Personal Tax Newsletter – February 2021
Personal tax update and deadlines reminder
As we are fast approaching both Budget day on 3 March 2021 and the tax year-end on 5 April, you should have already received a copy of our Year-End Tax Planning Guide and hopefully had a chance to consider any tax planning. We have also included a further article below on some possible Budget predictions.
Prior to the end of the tax year, you may wish to consider topping up ISAs, making pension contributions or gift aid donations, or looking into tax favoured investments. In particular, for those who are higher or additional rate taxpayers and near any of the thresholds, there can be significant tax savings to be made.
If there are any areas of tax planning that you would like to discuss or any questions, please get in touch.
The tax return deadline was 31 January 2021 but due to Covid, HMRC announced that there would be no penalties for tax returns submitted by 28 February. The tax remained due by 31 January with interest running from this date. In addition to the possible interest on unpaid tax, there is usually a surcharge applied to tax unpaid after 28 February. HMRC announced on 19 February 2021 that this year the surcharge will only be applied to tax outstanding at 1 April 2021. With these dates in mind, while we know that the vast majority of tax returns are submitted and the tax paid, if you do still need to complete either the tax return or the payment, this is your reminder.
If you need more time to pay the tax, it can be possible to negotiate a time to pay arrangement with HMRC and this should be done by 31 March 2021.
The last budget took place on 11 March 2020 and since then the Chancellor has had to deal with challenges to the UK economy that have not been faced in 300 years. Covid’s impact has been immense and the pandemic has meant the Chancellor has had to embark upon a series of mini budgets to help businesses and individuals cope with the financial impact of the Covid pandemic. Because of this government borrowings are at their highest since the end of the Second World War.
The Conservative manifesto in December 2019 promised that there would be no increases in income tax, national insurance and VAT, although that was before the pandemic and the billions the Treasury has had to spend on supporting the economy.
With that in mind, the Chancellor has a choice of whether to raise taxes in order to start rebalancing the deficit or, or whether to defer tax rises and continue to support people and jobs until the economy is on a surer footing.
There have been calls to extend the job support schemes, due to end 30 April, the business rates relief due to end 5 April and the reduced VAT rate for the hospitality sector due to end on 31 March. It is likely that the Chancellor may announce new measures either in a separate announcement prior to the budget or as part of his budget speech.
In view of the competing pressures the Chancellor is under, I would like to set out our thoughts on what might be contained within this landmark budget.
Firstly, dealing with business tax:
It has been widely rumoured that there will be an increase in the headline rate of corporation tax, from 19%. At the last Budget, the Chancellor scrapped a planned further cut to 17% from 1 April 2020. We think that he may increase this rate by 1% which would still mean the UK has one of the lowest rates in the G20.
Following the recession caused by the financial crash in 2008 the government extended the corporation tax loss carryback from 12 months to 36 which made an enormous difference to the cash flows of viable businesses. The Chancellor may opt to reintroduce such a measure, alongside any increase in the headline rate of corporation tax.
Capital Allowances and R&D Incentives
Additionally, boosting business investment will be high on the Chancellor’s agenda so increases in capital allowances rates– particularly those that support the Government’s carbon reduction agenda such as low carbon vehicles and energy-efficient technology are quite possible.
The government had previously announced that the reduction in the Annual Investment Allowance, a 100% relief for qualifying expenditure on plant and machinery, from £1m to £200,000 would be delayed from 1 January 2021 to 1 January 2022. In order to boost further investment, it is possible a further deferral will be announced.
It is likely he will also look at R&D incentives as another way of boosting the economy. In the spring 2020 budget, the government announced it would consult on an expansion of the existing cost categories to include expenditure on data and cloud computing costs. This consultation closed in October 2020 and it is likely he will use the budget to confirm he will proceed with this proposal.
Similarly, while broadening the scope of qualifying expenditure it is likely the Chancellor will also limit relief on routine, indirect activities, i.e., items which do not contribute directly to technological uncertainty.
It is likely we will hear an announcement on Freeports. Following the UK’s departure from the EU, the government sees the establishment of new Freeports as a means of boosting trade, jobs and investment across the UK. The bidding process closed on 5 February 2021 and over 50 applications have been submitted from sea, rail and airports across the UK. Businesses will be able to claim reliefs from key business taxes within a Freeport, for example, enhanced rates of Structures and Buildings Allowance and enhanced relief for companies investing in qualifying new plant and machinery assets. As well as these anticipated announcements on Freeports the Chancellor may seek to announce new Enterprise Zones, in areas hit hard by Covid. Current enterprise zones already benefit from some of the tax advantages being mooted for the freeports.
Online sales tax
The UK’s digital services tax (DST) was introduced with effect from 1 April 2020 and generally operates as a 2 per cent tax on the turnover of groups of companies providing certain digital services. However, the relevant de minimis thresholds are set such that the tax only applies to the largest digital businesses, and only a narrow set of activities are in-scope.
