Insights

Autumn Budget 2021: Business Taxes

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  • Published: Wed, 27 Oct 2021 19:12 GMT

The Chancellor has confirmed the Government's commitment to encouraging investment in the UK, extending the temporary increase in capital allowances, refocusing research and development tax relief to UK innovation, and encouraging companies to move their domicile to the UK. A new levy on entities subject to the money laundering regulations will continue the work on reducing financial crime. The increase in corporation tax from April 2023, already announced at the Spring Budget, along with the new 4% residential property developer tax will bring the Treasury much needed funds.

Residential property developer tax

The Government confirmed the introduction of a new residential property developer tax (RPDT) that will apply to the profits of companies carrying out UK residential property development (RPD) activities.

Companies carrying out UK RPD activities will be subject to RPDT at a rate of 4% on RPD profits in excess of an annual allowance of £25 million per year, per group. The RPDT will be incorporated within the existing UK corporation tax process with any tax due reported with the company’s corporation tax return.

RPDT will be calculated by first identifying the company's taxable profits that relate to RPD activities and then making prescribed adjustments. No deduction will be permitted, for example, for financing costs and the utilisation of losses will be restricted.

Our comment

The Government had previously announced the introduction of the RPDT, which has undergone a period of consultation since the Spring 2021 Budget. Draft legislation has already been published.

It has been confirmed that the RPDT will not apply to companies that are developing UK residential property for investment purposes: Build-to-Rent (BTR). The potential application to the BTR sector had been debated extensively during consultation. Concerns had been raised about the administrative challenges and the impact for BTR developers that do not realise profits on completion of a development but over a longer time frame.

Whilst the RDPT is intended to target the largest developers, the restriction on deductions for interest and utilisation of losses will inevitably bring many companies within the scope of RPDT. The annual allowance of £25 million is also a group-wide allowance and cannot be carried-forward if not fully utilised in a chargeable accounting period. This may also increase the impact. In addition, the structure of the legislation does not provide any form of 'grandfathering' to mitigate the impact for existing developments that were initiated before the RPDT was announced but will not complete until after the introduction of the rules in April 2022.

When will it apply?

From 1 April 2022

Reform of income tax basis periods

Following a consultation over the summer of 2021, legislation will now be introduced to change the way in which trading income is allocated to tax years. The aim of the changes is to simplify the system. It will mean that the self-employed and partners in trading partnerships will be taxed on profits arising in a tax year. This will align the way these profits are taxed with other forms of income, such as property and investment income.

Currently, profits or losses disclosed on tax returns filed by self-employed individuals are generally based on a business’s set of accounts ending in the tax year. This is known as the ‘current year basis’. Although this allows the self-employed to defer the tax payment date in the early years of trading, it does result in complexity, particularly in respect of ‘overlap profits’ which arise when profits are initially taxed twice.

Under the reform, the ‘current year basis’ rules will be replaced with a ‘tax year basis’. Self-employed individuals with an accounting date other than the end of the tax year will be required to apportion profits or losses from different accounting periods to fit in with the tax year. This may mean using provisional figures in tax returns if the accounts and tax computations for the later accounting period are not prepared before the 31 January filing deadline. Amendments may therefore be required to tax returns once final figures are available.

There will be a transition year in 2023/24, in which all businesses will have their basis period moved to the end of the tax year and any overlap relief given. For businesses with an accounting date other than the tax year end, this could accelerate profits into an earlier tax year, increasing tax liabilities for the transition year. This may impact cashflow, particularly around 31 January 2025, when the balancing payment for 2023/24 is due. To mitigate the cashflow impact, any excess profits in the transition tax year will be spread over a period of five years, although there will be an election allowing a business to elect out of spreading.

Our comment

Although the consultation concluded in August, we are yet to see the Government’s response document which is due to be published on 4 November. This will provide some further clarity around the legislation and how it will be introduced. Generally, although there is likely to be additional administration to align the basis periods with the tax year, there will also be simplification by way of aligning the reporting of trading income with other forms of income, including property income. This should simplify requirements under making tax digital for income tax, which is due to be introduced for some sole traders and landlords from April 2024.

Some self-employed individuals will face practical implications from these changes, particularly around the acceleration of profits during the transition period and the related cashflow impact this could have.

Further details can be in found in our insight article here.

https://smithandwilliamson.com/en/insights/hmrc-reform-of-income-tax-basis-periods-in-preparation-for-making-tax-digital/

When will it apply?

