UK borrowing is at a peacetime record of £355bn this year and estimated to rise to a total £407bn. The OBR’s prediction is that the recovery will be 'swifter and more sustained' than thought, returning to pre-COVID-19 levels by middle of 2022.
The devil is always in the detail and we are still awaiting the legislation to review, but the key relevant headlines so far are:
- Corporation tax will increase from 19% to 25% from 2023
- The rate of corporation tax will increase from April 2023 to 25% on profits over £250,000.
- The rate for small profits under £50,000 will remain at 19%.
- For profits between £50,000 - £250,000 there will be a tapered rate.
- Diverted profits tax rate will increase to 31% from April 2023.
- It is not yet known whether there will be any anti forestalling measures, to counteract companies taking action to benefit from the rate change. Subject to that, FS businesses can take opportunities that exist to manage their effective tax rates by accelerating taxable profits and deferring costs.
- 3 year loss carry back will be available
- Loss carry-back to be extended from 12 months to 3 years with a £2m cap (which applies at group level).
- Available to both incorporated and unincorporated businesses.
- There will be incentives to encourage businesses to take on new apprentices/employees and to invest in new equipment, including:
- From 1 April 2021 until 31 March 2023 companies investing in qualifying new plant and machinery assets will benefit from a 130% first year capital allowance.
- 50% first year capital allowance on Special Rate assets.
- The furlough scheme continues but from July, businesses will be asked to contribute (10% in July and 20% in August and September)
- 100% business rates holiday will continue for certain retail and hospitality businesses (subject to a cap) until June 2021, with discounted rates until 31 March 2022.
- The Treasury will establish a new economic campus in Darlington.
Bank profits surcharge
Alongside the proposed increase in the corporation tax rate, the Government has announced that it will review the bank profits surcharge, which currently sits at 8%.
The Government acknowledges that at 33%, the overall tax rate for banks will be too high once the 25% corporation tax rate is introduced and has therefore announced a consultation into reducing the level of the surcharge to ensure that the UK banking sector remains competitive with international peers.
Government guarantee for 5% mortgages
The Government is to provide a guarantee to financial institutions which provide mortgages to prospective homebuyers with deposits as low as 5%. In order to encourage additional lending and increase the lending appetite of mortgage providers, the Government will guarantee of up to 80% on certain high loan to value mortgages provided to homebuyers, thereby reducing their credit risk.
The scheme is designed to be a temporary measure and will open for new mortgage applications from April 2021 until December 2022. There are specific eligibility requirements, which need to be met, designed as such to ensure that lenders cannot use the scheme to restructure existing risky loan stock.
Government guarantee on recovery loans
The Government is also offering a guarantee of up to 80% for Recovery Loans made to struggling businesses. Businesses can apply for loans with a value of £25k up to a limit of £10 million.
This scheme will offer banks and other lending institutions the opportunity to reduce their credit risk, while increasing their total assets.
Capital investment – 130% super-deduction
The super-deduction offers an exceptional opportunity for financial services businesses to consider their mid to long term investment strategies and determine whether there is the opportunity to accelerate capital investment to take advantage of the increased deductions available.
This policy could have also significant knock-on effects to the banking sector in light of the Recovery Loan policy, as corporate borrowers look to take advantage of increased flexibility in lending and the higher incentive to claim additional tax breaks on capital investment.
A new UK Infrastructure Bank will be established in Leeds, with a mandate to finance a ‘green industrial revolution.’ With initial equity and debt capital of £12bn, it will have £40bn to invest. The aim is to provide finance to help tackle climate change and support regional and local economic growth. It will ‘crowd-in’ private capital and will bolster government’s lending to local government and complex projects. It’s planned to be operating in late Spring 2021.
The Bank of England’s mandate will be amended to reflect the importance of environmental sustainability and the transition to net zero greenhouse gas emissions to net zero by 2050.
The Government will issue at least £15bn in ‘green bonds’ to help finance the transition to net zero. Money raised will be invested in programs supporting the transition to a low-carbon economy, create green jobs and combat climate change. The Government will also launch the world’s first sovereign ‘green savings bond’ for retail investors, to be offered through NS&I. The funds raised will finance projects such as renewable energy and clean transport.
Recommendations of the UK Listing Review will be implemented to strengthen the UK’s position as a world leading financial centre. The free float requirement will be reduced from 25% of a company’s shares to 15%. The rules on dual class share structures will be amended so that directors or founders can have enhanced voting rights. A fundamental review of the prospectus regime will be undertaken and rules for special purpose acquisition companies (SPACs) will be liberalised.
