unreasonable for the recipient of a Follower Notice to continue their litigation.
Although a reduction in the penalties associated with Follower Notices is welcome, this amendment does beg the question of why charge any penalty in a situation in which a Tribunal has found that it was reasonable for the recipient of a Follower Notice to continue their litigation.
Following recent consultations on the topic, there are also changes to penalties and interest for taxpayers filing self-assessment returns for income tax, partly to harmonise the approach across income tax and VAT.
Initially the new regime will only apply to taxpayers reporting business or property income over £10,000 a year by self-assessment in respect of accounting periods beginning on or after 6 April 2023. For everyone else, the changes will take effect from 6 April 2024.
Penalties for filing a tax return late will operate on a detailed points system, with one point being incurred for each deadline missed and penalties being issued depending on how many deadlines are missed and how frequently the taxpayer is required to submit tax returns. Penalties start at £200. This appears to be aimed in particular at encouraging compliance with the recent “Making Tax Digital” changes which require business and property income to be reported quarterly or monthly depending on the taxpayer’s level of income.
There are many taxpayers who incur late filing penalties inadvertently and who still have to pay the penalties even if no tax is due. For such individuals, the new system will be a great improvement.
Late payment penalties will change so that a penalty of 2% of outstanding tax will apply if tax is not paid within 15 days of the due date. A further 4% penalty will be due from day 30, with an annual penalty at 4% p.a. thereafter.
The Chancellor announced a new fast track visa scheme to help start-ups and rapidly growing tech firms source talent from overseas. Digital technology is a key growth area for the UK economy and relies heavily on migrant talent.
The current UK immigration system already favours applicants with technology backgrounds, for example with fee concessions and salary reductions available in various sponsored categories such as Skilled Worker. There is also an existing dedicated visa for the exceptionally talented under the Global Talent route sponsored by Tech Nation and a Start-Up visa for entrepreneurs.
We await the details of this new route but we expect it to be supervised by Tech Nation. It may require the migrant to have a job offer from an established UK company or start-up rather than a proven track record of excellence. This would broaden the appeal of the existing Global Talent visa which has a very high bar for entry and deters many applicants. It would also mean that digital technology workers who do not wish to run their own businesses would be encouraged to consider the UK as their base without the need to set up a company.
Freeports (sometimes known as free zones) are designated locations within a country’s geographic area that are treated as being outside that area for the purposes of customs and import duties. The 2019 Conservative Manifesto pledged that a Conservative government would create up to 10 freeports around the UK.
In his Budget today, the Chancellor delivered at least in part on that promise, declaring that eight sites in England will be designed as freeports: East Midlands Airport, Felixstowe and Harwich, the Humber region, the Liverpool City Region, Plymouth, Solent, Thames and Teeside.
Scotland, Wales and Northern Ireland are expected to announce their own freeport policies. Scotland has already chosen to brand its own policy of “green ports”. The Freeport announcement was the closest the Chancellor came today to identifying a “Brexit Dividend”. Despite the fact that the UK had seven freeports between the mid-1980s and 2012 during its membership of the European Union, EU freeports tend to be more limited than their international counterparts.
The aim of freeports is to allow businesses to benefit from tax reliefs in the freeports and these have largely been confirmed today: full business rate discounts, enhanced capital allowances, a beneficial SDLT regime for commercial land and property transactions, a reduction to employer national insurance contributions, and, of course, facilitations for VAT and exercise duties for goods.
The measures will likely be time limited to five years (which aligns with the time limit that applies to the similar tax advantages available in enterprise zones) but more details are expected in the Finance Bill.
The Chancellor also announced the launch of the Mortgage Guarantee Scheme in response to the sharp decline in high loan to value lending for home purchases since the pandemic hit. This will be similar to the scheme run after the 2008 financial crash. The Government will provide a partial guarantee for mortgages with a loan to value ratio of 91% to 95%, where the purchase price is up to £600,000. The scheme is aimed not only at helping first time buyers to get on the housing ladder, but also at existing homeowners looking to re-mortgage in a more cautious lending environment. However, second homes and buy to let properties are excluded. The scheme is due to run from April 2021 until December 2022 in the first instance.