The transition period will start on 6 April 2023, with full implementation from 6 April 2024.

Proposals affecting diverted profits tax

Legislation will be introduced to allow a mutual agreement procedure (MAP) outcome to be implemented in relation to diverted profits tax (DPT). Amendments are also planned to the DPT legislation in relation to revisions to company tax returns during the DPT review period.

A MAP is an administrative process to help resolve disagreements arising in relation to double taxation and the application of tax treaties.

The types of taxes for which a MAP outcome can be implemented is to be expanded to include DPT. This will allow relief to be given against DPT where it is required to implement a decision reached under the MAP.

Amendments will be made to the legislation to ensure that companies are able to utilise particular DPT reliefs when revising company tax returns during a DPT review period. Changes will also be made to ensure a corporation tax closure notice cannot be issued until the DPT review period ends.

Our comment

Whilst the inclusion of DPT with regards to a MAP outcome is only expected to affect a small number of multinational businesses, it is encouraging to see measures introduced to ensure tax treaties are able to operate effectively.

The ‘fine-tuning’ of the rules relating to closure notices and the amendments to relieving provisions are welcomed to help the legislation function as originally intended.

When will it apply?

MAP decisions reached after 27 October 2021. The relieving provisions will apply from 27 October 2021.

Changes to closure notices will apply from 27 October 2021 and will apply to any application for a closure notice made on or after 27 September 2021.

Banking surcharge decreased from 8% to 3%

The rate of the banking surcharge will decrease from 8% to 3%. As the standard corporation tax rate is set to increase, banks will still pay a higher rate of tax than they do now with the combined tax rate on profits increasing from 27% to 28%.

The surcharge applies to profits in excess of the surcharge allowance, and this allowance will increase from £25 million to £100 million.

The Government committed to a review of the banking surcharge at Spring Budget 2021 in response to the announced increase of corporation tax from 19% to 25%. Following the review, the rate of the surcharge will be set at 3%, a reduction of 5% from 8%. This results in a combined rate of 28% for banks when taking into account the increase in corporation tax rate to 25% from 1 April 2023.

The surcharge applies to profits in excess of the surcharge allowance. Groups with banking companies currently have a surcharge allowance of £25 million. This has been increased to £100 million, increasing, therefore, the amount of profits banks can make before they pay the surcharge.

Our comment

Following the commitment of the Government to a review of the surcharge, the change will be welcomed by the banking sector. Whilst the combined rate of corporation tax and the banking surcharge still increases by 1% the potential effect of the corporation tax rate increase is less pronounced. In addition, the fourfold increase of the surcharge allowance to £100million will help to reduce the impact and could mean many challenger and small to mid-size banks will fall out of the regime.

The overall intention for the change is for the sector to remain internationally competitive, to continue to encourage growth for both challenger banks and FinTechs, and to promote competition for consumers.

Care will be required when calculating taxable profits for periods straddling the effective date. A time apportionment basis will be required to calculate the allowance and the 3% will apply to profits for the notional period commencing on 1 April 2023.

When will it apply?

Business levy to fund anti-money laundering (AML) measures

The economic crime (anti-money laundering) levy will see some AML regulated businesses pay a fixed annual charge, calculated by reference to their annual revenues. Small entities, with UK revenue for the relevant accounting period of less than £10.2million, will be fully exempt. 

The new levy will be relevant for accounting periods starting from 1 April 2022 and applies to entities regulated under the Money Laundering, Terrorist Financing and Transfer of Funds Regulation 2017.

The charge will be a fixed annual fee calculated by reference to the size band of the business, which will be determined based on UK revenues. UK revenue is broadly defined as turnover plus other amounts recognised as revenue under generally accepted accounting practice, with appropriate adjustments for non-UK activities.

The precise amount of the annual levy is still to be determined but the following guideline figures have been provided:

Business size band UK revenue in period of account Annual levy in the region of
Small Less than £10.2m Exempt
Medium £10.2m to £36m £5,000 to £15,000
Large £36m to £1bn £30,000 to £50,000
Very large Greater than £1bn £150,000 to £250,000

 

The levy aims to raise £100 million per annum and it will be collected by HMRC, the Financial Conduct Authority, or the Gambling Commission. The amounts raised will be used to fund Government initiatives introduced as part of the 2019 Economic Crime Plan to help tackle money laundering.

