PROSPER MAGAZINE: DIGITAL EDITION
BLACK COUNTRY 2.0
BUSINESS REGION IN FOCUS
WHAT DOES THE BUDGET MEAN FOR BLACK COUNTRY BUSINESSES?
At the beginning of last month, the Chancellor announced his Budget, described by commentators as a ‘wartime’ Budget, and by the Chancellor himself as ‘generous’, Rishi Sunak’s Spring Budget was marketed as one that provides enough financial support to weather a pandemic that has damaged the economy and public health in equal measures.
Understandably, it was also focused on the economic response to COVID-19, including business recovery, incentives for investment and changes to key taxes and rates.
Black Country businesses will continue to pore over the finer details of the Chancellor’s Budget for many months to come, as they assess whether the 130% ‘super deduction’ on plant and machinery investment, given in one hand, will balance with the planned hit to profits when the new 25% Corporation Tax rate takes effect in two years’ time.
Prosper asked Paul Townson, tax partner at Midlands-based BDO, for an insight.
For Sunak, the capital allowance super deduction is the antidote needed to encourage growth and act as a catalyst for business investment through tax breaks and to prevent CAPEX from being deferred until after-tax rates rise (when relief would otherwise have been more generous).
But will Black Country businesses view it as such and capitalise on the window of opportunity?
The Budget was brimming with announcements and incentives - such as an extension to the furlough scheme, an increase in the National Living Wage, the extension of the stamp duty holiday, and the extension of the 5% reduced rate of VAT for the hospitality and tourism sectors - but what were the key takeaways for the region’s businesses?
Often central to Government plans to stimulate investment, capital allowances were, once again, a key part of this year’s Budget.
The super deduction grabbed the headlines, enabling companies to claim a 130% capital allowance on qualifying plant and machinery investments, with a 50% first-year allowance for qualifying special rate assets also being announced.
The latter will allow companies to reduce tax bills by roughly £9.50 in the year of expenditure for every £100 invested. The super deduction is intended to allow companies to cut their tax bill by up to £25 for every £100 they invest, in the year of investment, ensuring the UK capital allowances regime is amongst the world’s most competitive.
The announcement appears to be having the desired effect. Findings from the latest BDO Rethinking the Economy survey of 500 mid-tier businesses, found that more than three-quarters of Midlands businesses say 2021 is the year to invest; nearly half (47%) intend to change investment plans as a direct result of ‘super deduction’.
In addition, the Chancellor announced new temporary first-year allowances (FYAs) for expenditure on ‘new and unused’ plant and machinery. The FYAs are uncapped and are in addition to the £1m Annual Investment Allowance (‘AIA’) available until 31 December, which is still also available to businesses.
The Budget also brought accelerated allowances in newly created Freeports, including the proposed site in neighbouring East Midlands Airport. There are two distinct incentives available for qualifying capital expenditure incurred in Freeports.
A 100% Enhanced Capital Allowance (ECA), which is not available to property investors and landlords, as well as the more widely available, enhanced 10% Structures and Buildings Allowance (SBA) rate. This is for expenditure on the construction or renovation of non-residential structures and buildings in Freeports.
Both forms of accelerated capital allowances will be available until 30 September 2026 and will be subject to certain clawback rules if there is a disposal within five years of claiming.
These capital allowances opportunities for developments within Freeports are alongside other tax incentives such as certain Stamp Duty Land Tax (SDLT), business rates and NIC reliefs.
Freeports could potentially offer valuable incentives and tax relief and when businesses are looking at expansion plans, investment in Freeport locations, such as East Midlands Airport, should be considered.
As with anything Budget related, there’s a lot more to the capital allowances announcement than first appears. For example, the super deductions don’t appear to be available for property investment companies, even if they let the assets to trading companies in their group; there’s no enhanced relief if contracts are signed pre-Budget; the allowance is not designed for second-hand equipment; and, importantly, it comes to an end on 1 April 2023, so there is only a two-year window in which to access the enhanced relief and associated cash-flow benefits. As such, the date expenditure is ‘incurred’ for capital allowance purposes will be critical.
From 2023, the rate of Corporation Tax paid on profits over £250,000 will increase from 19% to 25% - companies with profits under £50,000 will remain at 19%, with a new marginal rate of 26.5%. It’s important to note the limits are split between associated companies.
While the move was unsurprising, given the level of public debt that has accumulated over the last 12 months, the delayed implementation of Corporation Tax will be welcomed by those businesses affected by the changes.
Despite an insistence from the Chancellor that the increased rate will still be the lowest in the G7, the tax hike will generate additional revenues of £11.9 billion in 2023/24, rising to £17.2 billion in 2025/26.
