Charter Tax Consulting Ltd
Autumn Budget and Spending Review
27 October 2021
Client Summary Note
Introduction
Today’s statement was memorable for all the additional spending announcements and the virtual absence of any additional tax raising plans to pay for them.
The most surprising aspect was, once again, no mention of any reform of Inheritance Tax or Capital Gains Tax. Both these taxes have recently been the subject of detailed reviews and recommendations and there was much speculation that some increase in rates or reduction in reliefs was imminent – but the Chancellor remained silent on both.
Neither was there any comment on a Wealth Tax which had been suggested as a better way of funding the Covid related deficit than by raising other taxes but the Chancellor seems keen to rely on economic growth and the additional tax so generated to reduce the additional indebtedness that his generous support measures incurred.
It is true, of course, that the principal tax increases have already been announced, being the 6% increase in Corporation Tax to 25% commencing in April 2023 and the increases in National Insurance of 1.25% for both employers and employees and Income Tax on Dividends of 1.25% commencing in April 2022.
Nevertheless, Chancellor Sunak managed to enthuse his party’s own MPs and maintain a glum silence from the Opposition during his speech. He seems confident that the country can claw its way out of debt by growing its economy rather than having to raise taxes… but only time will tell.
Whether or not the Government will introduce reforms to Capital Taxation at a later date remains to be seen but Chancellor Sunak re-emphasised his ambition to reduce taxes in future whilst recognising the need to reach a balanced budget and reduce debt over the longer term.
Whilst Capital Gains Tax, at least for non-residential property assets, remains at 20% and the current Inheritance Tax exemptions for life-time giving and surviving 7 years, as well as the generous reliefs afforded by Business and Agricultural Property Reliefs remain in place, we would encourage all clients to review their capital position and consider whether to take advantage of the relatively benign regime which many had expected to be curtailed.
Below is our summary of some of the key detail announced today though, as ever, this is not complete advice and if you think these tax changes are likely to affect you, then please do not hesitate to contact us for advice.
Yours
The Charter Tax team
Contents:
Basis Period Reform
Earlier this year, HMRC released a call for evidence under the heading ‘The tax administration framework: Supporting a 21st century tax system’, with basis period reform put forward as an example of possible simplification. It has now been announced that legislation will be introduced in Finance Bill 2021-22 to implement this reform.
As a result, unincorporated businesses, including the self-employed, partners in trading and professional partnerships, trading trusts and estates and non-resident companies with trading income charged to Income Tax will from 6 April 2024 be taxed on profits arising in a tax year, bringing the way self-employed profits are taxed in line with other forms of income, such as property and investment income.
A simplification?
The reform will impact unincorporated businesses whose accounting year end is not 31 March or 5 April.
At present, profits or losses disclosed on tax returns filed by the affected unincorporated businesses are based on the set of accounts ending in the tax year – this is known as the ‘current year basis’. Where the accounting date is not 31 March or 5 April, those businesses are, in the early years of trade, taxed on some profits twice, generating ‘overlap profits’. These are carried forward and ‘overlap relief’ is given in the tax year when the business ceases, ensuring that over the lifetime of a business, profits are only taxed once.
The basis period reform replaces the ‘current year basis’ with a ‘tax year basis’, removing the need for overlap profits and overlap relief.
However, unincorporated businesses with an accounting date other than the end of the tax year would need 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.
Or simply an acceleration of tax take?
Unincorporated businesses with a year end other than 31 March or 5 April will see an acceleration in the payment of their tax. For example, a business with a year end of 30 April will, under the current year basis, include the income for the year ended 30 April 2021 on their tax return for the year ended 5 April 2022, with the tax due for payment by 31 January 2023. Under the basis period reform, 11 months of the accounting period will be brought forward into an earlier tax year, bringing the tax payment relating to that amount forward by 12 months.
The year ended 5 April 2024 will be a transition year. For unincorporated businesses with a year end other than 31 March or 5 April, this will mean being taxed on their profits under the current year basis for the accounts period ending in the year ended 5 April 2024, plus their profits for the period from the end of that accounting period to 5 April 2024. Any overlap profits brought forward or generated will be relieved in full in the year, and not carried forward to future years.
For unincorporated businesses with higher profits in 2023 to 2024 due to the change in basis period, the transitional period additional profits are automatically spread over a period of five years, although there is the option to elect out of spreading and accelerate the charge, to treat the additional amounts as arising in the 2023-24 tax year.