Our comment

The businesses targeted by this measure already face severe penalties if they fail to meet their anti-money laundering obligations and have seen an increase in administrative costs in recent years as they responded to increasingly stringent regulations. These businesses will now be required to self-assess their obligations under the levy, and will not only suffer the cost of the levy itself, but will also see further administrative and professional costs in ensuring that they discharge their obligations correctly.

While there is a welcome exemption for some ‘small’ businesses, the decision to define ‘small’ by reference to revenue rather than profit means that the measure could disproportionately affect certain high-cost businesses. Furthermore, while businesses with higher revenue may be more likely to be able to bear the cost of the levy, there is no indication that those are the businesses that pose the greatest risk in respect of money laundering.

When will it apply?

The levy will first be charged on entities that are regulated during the period from 1 April 2022 to 31 March 2023. The first payments will not be due until after 31 March 2023.

Enhancement of tax reliefs for theatres, orchestras, museums, galleries, film and television

The Government will legislate to extend the life of museum and galleries exhibition tax relief and increase the rate of theatre tax relief, orchestra tax relief and museums and galleries exhibition tax relief. It will also allow film production companies to obtain film tax relief in specific circumstances where films are released on streaming services rather than in cinemas.

The ‘sunset clause’ for museums and galleries exhibition tax relief (MGETR) will be extended by two years from 31 March 2022 to 31 March 2024.

There will also be temporary increases to the rates of several reliefs where production activities commence on or after 27 October 2021 as follows:

  Non-touring productions Touring productions
Theatre tax relief (TTR) and museums and galleries exhibition tax relief    
Until 26 October 2021 20% 25%
27 October 2021 to 31 March 2023 45% 50%
1 April 2023 to 31 March 2024 30% 35%
From 1 April 2024 for TTR only, relief for MGETR due to expire at 31 March 2024 20% 25%

 

Orchestra Tax Relief (OTR)  
Until 26 October 2021 25%
27 October 2021 to 31 March 2023 50%
1 April 2023 to 31 March 2024 35%
From 1 April 2024 25%

TTR, MGETR and OTR operate broadly by allowing the company an additional tax deduction for up to 80% of qualifying expenditure. The company may elect to surrender these enhanced trade losses for a repayable tax credit, subject to specific restrictions. For each relief, the activities must meet the relevant criteria.

The Government will introduce further legislation, effective for companies entering production after 31 March 2022, to safeguard the reliefs from abuse and improve their targeting.

For film production companies, new flexibility will be introduced for any new film commencing production from 1 April 2022, or ongoing productions that have not completed principal photography by the same date. The relaxation allows a company to claim film tax relief (FTR) where it had originally intended to release a film in cinemas but instead released it via streaming services, provided that the film production meets the criteria for High-End Television Tax Relief (HETV).

Our comment

The nation’s theatres, orchestras, museums, galleries, film and television industries will probably find the tax relief enhancements announced in the Autumn 2021 Budget encouraging, along with the stated policy commitment to increase the amount of qualifying productions.

For qualifying touring productions and orchestras, the repayable tax credit will be as much as doubled, although there can be some restrictions. Each of the above reliefs has specific qualifying criteria set out in tax legislation.

When will it apply?

From 27 October 2021 (TTR, MEGTR, OTR); from 1 April 2022 (FTR)

Reform to research & development (R&D) tax relief following consultation

Following a consultation on the R&D tax incentive schemes, two major changes have been announced. First, the expenditure relating to cloud computing and data will be included within eligible spend. Second, the wider scheme is being reformed to better support and incentivise innovation taking place in the UK, and not that undertaken overseas. The full details of these changes are set to be announced in late Autumn.

The Government previously announced its goal to increase spending on R&D to 2.4% by 2027, representing an investment of £22 billion. Reforms to the existing R&D tax relief scheme aims to take the combined public direct and indirect support for R&D from 0.7% of Gross Domestic Product (GDP) to 1.1% of GDP by the end of the current Parliament. Despite the Government investing heavily, and the UK having the second highest spend on R&D in the Organisation for Economic Co-operation and Development (OECD), the investment into R&D by UK businesses is less than 50% of the average in the OECD.

The reform of the existing R&D tax reliefs are therefore designed to benefit and incentivise organisations undertaking R&D in the UK. Full details of the reforms and next steps for the R&D review are still to be published. The headline reforms announced are:

  • Cloud computing and data costs will now be included within qualifying expenditure
  • The Government will seek to better support and incentivise UK activity
  • Measures to tackle abuse and improve compliance

Our comment

The inclusion of data and cloud computing as qualifying expenditure for R&D tax relief is a welcome addition. The software and computer science industries are fast paced and as a result the R&D legislation, which was written over two decades ago, is not always relevant. To reward cutting-edge innovation, the legislation needs to be updated in a timely manner to reflect the dynamic R&D landscape.

