Quick facts

25%
Corporation tax rate from April 2023
£8bn
Revenue raised from income tax thresholds freeze
8
Number of new freeports

Overview

What to make of Rishi Sunak's Budget? Corporation tax going up, Sunak's Super-Deductions and 8 new freeport sites identified. Just some of the measures announced today.

Treading the fine line between filling the hole in the public finances created by the Covid-19 pandemic but not stifling an economic recovery was never going to be an easy path to tread, particularly as the overall tax burden is modelled to rise to 35% of GDP by 25/26, which would be the highest tax burden since Roy Jenkins was chancellor in the '60s.

But what is really at play here?  It would be tempting to focus on the proposed increase in corporation tax to 25% in 2023 but as we said in our article 'When is a tax rise not a tax rise?' last month the headline rate is but one factor of the effective tax rate a company really pays.  Thresholds, allowances and reliefs are the others and the Budget was awash with announcements on these.  Before considering those it is also worth pausing to remember that not all rate changes announced ahead of their implementation date come to pass -  corporation tax was meant to drop to 17% this year.

So what of those thresholds, allowances and reliefs?  It has been well trailed that fiscal drag would be deployed.  A freezing of thresholds and allowances (which would otherwise have increased by the Consumer Prices Index) will result in companies and individuals tripping into higher effective tax rates for income tax, NICs and VAT, the headline rates of which were protected under the triple tax lock.

There were also some eye catching measures such as the relaxation of the loss-carry back rules allowing companies to set more losses off against profits made in the last three years (that would otherwise be taxed at a 19% corporation tax rate), then reducing the amount carried forward to be used in a new 25% corporation tax world. Read our article on this measure here.

A new super-deduction will be available from 1 April 2021 to 31 March 2023 allowing businesses to claim 130% of expenditure on qualifying new plant and machinery against their profits. Read our article on this measure here.

And as to reliefs, not all companies will pay the new 25% rate. Companies with profits of £50,000 or less will pay a lower 19% rate with that rate tapering up to the full 25% rate as profits increase to £250,000. Perhaps an indication that the Treasury believe that the new off-payroll rules (read our article on this measure here) coming into force in April and the phoenixism rules introduced a few years ago will now ensure small businesses only incorporate for the right reasons.

Eight sites have been designated freeport tax sites allowing businesses in these tax sites to benefit from a number of tax reliefs. It will be interesting to see how these sites operate in practice and whether they will be more akin to enterprise zones or customs hubs. The Government will also have to give consideration to maintaining standards of transparency and ESG if they are to attract institutional investment into businesses establishing there. Read our article on freeports here

There were also areas left (arguably, well) alone. No changes announced to the rate of capital gains tax or, indeed, to some of the so-called boundary issues identified by the recent Office of Tax Simplification report on capital gains tax. This is the second OTS report, the first covering inheritance tax, the recommendations of which have not been adopted by the Government of the day.  A bit of a thumbs down for the "wonks"?

There were also an absence of measures specifically targeting the UK asset management sector. This is to be welcomed and can be explained to some extent by the ongoing call for evidence on the UK funds regime and the consultation on a proposed new asset holding company regime for the UK. You can read our article on both of these measures here.

Credit though should be given to HM Treasury and HM Revenue on their continued efforts to amend the anti-hybrids regime, which does impact the asset management sector, with further measures announced today to ensure those rules work proportionately and as intended. You can read our article on those changes here.

And finally, further measures were announced to close the tax gap, increase transparency, require more disclosure and curtail anti-avoidance. The wind has been blowing in this direction for some time and we should expect more to come.

On which note look out for the publication of further consultations on 23 March. These consultations will not result in new law in this year's Finance Bill or have an impact on the Government finances. They are, however, styled as important but less high profile measures. We shall see.

To see last year's content, read our analysis of Budget 2020

Sources of quick facts

  • UK public debt figures as at 21 August 2020, public sector net debt excluding public sector banks
  • UK tax gap figures as at 9 July 2020, UK tax gap for 2018-2019
  • Estimated corporation tax revenue - Financial Times article 19 January 2021


This page was originally published on 12 February 2021. 

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