Example
An unincorporated business has overlap profits of £10,000 and a year end of 30 April. Profits are £60,000 for the year ended 30 April 2023, increasing by £6,000 each year.
| Tax year | Taxable on current year basis | Taxable on tax year basis without transitional adjustment | Taxable on tax year basis with transitional adjustment |
| 2023/24 | £60,000 | £110,500 | £70,100 |
| 2024/25 | £66,000 | £71,500 | £81,600 |
| 2025/26 | £72,000 | £77,500 | £87,600 |
| 2026/27 | £78,000 | £83,500 | £93,600 |
| 2027/28 | £84,000 | £89,500 | £99,600 |
| 2028/29 | £90,000 | £95,500 | £95,500 |
With a budget which was heavy on spending announcements and light on tax announcements, basis period reform may be a way the Treasury is seeking to rebalance the books without increasing taxes.
Capital Gains Tax - Reporting for UK Residential Property Deadlines Extended
Whilst not actually announced in the Chancellor’s speech, HMRC have today announced, in line with the Office of Tax Simplification recommendations, the extension of the reporting and payment deadline for disposals of UK residential property.
Since April 2020, individuals, trustees and executors disposing of UK residential property have had a reporting deadline of 30 days to report and pay any capital gains tax. Today’s announcement extends that deadline to 60 days for disposals that complete on or after 27 October 2021.
There has also been a minor clarification in respect of disposals of mixed used properties, whereby only the proportion of the gain that relates to residential use needs to be reported and tax paid.
We did not see the anticipated increases in capital gains tax rates that the Office of Tax Simplification also recommended. Perhaps this is a measure that will be further considered in the Spring.
Income Tax Increase on Dividend Income
The announcement that income tax rates in respect of dividend income were to increase by 1.25% from April 2022 was made by the Prime Minister on 7 September 2021, to help support social care and the NHS.
The rates can be summarized as follows:
| Current rate | Rate from April 2022 | |
| Basic rate | 7.5% | 8.75% |
| Higher rate | 32.5% | 33.75% |
| Additional rate | 38.1% | 39.35% |
Dividend allowance is still available against the first £2,000 of dividend income received.
With the rate of tax on overdrawn directors’ loan accounts being linked to the higher rate of dividend tax, it should be noted that this will increase to 33.75% from April 2022.
Annual Investment Allowance
It had previously been announced on 3 March 2021 that the Annual Investment Allowance (AIA) would remain at £1,000,000 until 31 December 2021, reverting back to £200,000 on 1 January 2022.
In more good news, it was announced that the AIA will now remain at £1,000,000 for qualifying expenditure on plant and machinery incurred during the period from 1 January 2022 through to 31 March 2023 enabling businesses to be able to plan for future capital expenditure in the full knowledge of the allowances they will be able to claim over a longer period.
It is worth noting that a company cannot claim AIA and a super-deduction on the same amount of qualifying expenditure, thus in most cases it would make sense to prioritise the super-deduction where possible.
Government Commits to Supporting Theatres with Increased Reliefs
The Government has pledged its support to theatres, orchestras, museums and galleries by doubling the corporation tax relief available to qualifying companies. It is hoped that this temporary measure will provide a boost to this sector while they recover from the months of closures they have had to face.
The relief allows for an additional deduction to be claimed against their taxable profits by companies engaging in the production of qualifying theatre shows, orchestral concerts and exhibitions. Much like R&D credits, if the additional deduction results in a loss, those losses can be surrendered for a payable tax credit.
The current rates of relief are between 20-25%, and these will increase to 45-50% from 27 October to 31 March 2023. The following year to 31 March 2024 will see rates fall to 30-35%, before returning to the current rates from 1 April 2024.
The Government has also announced that it will be amending the legislation to simplify the wording and safeguard against the abuse of these generous reliefs, although it has not yet provided any detail as to what those changes might entail.
Residential Property Developer Tax
On 10 February 2021, the Government announced that it would introduce a new tax aimed at residential property businesses. Following a period of consultation to 22 July, the Government drafted the necessary legislation and has now committed to bringing the new tax in.
The tax which has been set initially at 4% is aimed at companies or groups of companies undertaking UK property development, where the business generates more than £25m in annual profits from 1 April 2022.
Corporate Re-domiciliation
The Government has announced a consultation into corporate re-domiciliation, the process by which a foreign-incorporated company may change its place of incorporation to the UK while maintaining its legal identity as a corporate body. The consultation will run until 7 January 2022.
