Having looked at some of the detail coming out of the Budget, I thought I might add a few observations which may be of interest to your audiences.
Although there was no rise in the rate of income tax on dividends, the rise in corporation tax rates to 25% and the marginal rate between £50,000 and £250,000 to 26.5% means that dividend calculations going forward will need to be revisited.
Allowances and Rate Bands
The freezing next year of the higher rate threshold at £50,270 also means that the upper earnings limit is frozen as well as outside Scotland no one thinks that a 52% marginal rate is acceptable for middle earners. This does reduce the hit that the freezing of the threshold for four years will entail.
Whilst the capital allowances at 130% will encourage investment in the next two years, there is anti-avoidance to stop companies with Chargeable Accounting Periods straddling 31 March 2023 from benefiting in part from the Enhanced capital allowances saving tax at the 25% rate. But what happens if there is pressure to extend the policy as it was for AIA?
Companies that invest in the new Freeport areas and are paying the 25% rate of corporation tax do have a slight advantage in deferring their expenses until the new rate comes into effect, although this is very minor. In 2022 £10M investment produces a saving of £2.47M. In 2024 £10M produces a saving of £2.5M. Based on the current Government policies, one would have longer to invest in Freeport areas and obtain a similar value of tax reliefs.
The 130% allowance means for the first time that capital expenditure will be treated more favourably than revenue expenditure which will only attract 100% relief. This may lead to disputes where HMRC is arguing for revenue expenditure and trying to overturn centuries of case law.
The gutting of DAC 6, the introduction of Freeports and the legislation repealing Interest and Royalties directive indicates that the government is moving relatively fast to divert from the European framework of taxation. There has been talk of an operation to bleach all references to the EU and EEA from direct taxation legislation. I think we may have to wait for the publication of the Finance Bill 2021 in full to see whether this happens. However, clients may be warned about the possibility that tax reliefs on areas such as woodlands, furnished holiday lets, and creative industries might be limited to the UK.
The dogs that did not bite
There were also a number of kites flown by the Treasury which did not see the light in the Budget announcements such as restrictions in pension relief; with the exception of the freezing of the lifetime allowance. There was no move to increase national insurance on the self-employed despite this being warned about in last March’s budget. There was no further restriction in business asset disposal relief. Finally, none of the changes proposed by the OTS in respect of CGT or IHT saw the light of day. Whether they will in future probably depends on the fiscal position. However, this does leave significant amount of capital tax planning and pension planning that clients can do for the next year.
Diverted Profits Tax
Finally, the projected increase in the Diverted Profits Tax rate to 31%, indicates that the UK will fight hard to stop the diversion of profits overseas to lower tax jurisdictions. As the U.K.’s corporation tax rate moves up, the temptation for multinationals to shift profits out of the UK becomes greater. One can expect to see considerable efforts by HMRC to deter this type of planning.
International Tax Comparisons
Much was made by the Chancellor of the fact that the UK will still have the lowest corporation tax rate in the G7. This however is and may not be strictly true. Under the Trump tax reforms, the rate of US federal corporation tax was cut to 21%. Some individual states levy corporate taxes on top but others do not. President Biden’s plan was to increase the rate of corporation tax to 28% but it remains to be seen whether he can get this plan through Congress.
We do not know the reaction of other developed economies, who may raise their rates corporation tax to pay for their own budget deficits caused by COVID 19.
Close investment companies
In another move which goes back to the pre-2015 corporation tax regime, close investment companies will be taxed at the rate of 25% on the 1st pound of profit. Close investment companies have enjoyed greater popularity, including Family Investment Companies. These have been seen as either an adjunct or an alternative to Discretionary Trust arrangements. These will become less attractive as a result of the tax rises.