As was widely trailed in the press prior to the Budget (and so should come as no surprise), the Chancellor announced an increase in the corporation tax rate. The secret kept by the Chancellor until today, however, was the proposed rate, which has been set to increase to 25% on profits over £250k and will take effect from 1 April 2023. The current corporation tax rate of 19% will continue to apply for the remainder of this financial year and for the financial year beginning 1 April 2022. For businesses with less than £50k of profits, a small profits rate of 19% will apply; and for those with profits between £50k and £250k, a taper will apply to profits between £50k and £250k to increase the rate proportionately from the small profits rate to the main rate, as described in (2) below.

The Budget 2021 predicts that the main rate change (together with the reduced rate for small companies and the taper relief that are outlined below) will yield over £17bn by the financial year 2025-26, despite the increased rate still being the lowest corporation tax rate in the G7.

Notwithstanding the revenues from the raise that are predicted to contribute to the Treasury's coffers in the coming years, the corporation tax rate that businesses will ultimately pay has to be factored in alongside the plethora of other announcements which may impact their effective rate. Examples include the 130% super deduction for capital allowances, the proposed changes to R&D reliefs, and the proposed further changes to the loss relief rules.  

Other announcements that have a direct impact on tax on certain types of company are set out in further detail below, including (i) an extension to the period for which trading losses can be carried back to offset corporation tax, (ii) a review of the bank surcharge and (iii) an increase in the rate of diverted profits tax.

To review the policy paper on the changes for the main corporation tax rate change and the small profits rate see here.

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Businesses with profits of £50k or less will pay a small profits rate from April 2023 which will continue to be at the current corporation tax rate of 19%. For companies that have profits between £50k and £250k, the government will introduce marginal relief provisions such that a business can claim an amount of relief that bridges the gap between the 25% and 19% rates, resulting in a gradual increase in the corporation tax rate between those margins.

Where companies form part of a group, the £50k and £250k limits will be proportionately reduced based on a new associated company test. The associated company test is yet to be introduced but companies will be associated if, broadly, in the preceding 12 months one company has control of the other or both companies are under common control. Proportionate reductions will also apply for short accounting periods.

Interestingly, the cost for implementing the changes to the corporation tax rates are estimated to be £5.1m - it is likely that the bulk of that expenditure will be used by HMRC in developing and monitoring the reduced rate and taper relief, rather than the in implementing the headline change to the main rate.

The trading loss carry-back rules (which allow a company or unincorporated business to make a claim for unused trading losses to be set off against its profits for the preceding 12-month period) will be extended from one year to three years for accounting periods ending between 1 April 2020 and 31 March 2022.

Relief will not be subject to additional restrictions for the current rule permitting losses to be carried back for one year, but caps will apply to the extended period (beyond that usual one year) of trading loss carry back as follows:

• £2m cap of losses for each of the financial years 2020-21 and 2021-22; and
  
  
• where companies form part of a group, the cap is expected to apply across the group as a whole for each relevant year. A nominated company will be required to submit an allocation statement to HMRC showing any companies that have been allocated an amount of the £2m cap, in each case where that amount exceeds a de minimis limit of £200k (taking into account any other reliefs that would result in an increase in the amount of the loss).
  
  

Where losses are carried back, they must be set off against the profits of the most recent year first. Claims will need to be made in the relevant tax return, except where the claim is below the de minimis limit of £200k of losses, in which case it may be made outside a return.

The extension is available for incorporated businesses (as outlined above) and broadly similar rules will apply for unincorporated businesses.

To review the policy paper on the extended loss carry back for businesses see here.

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In the more immediate term, the government will legislate so that businesses that were entitled to business rates relief and made a repayment in respect of the same will be permitted to deduct those repayments for corporation tax purposes (such that businesses that made relief repayments are no worse off than if they had paid the business rates in the first place).

To review the policy paper on the tax deductibility of business rates repayment see here.

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If the main corporation tax rate were increased to 25%, the additional bank surcharge would lead to an overall taxation rate of 33% on banks in the UK. The government views this rate as uncompetitive and accordingly has committed to reviewing the bank surcharge. The expectation is that in Autumn 2021 the government will set out how it aims to ensure that the combined rate of tax on banks' profits does not "increase substantially from its current level".

