The second Budget of 2021 will be delivered by the Chancellor this week.
Once again he faces the dual challenges of incentivising economic growth while also generating more tax revenue to pay down the national debt. The key questions are how this Budget will balance these objectives and what role the Chancellor sees UK businesses playing in the recovery of the economy.
The corporation tax rate: holding steady for now?
Many businesses are still planning how to respond to the future corporation tax increase announced in March, and, more recently, the impact of the increase in national insurance contributions (NICs). It is unlikely that the Chancellor will change the corporation tax rate again so soon after those announcements, but there are a wide range of other options available to him to manage corporate tax revenues.
NICs and employment: recent announcements and challenges
Despite a manifesto commitment not to raise rates of income tax or NICs, NICs and income tax on dividends will both increase by 1.25 per cent from April 2022, forming a new ‘health and social care levy’. As this was announced so recently, further increases to employment taxes at the Budget seem unlikely.
A consultation on Enterprise Management Incentives (EMI) was held earlier in 2021, examining the possibility of expanding this generous relief to more businesses. The review of EMI was first announced at the 2020 Budget, and the October Budget is well timed for the Chancellor to clarify how it will operate in the future. Relaxing some of the strict criteria that prevent some high-growth businesses from adopting EMI would certainly be a welcome outcome.
Residential Property Developer Tax (RPDT): the key details
As announced earlier this year, a new tax will be introduced in April 2022 to help fund cladding remediation. The RPDT will apply to companies and groups undertaking UK residential property development activities. The Government has already released draft legislation.
The Government has not, however, confirmed the rate of the new tax, or for how long this ‘temporary’ tax will apply. We expect the Chancellor to provide these key details and more in the forthcoming Budget, particularly as the RPDT is set to come into effect in less than six months’ time.
R&D relief: time for an overhaul?
A consultation on the future of R&D relief in the UK was held shortly after the March 2021 Budget. It considered several fundamental aspects of the R&D relief regime, including the definition of ‘R&D’, the rates of relief and the possibility of combining the two existing R&D schemes. Considering the need to stimulate investment, it seems likely that the Chancellor will take this opportunity to expand and improve the R&D tax reliefs. In particular, the October Budget may bring a change to the amount of relief businesses can claim and a widening of the activities that qualify for R&D relief.
Other corporate tax changes: aligning corporation tax with other plans
The Government’s wider plans for the UK economy may also hint at what could be in the Budget. The Chancellor has repeatedly affirmed his commitment to tackling climate change, so it would not be surprising if the tax system was used to encourage investment in the ‘green’ sector.
The UK Treasury has also been a keen supporter of a global minimum rate of corporation tax, working as part of the G7 and the Organisation of Economic Cooperation and Development (OECD) to develop an international framework for taxing the largest multinational entities. The Chancellor may use the Budget to provide some clarity on how this will apply in the UK and confirm whether or not it will replace the UK’s domestic Digital Services Tax.
Anti-avoidance measures: further strengthening HMRC’s information gathering powers
Anti-avoidance measures are regular feature in UK Budgets. This is particularly likely this time because of the need to manage the escalating national debt. The Government has previously announced its plans to replace the EU’s mandatory disclosure rules, technically known as ‘DAC6’, with the OECD’s mandatory disclosure framework. We may see further details on this in the Budget, and possibly new measures to discourage tax avoidance in the UK.
Conclusion
UK businesses have already begun to feel the impact of the Treasury’s efforts to boost future tax revenue, with the forthcoming increase to corporation tax and the proposed increase to NICs. Will this trend continue, or will the Budget instead focus on generating investment and growth? The balance the Chancellor needs to strike is a fine one, and it could go either way for businesses.
by Katherine Colledge, director, business tax services at Smith & Williamson in Bristol