The new eligible cost categories of data and cloud computing costs will allow companies to reap increased benefit from their innovation activities.

The Government’s decision to focus R&D tax reliefs on domestic activities will have an impact on many organisations that use foreign entities or globally mobile workers to support their R&D activities, either directly or indirectly. Many workers are choosing to work remotely from locations all over the world for various reasons. Global businesses are also increasingly sharing a workforce across jurisdictions. Local talent and skills are not always available to businesses when required, and so businesses sometimes rely on workers based overseas.

Currently, R&D tax relief is supporting billions of pounds worth of innovation that is taking place in foreign jurisdictions. Removing support for R&D activities conducted overseas is a stance that has already been adopted by a number of other OECD countries such as Australia, Canada, Switzerland, and the United States.

It is not yet clear how much of an effect this will have on businesses. The Government is yet to release detail on how it will refocus the reliefs towards innovation in the UK. While we support additional incentives for R&D taking place in the UK, consideration should also be given to ensuring that R&D tax relief is fit-for-purpose for modern business.

We eagerly anticipate the response to the R&D consultation that took place earlier this year.

When will it apply?

From 1 April 2023.

UK to ease corporate re-domiciliation to align with international competitors

Post-Brexit, in order to maintain and enhance its role as a global investment and business centre, the UK is to make it possible for companies to re-domicile to the UK by moving its place of incorporation here. This will allow continuity of business, reduce administration and negate the need to incorporate a new entity in the UK.

In order to align and compete with other common law global centres such as multiple US states, Canada, Australia, New Zealand, Singapore, and around 50 other jurisdictions, the UK will allow companies to re-domicile to the UK without the need for a new corporate identity. Permitting this re-domiciling will bring new investment and growth opportunities to the post-Brexit UK economy.

Corporate identity, structure, assets, contracts, and intellectual property will remain undisturbed.

The Government is consulting on the regime, including any required changes to tax laws, to facilitate re-domiciliation. Rules currently exist for companies that migrate control to the UK, but these may need to be extended; for example, to prevent importation of foreign losses to offset profitable group entities already within the UK.

Our comment

The Government has not specifically mentioned substance as a requirement. In reality, this may be a challenge. For companies considering re-domiciliation, a key test may be around management and control, for instance if an entity re-domiciles, but certain functions are not transferred with the re-domiciling entity.

The Government has not expressed an intention to allow re-domiciling between the three separate Registrars of Companies within the UK.

When will it apply?

Consultation concludes on 7 January 2022.

Other announcements

This section covers other points raised in the Budget that may be of interest, and some previously announced changes.

  • Following the previous announcement in December 2020, the Government confirmed its intention to include legislation in Finance Bill 2021/22 to establish a new tax regime for qualifying asset holding companies from 1 April 2022.
  • The rules allowing for cross border group relief between UK-tax resident and EEA-tax resident companies in the same group will be abolished for accounting periods ending on or after 27 October 2021.
  • The change to international financial reporting standard (IFRS) 17 will affect the timing of the recognition of profits and losses for insurance companies for reporting periods beginning on or after 1 January 2023. Ahead of the change, the Government is proposing legislation to lessen the transitional impacts and allow adjustments to be spread for tax purposes.
  • The Government is planning to amend how the corporate tax loss relief legislation applies to the reversal of onerous lease provisions. The reforms are to ensure that, where leases are accounted for under IFRS 16, companies are not disadvantaged in how their deductions allowance is applied. The changes will apply retrospectively for accounting periods beginning on or after 1 January 2019.
  • The annual investment allowance will now remain at £1 million until 31 March 2023. It was otherwise going to revert to £200,000 from 1 January 2022.
  • The Government announced in July 2021 that it planned to legislate for mandatory disclosure by large businesses of any uncertain tax treatments in their VAT, income tax (including PAYE) or corporation tax returns. The legislation will be effective for returns that are due to be filed on or after 1 April 2022. Taxpayers will only need to notify HMRC where the tax advantage is expected to be over £5 million for a 12 month period. A potential widening of the scope of the proposed rules was announced in the Autumn 2021 Budget to include where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect.
  • The Government announced its intention to legislate for tax reporting by UK digital platforms. As part of this, a consultation will be opened shortly on a proposed online sales tax.
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