The DPT rate will increase from the current rate of 25% to 31% from 1 April 2023. The policy rationale behind the increase is to maintain the differential between the DPT rate and the corporation tax rate. The increase will not apply to DPT on diverted profits which are ring-fence profits or notional ring-fence profits (which will continue to be taxed at 55%) nor will it apply to DPT on taxable diverted profits which would have been subject to the bank surcharge (which will continue to be taxed at 33%).

To review the policy paper on the change to DPT see here.

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The headline-grabbing item here is, of course, the announcement of an increased corporation tax rate of 25% from April 2023. An increase in rate had been widely trailed in the Press, but this step up is higher than those rumours, and will raise c.£12bn in 2023/2024 and c.£17bn after that. A big leap, sufficiently so to require a matching rise in Diverted Profits Tax and very likely a reduction in the Bank Surcharge. More detail on this measure is available here, and the possible incentive to incorporate (and additional complexity) created by the reduced rate for small businesses is available here.

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Although the Budget is light on tax measures which specifically relate to asset management, the funds industry will welcome the continued economic support for businesses suffering due to the Covid-19 pandemic and the longer term measures aiming to stimulate business investment. In addition, measures to improve the anti-hybrids rules look set to go ahead (with some changes from the proposals announced in November (for more detail please click here) and these should ease (if not completely solve) several of the issues that have troubled the asset management industry since the regime was introduced in 2017. Given the state of the public finances, asset managers will probably be relatively unsurprised at the increase in corporation tax to 25% scheduled for 2023 and will be pleased that nothing was announced today in relation to increasing capital gains tax rates or tax on carried interest, albeit the industry will be keeping an eye out for possible developments in relation to both those issues.

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An interesting consultation on research and development tax credits was published alongside the Budget.

Currently R&D reliefs are available under two schemes which overlap to an extent:

• Research and development expenditure credit (RDEC): a 13% above the line credit and is primarily used by larger companies.
  
  
• SME scheme: 230% deduction or tax credit of 14.5% if the company is loss-making. This scheme is only available to SMEs.
  
  

The government aims to increase investment in R&D to 2.4% of UK GDP by 2027. This broad-ranging consultation invites responses on whether the two current schemes should be combined – perhaps with a higher rate for SMEs. The consultation also considers the location of R&D claims (currently concentrated in companies headquartered in London and the South East and East of England) and whether R&D reliefs could be used to incentivise R&D with a social value, for example, development of green technology. There is also a hint that the government may consider restricting relief in some situations where the R&D activity takes place outside the UK.

R&D reliefs are an expensive use of public money; R&D relief cost £5.1bn in 2017-18. It will be interesting to see whether the government decides to use R&D in a more nuanced way, perhaps to incentivise green technology or achieve a more even geographical spread of R&D claims in the UK. However, it will also be important that any changes do not detract from the government's aim to increase overall investment in R&D.

Read the full consultation. 

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Further details of the new super deduction were revealed in the 11 March draft of the Finance Bill 2021. The new 130% deduction is available for expenditure on new plant and machinery which would otherwise qualify for the 18% main rate of capital allowances. A special rate first year allowance at 50% (the SR allowance) is available for expenditure that would otherwise have qualified for the special rate writing down allowance, such as integral features or long life assets.

The expenditure must be incurred between 1 April 2021 and 31 March 2023 in order to qualify for the super deduction.  Expenditure incurred under contracts entered into before 3 March 2021 does not qualify for the super deduction, even if an unconditional obligation to make a payment under the contract does not arise until 1 April or a later date. There is also a targeted anti-avoidance rule which enables the counteraction of contrived or abnormal arrangements (or those which circumvent the intended limits of the relief) which have a or the main purpose of obtaining the super deduction or the SR allowance.

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The Chancellor announced that the capital gains Annual Exempt Amount (AEA) will stay at its present level until April 2026. The AEA is essentially the value of gains that a taxpayer can realise in a given tax year before paying capital gains tax (CGT). This announcement means the AEA will no longer increase annually in line with increases in the Consumer Prices Index. The AEA is currently £12,300 for individuals and personal representatives and £6,150 for most trustees of settlements.

This measure is expected to raise revenue for the Exchequer incrementally over the years, with an additional £30 million expected in 2025/26. This is in keeping with the trend seen elsewhere in the Budget of measures designed to bring in increased tax over the years by way of "fiscal drag", rather than up-front tax rate increases – which are often, politically, a much harder sell. 