Corporate re-domiciliation is part of the Government’s plan to strengthen the UK’s position as a global business hub and an open, competitive, free market economy. It is clear from the consultation document that the Government intends to introduce corporate re-domiciliation, and the consultation questions focus on implementation, rather than whether such a policy should be introduced.
We have recently been seeing an increase in foreign corporates wishing to relocate to the UK, and therefore this development is likely to be of interest to many foreign domiciliaries with business interests. As yet, no draft legislation has been published.
This consultation can also be viewed through the lens of the Chancellor’s comments on migration, and mention of the Scale-Up visa. The intended message appears clear: Global Britain is open for business.
Economic Crime (Anti-Money Laundering) Levy
Unsatisfied by burdening financial services businesses with a whole host of anti-money laundering rules and procedures, the Government will now also require entities regulated for anti-money laundering (AML) purposes under the Money Laundering, Terrorist Financing and Transfer of Funds Regulation 2017 to pay a financial levy, unless the business is considered as “small”.
The proposed new levy will increase based on the size of the business, as follows:
- Small businesses (turnover under £10.2m of UK revenue) – will be exempt
- Medium businesses (turnover of £10.2m - £36m of UK revenue) – will pay c.£5-15k
- Large businesses (£36m - £1bn of UK revenue) – will pay c.£30-£50k
- Very large (over £1bn of UK revenue) – will pay c.£150-£250k
UK revenue for this purpose will be defined as follows:
- for a UK resident entity, the entity’s revenue after deducting so much of its revenue as, on a just and reasonable apportionment, is attributable to the activities of any permanent establishment of the entity in a territory outside the United Kingdom
- for a non-UK resident entity, the entity’s UK revenue is so much of the entity’s revenue as, on a just and reasonable apportionment, is attributable to activities of any permanent establishment of the entity in the United Kingdom
The levy will first be charged on entities that are regulated during the financial year from 1 April 2022 to 31 March 2023, with the amount payable being determined by reference to their size based on their UK revenue from periods of account ending in that year. Amounts will be payable following the end of each financial year, meaning that the first payments will be made in the financial year from 1 April 2023 to 31 March 2024.
The levy will aim to raise £100 million per year from the AML regulated sector to pay for government initiatives outlined in the Economic Crime Plan to help tackle money laundering.
The levy will be collected by HMRC, the Financial Conduct Authority (FCA) and the Gambling Commission – each body will collect for their existing AML-regulated populations, with HMRC also acting as levy collector for entities currently regulated by any of the 22 legal and accountancy Professional Body Supervisors.
Trust Registration Service – Extension of Deadline for Reporting Changes to the Trust Register
Under the current rules trustees are obligated to update details held on the Trust Register within 30 days. The government will be legislating to increase this deadline to 90 days, and in the meantime HMRC have confirmed that they will not be enforcing the 30 day rule in the interim period.
From 1 September, existing non-taxable trusts should be entered onto the Trust Register, but following delays in upgrading HMRC’s systems, the deadline for registering such trusts has been extended from 10 March 2022 to 1 September 2022. All new trusts created after 2 June 2022 will be required to be registered within 90 days of creation.
Discovery Assessments
When HMRC do not have enough information to assess a tax liability, they are given extended time limits to recover this tax.
Restrictions in tax reliefs can be missed by taxpayers with otherwise simple tax affairs – such as an employee earning more than £50,000 and claiming Child Benefit. The clawback of some or all of this benefit is not as widely known or understood as HMRC had hoped, and the Court have recently applied the existing rules on HMRC’s power in favour of the taxpayer.
HMRC are appealing the case – but Government are also changing the law, just in case! As such, HMRC will have extended time limits to assess clawback tax charges such as:
- The Child Benefit charge where one parent earns over £50,000
- The charge where certain pension contributions above the allowable limits are made
- The charge on Gift Aid donations with relief above the donor’s tax liability
This is in one sense an understandable change, but could lead to uncertainty for a number of years where taxpayers have not notified HMRC of their filing requirement (because they did not know of such a requirement). If a medium earner realises too late that they have liabilities stretching back over many years – one has to wonder at the equity of reclaiming large amounts of tax in this way, and whether the fault is with the individual at all.
Caution would be the best course of action, and seeking professional advice in areas of uncertainty.