According to the Government, only 30% of UK businesses will be affected by the change. However, those within that band should be aware of the small print that comes with this announcement.
The tax increase will make R&D tax credits more valuable, together with Patent Box claims. In addition, the new marginal rate of tax of 26.5% - for singleton companies this will be charged on profits between £50,000 and £250,000 - will mean that business owners should reassess how they extract profits from their business, with salary and charging interest or rent to the company becoming relatively more attractive forms of dividends.
Carry back rules
Under existing rules under the Corporation Tax Act 2010, a company incurring a trading loss in an accounting period may make a claim for that loss to be set off against total profits.
Alternatively, a trading loss may be carried forward and set against trading profits or set against total profits of subsequent accounting periods depending on whether the losses are pre or post 1 April 2017 trade losses.
The current rules allow trading losses to be carried back one year without restriction. For accounting periods ending between 1 April 2020 and 31 March 2022, up to an additional £2m of losses can be carried back against profits arising 12 to 36 months before the loss-making year.
These are complex rules and businesses will need to assess whether to carry back losses (as created or enhanced by capital allowance claims) against past profits or carry them forward against profits, which may otherwise suffer tax at higher rates if post Corporation Tax rates rise in 2023.
There’s much to digest from the Chancellor’s Spring Budget. Deferrals provide the region’s businesses with the opportunity to take stock and plan; windows of opportunity, on the other hand, need to be capitalised on as soon as possible, to ensure companies are benefitting from the ‘generous’ measures in this exceptional ‘wartime’ Budget.
SPRING BUDGET 2021
KEY POINTS AT A GLANCE
Furlough scheme extended until 30 September 2021 - the government will continue to pay 80% of employees’ wages up to £2,500 a month until the end of June, employers then pay a 10% contribution in July, rising to 20% in August and September
The Self Employment Support Scheme also extended until the end of September
Business Support & Taxation
A new ‘Recovery Loan Scheme’ replacing previous emergency government funding to support businesses, offers loans between £25,000 and £10m up to 31 December 2021 (government provides an 80% guarantee)
A new ‘Restart Grant’ scheme provides retail, hospitality, accommodation, leisure and personal care firms up to £18,000, and non-essential retailers £6,000
Business Rates Relief for retail and hospitality firms has been extended for three months to 30 June 2021, with a two-thirds discount available until 31 December 2021
The headline rate of Corporation Tax will rise from 19% to 25% in April 2023; a tapered rate will be introduced for profits above £50,000 so that only businesses with profits of £250,000 or more will be taxed at the full 25% rate, businesses with profits of £50,000 or less will continue to be taxed at 19%
To encourage business investment, a temporary ‘super deduction tax incentive scheme will cut companies’ tax bills by 25p for every £1 they invest, by providing allowances of 130% on qualifying investment in new plant and machinery, from 1 April 2021 to 31 March 2023
VAT 5% reduced rate for tourism and hospitality sectors extended until 30 September 2021, followed by an interim rate of 12.5% for six months.
Personal taxation, wages and pensions
From 6 April 2021 Personal Allowance increased to £12,570 and the Income Tax higher rate threshold increased to £50,270, both thresholds will remain at these levels until April 2026
National Insurance threshold increased to £9,568 from 6 April 2021, the Upper Earnings Limit will be £50,270
Inheritance Tax nil-rate band remains at £325,000 and residence nil-rate band at £175,000, until April 2026
Capital Gains Tax annual exemption remains at £12,300 for individuals and £6,150 for most trusts
Lifetime Allowance for pensions remains at £1,073,100 until April 2026, the Annual Allowance remains at £40,000
The new single-tier State Pension increased to £179.60 per week in April 2021, the older basic State Pension increased to £137.60 per week
ISA (Individual Savings Account) allowance remains at £20,000 for the 2021/22 tax year
JISA (Junior Individual Savings Account) allowance or Child Trust Fund annual subscription limit remains at £9,000 for the 2021/22 tax year
National Living Wage increased to £8.91 per hour from April 2021 and will include those aged 23 and over.
Stamp Duty (SDLT) holiday on house purchases in England and Northern Ireland extended, with the £500,000 threshold at which SDLT starts to apply ending on 30 June, a threshold of £250,000 applies for a further three months, with the regular £125,000 threshold returning from 1 October 2021. In Wales, the Land Transaction Tax (LTT) temporary tax reduction has been extended to 30 June 2021
Mortgage guarantee scheme introduced in April, with the government providing guarantees to UK lenders who offer mortgages to buyers to secure a loan with a 5% deposit on a property of up to £600,000 up to 31 December