It is, however, perhaps surprising that the Chancellor chose not to cut the AEA or increase CGT rates in this Budget. The Office of Tax Simplification in their recent report into CGT (prepared at the Chancellor's request) found that both the relatively high level of the CGT AEA and the relatively low level of CGT rates - as compared to income tax rates - had a distortive effect on taxpayer behaviour (with taxpayers incentivised to try and arrange their affairs in a way that effectively re-characterises income as capital gains) and recommended both reducing the AEA and increasing CGT rates as a way to reduce the distortion. 

Resources:

• Policy Paper
• OTS report

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Whilst the Chancellor acknowledged in his Budget speech that the price of government support for the economy during the pandemic would be for the highest-earning households to contribute more, the changes announced on Budget Day to the rules on personal taxation were not as radical as many had expected. 

The recommendations put forward by the Office of Tax Simplification in November 2020 for the reform of the capital gains tax regime had led to media speculation that headline rates of CGT would be aligned with income tax rates, spurring on M&A activity as shareholders and business owners hurried to complete transactions before Budget Day. As it turned out, no change in rates was announced and existing reliefs, notably Business Asset Disposal Relief (formerly known as entrepreneurs' relief) remain untouched for now. Whether this is a temporary reprieve or an indicator that the Treasury has accepted the arguments in favour of differentiating between income and capital gains remains to be seen.  

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In line with the Budget aim of seeking to support innovative, fast-growing firms, the Treasury have released a call for evidence in connection with the Enterprise Management Incentive (EMI) options regime. First introduced in 2000, EMI options are a share incentive arrangement widely used by start-ups and other growth companies, in particular in the tech related industries. EMI options can give generous tax advantages for both employees and employers provided implemented correctly. For more information about EMI options, please see here.

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In today's Budget, the Chancellor did not announce any further delay to the new Off-Payroll rules which will take effect in the private sector from 6 April 2021 as planned. 

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The government has introduced legislation to repeal parts of the UK tax code which implement the EU Interest and Royalties Directive into UK law. These provisions will be repealed with effect from 1 June 2021 and will mean that businesses will have to rely upon the withholding tax provisions in the double tax treaty entered into with the relevant EU Member State in order to reduce or eliminate UK withholding tax on outbound payments of interest and royalties to EU connected companies.

This is somewhat of a policy U-turn by the government who had previously published guidance (which was subsequently quietly withdrawn) stating that they did not intend to repeal these provisions. This measure is not a big revenue raiser (projected to raise £35 million) but is pitched as ensuring that EU companies do not enjoy more favourable tax treatment than companies elsewhere in the world. In many cases the double tax treaty will produce the same outcome (where the treaty provides for a zero withholding tax rate), but that will not always be the case – for example, interest and royalty payments to an Italian parent company would suffer a withholding under the UK: Italy Double Tax Treaty).

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The 2021 Budget includes an extended package of measures to help the U.K. manage the ongoing effects of the COVID-19 pandemic. In addition to the £280bn of COVID relief initiatives that the government introduced between March and December 2020, many new COVID-related schemes have been introduced in this Budget. These include both new policies and extensions to various grants and reliefs that have been introduced in the past year.

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Rishi Sunak has announced as part of the Budget that the furlough scheme will be extended until 30 September 2021. The government subsidy (currently 80% of wages) will step down to 70% for July and 60% for August and September. Employers will have to top up the shortfall to ensure employees get 80% of wages for unworked hours (so employers will pay 10% in July and 20% for August and September). The announcement provides some welcome clarity for employers, as the road out of lockdown unfolds.

You can read our guide on how the scheme currently works here.

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Also published on 3 March was a review of the UK listing regime, led by Lord Hill. The Hill Review is an ambitious, forward-looking set of recommendations intended to encourage investment in UK business and increase the number of companies choosing to float in the UK (as opposed to listing in other jurisdictions). The review aims to strike a balance between high standards of governance and regulation with flexibility and nimbleness. In particular, the review considers how to attract tech companies - who are currently under-represented on the UK markets compared to other jurisdictions - to list in the UK. However the implications extend more widely than that.

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The government has announced in today's Budget that the following areas will be granted freeport status: East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.

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The Chancellor has announced a range of new anti-tax avoidance, anti-tax evasion and tax compliance measures as part of the 2021 Budget. These include several measures which are expected to be legislated for in the Finance Bill 2021, which is due to be published on the 11th of March.

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