HMRC Powers – Tackling Avoidance Schemes
HMRC’s powers in respect of collecting taxes and charging penalties have been tinkered with over the last few years, and last year there was a consultation into further powers that might be required.
This budget was no exception, with HMRC being granted further powers. The focus this time was on aggressive tax avoidance “schemes” promoted by companies who are then able to avoid the penalties HMRC would otherwise impose by dissipating their assets or winding up.
Under proposed legislation, HMRC would be able to seek a freezing order for companies meeting certain conditions, or to wind up companies not deemed to be in the public interest.
It is also HMRC’s view that taxpayers can be “sucked in” to schemes they would not otherwise contemplate if they had known more about them. Further powers to name and shame will, they hope, limit this.
Promoting such schemes has never been something Charter Tax has been involved with – if anything ever sounds too good to be true, it probably is! The courts have agreed down the years as the schemes have eventually been thwarted.
If you are offered something with tax benefits and are not sure about it, do let us know and we can review it for you.
Tax Relief on Pension Contributions
One of the Government’s perceived successes is the introduction of Automatic Enrolment into a workplace pension scheme for all employees. It has long been recognized that the Basic State Pension (BSP) is insufficient to support most people in their retirement. Recent increases in the BSP have improved the position but the Government was keen to encourage independent pension saving to supplement the BSP and Auto Enrolment was the plan devised to achieve this.
One of the drivers behind the introduction of Auto Enrolment is the increasing proportion of people in the UK aged over 65. In 1997 this amounted to 16%, in 2017 this had increased to 18% but by 2037 this is projected to increase to 24%. As can be seen, over time the total cost of BSP will be borne by fewer working age people and will become increasingly expensive to afford.
The Government now reports that more employees than ever are saving into a workplace pension scheme and one of the factors behind this is the tax relief (up to certain limits) available for pension contributions.
There are two main ways for this relief to be given:
Net Pay Arrangements – an employee receives tax relief when pension contributions are deducted by the employer before tax is calculated, or
Relief At Source – individuals make contributions out of their earnings and the pension scheme claims tax back at basic rate from HMRC. Individuals then have separately to claim back any higher rate tax relief from HMRC directly.
For most people both methods work satisfactorily but for certain lower paid employees there is a risk that they lose out on the maximum tax relief available. The Government is therefore calling for evidence on how to improve the administration of pensions tax relief to ensure that all contributors receive all the tax relief they are entitled to.
Abolition of Cross-Border Group Relief
Current position
Since April 2006, following a challenge by Marks and Spencer to the European Court of Justice, it has been possible in some circumstances for an EEA subsidiary of a UK company to surrender their losses to group companies in the UK.
There were similar provisions relating to losses generated by a UK permanent establishment (PE) of an EEA company.
New position as of 27 October 2021
Following the UK’s withdrawal from the EU, the change announced today seeks to bring the treatment of EEA subsidiaries and UK permanent establishment of EEA companies in line with the treatment of non-EEA companies.
Group relief for losses from EEA subsidiaries will be abolished so that losses from EEA subsidiaries are treated the same as losses from subsidiaries in other countries around the world. This means that from 28 October 2021, group loss relief for all overseas subsidiaries will only be available if the subsidiary is resident in the UK or within the charge to UK corporation tax in limited circumstances.
The measure will take effect for all accounting periods ending after 27 October 2021, with companies with accounting periods that straddle this date having a deemed accounting period ending today for the purposes of this change only.
Similarly, from this date, UK permanent establishments of EEA companies will only be able to offset losses against other UK profits if it is not possible to deduct those losses from non-UK profits of any person in any period – again aligning the treatment with non-EEA companies.
This is one of many measures that are gradually being announced to unwind certain EU law requirements that the UK are no longer required to be bound by.
Recovery Loan Scheme
The recovery loan scheme was set up to help businesses that have been negatively affected by Covid-19. The scheme offers loans to businesses of up to £10m with the government acting as guarantor for up to 80% of the loan.
In order to be in a position to apply for a loan, the business must be trading in the UK, would be viable if it were not for the pandemic, show it has been adversely impacted by the pandemic and is not already in insolvency proceedings.
The assistance can be provided to the business by way of invoice or asset finance or a loan/overdraft and can be for a repayment period of up to 6 years.
From 1 January 2022, there will be some changes to the scheme meaning that only small/medium businesses will be eligible to apply for the scheme, the maximum available facility will be £2m and the element the government will guarantee will be reduced to 70%.
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27 October 2021