Notwithstanding this, due to lockdown, some outlets are reporting a boom in online sales, in contrast to the traditional high street retailers who have faced a reduction in footfall and consequently profits as well as suffering business rates and other property taxes. It has been widely reported that the Chancellor is considering introducing a more wide-ranging surcharge on online sales. This would be intended to ‘level the playing field’, given that online retailers do not generally suffer significant business rates and other property charges. It would be a surprise if legislation to implement an online sales tax was introduced at Budget 2021, but a consultation on the potential design of such a regime is certainly a possibility.
There may be specific amendments to VAT rates on some items plus an extension of the reduction of the hospitality VAT rate of 5% beyond the current end date of 31 March 2021. In line with the manifesto pledge, we see no further cause to increase the VAT rate and conversely, there have been calls to reduce the application of the 20% standard rate in an effort to stimulate consumer spending and access the reported £125bn of savings built up by better-off households through the pandemic.
Now, moving onto individuals:
The idea of a ‘one-off’ wealth tax as mooted by the ‘Wealth Tax Commission’ to bridge the gap in public finances after COVID has reportedly been ruled that out by the Chancellor, but possible changes to our existing wealth taxes, capital gains tax (CGT) and inheritance tax (IHT), are certainly attracting attention.
Capital Gains Tax
Following on from the much-publicised Office of Tax Simplification report there has been much speculation that the rate of CGT will rise. The report recommended equalising CGT rates with income tax rates. This would more than double rates for some business owners looking to sell and it would also be self-defeating as it may deter investment from entrepreneurs. You will recall Business Asset Disposal Relief (previously referred to as Entrepreneurs’ Relief) was severely restricted in the March 2020 budget to cover only the first £1m of lifetime gains. The OTS report suggested that the government should look at replacing BADR with a relief more focused on retirement. So, it is entirely possible that the Chancellor will announce a review of BADR and Investors Relief to a review to ensure the tax system incentivises entrepreneurship in the future.
Other suggestions in the OFT report include reducing the annual exempt amount, currently £12,300 and a review of share-based remuneration and the accumulation of retained earnings within owner-managed businesses. The report also mentioned the earlier OTS report on IHT which recommended that, where a relief or exemption from IHT applies, the Government should consider removing the capital gains uplift on death for assets transferred to beneficiaries. This would avoid assets falling out with the tax net and would encourage lifetime giving.
At this stage it is thought that CGT rates will go up, however possibly the Chancellor will wait until the economy is on a surer footing.
Tax relief on pension contributions for higher rate taxpayers
Cutting pensions tax relief has been discussed frequently in the run-up to prior budgets. On the basis the government has to address a huge deficit the Chancellor may opt to take advantage of cutting pensions relief. He could address this in a number of ways, including reducing the annual and lifetime allowances and limiting carry-forward of unused annual allowances, but the simplest would be to apply a single flat rate of relief, perhaps set at a level of 25%.
It will be interesting to see how far the Chancellor moves to balance the books in terms of tax rises. Of interest was mention in the Times recently was the tax gap, i.e., the £34billion which eludes the Treasury due to mistakes, poor computer systems and avoidance and the fact that HMRC do not need to increase any tax rates to pull in more of these tax revenues! It should be noted that HMRC are already on the case with this with its Making Tax Digital initiative with VAT already in operation and Income Tax for self-employed individuals and rental income planned for 2023 and corporation tax planned to go live in 2026.
These processes will stop errors and ought to reap extra proceeds for the taxman. With the increasing digitalisation programme being contemplated by HMRC I am sure there will be a declaration in the budget of the governments intent to continue and perhaps develop further these processes so that tax is calculated as you go or in real-time! An excellent way to raise more in taxation without having to increase the rates! Anyway, we will just have to wait and see…
IR35 – Off-payroll rules
The new “off-payroll” (IR35) rules, which were due to come into force on 6 April 2020, were delayed by one year as part of the package of measures to help businesses deal with COVID-19.
The new rules, which are now due to come into force on 6 April 2021, will apply to many organisations contracting for the services of workers via a contract with an intermediary such as a company (often called a “Personal Service Company”), rather than by a direct contract with the worker concerned.
The intention of the “off-payroll” rules is to help clamp down on perceived tax avoidance. HMRC argue that by providing their services via an intermediary, both the worker him/herself and the client organisations engaging them, may be gaining an unfair tax advantage. If looking at all the facts taken together (and based on a number of “tests” of employment), the worker should really be regarded as an employee, the “off-payroll” tax rules aim to ensure that they will end up paying broadly the same amount of tax and NIC as a conventional employee. The system, which was to have come into force in less than a fortnight, is an extension of long-standing “IR35” rules: when introduced, the new regime will make many organisations (other than “small” private sector entities) responsible for assessing, on a case-by-case basis, whether their arrangements with contractors are “caught” by the “off-payroll” rules. If the assessment is that the arrangements are “caught”, the client organisations are potentially obliged to operate PAYE and account for employer’s NIC on payments under the contracts concerned. Organisations operating the new rules will need to have in place a fairly onerous administrative system to ensure compliance. Many organisations have been working hard in recent months to assess what the new rules mean for them, and to get ready for these changes.
It is important for organisations that fall within the new rules to ensure that they are ready to comply well in advance of 6 April 2021.
If you require any assistance in connection with the “off-payroll” rules, please get in touch.