A new team, headed by former chief executive of the London Stock Exchange, Dame Clara Furse, will look for ways to expand the market for voluntary carbon offsets, so as to ‘position the City as the global leader for voluntary high quality carbon offset markets.’ Carbon tax will remain at £18 per tonne until April 2023.
Other areas of interest for Financial Services businesses include:
Non-UK resident stamp duty land tax
The Stamp Duty Land Tax (“SDLT”) holiday that was announced on 8 July 2020 which temporarily increased the nil rate band from £125,000 to £500,000 to 31 March 2021 in respect of purchases of residential property has provided a boost to demand for residential mortgage lending by banks.
The SDLT holiday has now been extended to 30 June 2021 therefore there is unlikely to be an abrupt end to this demand. From 1 July 2021 to 30 September 2021, the nil rate band will be £250,000. After this date the nil rate band will return back to £125,000.
The introduction of the SDLT surcharge of 2% from 1 April 2021 on non-UK resident persons purchasing residential property was reconfirmed. A non-UK resident person for these purposes include non-resident individuals, non-resident companies and UK companies that are under the control of non-UK resident persons. However, we note that there are certain exceptions for open-ended investment companies and UK REITs.
The Government will consult on whether certain costs within the charge cap affect pension schemes’ ability to invest in a broader range of assets. DWP will also draft regulations to make it easier for schemes to take up such opportunities within the charge cap by smoothing certain performance fees over a multi-year period.
In addition, as part of the Future Fund breakthrough, pension funds are to be unlocked to allow them to invest more innovatively.
A new type of employee retirement provision known as collective defined contribution schemes to be introduced and can operate as a registered pension scheme for tax purposes (so added to a defined benefit and defined contribution scheme).
Trade credit reinsurance scheme
- The Government will continue to review the impacts of the scheme to assess whether there is a case for further interventions beyond the scheduled end date of 30 June 2021, in order to minimise disruptions in insurance coverage as the economy recovers.
VAT Deferral New Payment Scheme
- Any business that took advantage of the original VAT deferral on VAT return from 20 March – June 2020 can now opt to use the VAT deferral New Payment Scheme to pay that deferred tax in up to 11 equal payments from March 2021, rather than one larger payment due by 31 March 2021 as originally planned.
Repeal of provisions relating to the EU Interest and Royalties Directive
- A repeal of the UK implementation of this directive is not a surprise. As a result, EU resident companies will be subject to UK withholding tax just like companies based elsewhere. Whilst domestic UK withholding tax rates now apply, there will be the ability to reduce withholding tax under the relevant double tax treaty in place. A number of specific exemptions for banks may continue to apply. The measures apply from 1 June 2021, but anti-forestalling provisions are now in place.
High skilled migration
- By March 2022 an elite point-based system should be introduced to allow those with a job offer from a UK scale-up to qualify for a fast-track visa.
- Automatic visa qualification for holders of international prizes and winners of scholarships.
- New global mobility system.
Capital allowances illustration
- From 1 April 2021 to 31 March 2023, companies within the charge to corporation tax which incur capital expenditure on qualifying new plant and machinery should be able to benefit from a 130% “super deduction”, being a substitute for the usual system of capital allowances.
Similarly, companies investing in assets that would ordinarily attract 6% writing down allowances should be able to qualify for a 50% first year allowance.
For illustration purposes, if a company incurs £100 capital expenditure that qualifies for the 130% super deduction, in cash tax terms, this would result in £25 of reduction in their tax burden (based on the current tax rate of 19%).
It should be noted that, if a company delays its capital expenditure for 2 years, although there would not be a 130% super deduction, the reduction in tax burden at that stage would also be £25 per £100 of expenditure, i.e. the overall tax effect is effectively the same (using the proposed higher tax rate of 25%). However, the timing of when the deduction will crystallise on a cash tax basis may be delayed depending on the availability of the Annual Investment Allowance and how it flows through the capital allowance pools. For many taxpayers, the difference is likely to become the time value of money.
Commenting on the Government’s plans to allow this temporary enhanced capital allowances relief, Prasam Patel, Mazars Real Estate Tax Director, commented: “This temporary relief, while initially appearing very generous, may be designed to ensure companies are not disincentivised from a tax perspective to incur the expenditure until 2023. Hopefully, this will help encourage capital expenditure and investment by business in the near future”.
- The temporary increase of the Annual Investment Allowance (“AIA”) that was announced in the 2018 Budget that was due to end in 1 January 2021, from £200,000 to £1,000,000 for qualifying expenditure on plant and machinery, has been extended by one year to 1 January 2022.