In the Chancellor’s second (real) Budget earlier in the month he announced that he had to level with people about the state of the UK economy. There were already announcements prior to Budget day of grants for High Street businesses and the hospitality sector and the widely predicted extension of the furlough scheme.
The chancellor has chosen a fine line between raising taxes to start paying down the massive Government borrowings but at the same time stimulate economic recovery and save jobs (whilst also keeping the pledges made in the Conservative Party manifesto!)
As it is anticipated that there will be a further Budget in the Autumn, perhaps it can be expected that the announcement of more significant increases in taxation will be delayed until later in the year. By then the economy will hopefully have started to bounce back and it has already been announced that there will be important consultation documents issued shortly which will seek views on future tax changes.
In the meanwhile, here’s a summary of five of the key tax changes coming out of Budget 2021 that affect small businesses
The rise in Corporation Tax rates probably got the most attention in the headlines, as this is an about-turn on the messaging that was previously being given….remember that not too long ago there was a plan to get CT rates down to 17%!
The good news is that nothing changes for two years – so the current 19% rate continues until 1st April 2023, at which point the main rate of Corporation Tax will increase to 25%, with the 19% rate (re)designated as the Small Profits Rate (SPR) and will continue to apply to companies whose taxable profits are £50,000 or less. Companies with taxable profits of £50,001 to £250,000 will pay tax at 25% but will have the benefit of a marginal relief calculation covering the profits in that banding.
Although this is a significant change it is expected that approximately only 10% of companies will be subject to tax at the full rate.
In a further measure that recognises that many businesses will have made a loss in the last year because of the Coronavirus pandemic and the difficult trading environment, a temporary change to the rules around trading losses was announced.
Trading Losses – (Temporary) Extension of Carry-back
Trading losses can normally only be set against profits of the preceding accounting period or previous tax year in the case of unincorporated businesses. The chancellor has announced that the carry back period will be temporarily increased to three years, thereby enabling some business to potentially obtain a tax refund. This will apply to losses made during the 2020/21 & 2021/22 tax years.
VAT Registration Limit Frozen (Again)
The VAT registration limit will remain at £85,000 for a further three years (until 1st April 2024). This will mean that the threshold will not have been increased for a period of 6 years.
Although arguably this makes it easier for businesses to assess whether they are required to register for VAT, as the threshold is no longer a moving target. However, it does mean that for any business that is operating at a level around the VAT threshold planning for VAT registration (or not) continues to be an important factor to keep under regular review.
Allowances – 2021-2022 and beyond
Although the Chancellor continued stick to the promise not to increase the rates of tax (for income tax, VAT or National Insurance) without breaking the triple lock election pledge, we continue to see ‘tinkering around the edges’ with the personal tax allowances as a method to increase the tax take by stealth!
For 2021/22 the personal allowance increases to £12,570 from £12,500 and the basic rate band rises to £37,700 from £37,500. However, there will be a freeze on these levels up to and including tax year 2025/26 i.e. they are being held at the same level for the next for 5 tax years.
It is a similar situation with Capital Gains Tax – although no changes in the rates (despite speculation in the run-up to the budget), the annual exemption for CGT increases to £12,300 for 2021/22 and is held at that level for the next 5 tax years.
One emotive topic not mentioned at all during the Budget was the thorny subject of National Insurance reform. It is probably too soon, given the Chancellor has further extended the two main COVID grant support schemes (CJRS & SEISS) and the silence at Budget 2021 is more likely a stay of execution rather than a permanent postponement – undoubtedly there will be further pressure to address this area as the Treasury and the Chancellor look at tax in the post-Covid world.
The National Insurance Contribution (NIC) rates and bandings were previously announced to take effect from 6 April 2021. Employees and the self-employed will not pay NIC on the first £9,570 of earnings for 2021/22.
The employee contribution rate continues to be 12% up to the Upper Earnings limit £50,270, with the self-employed continuing to pay at the rate of 9% on their profits up to the same level. Note that employer contributions will apply to earnings over £8,840 per annum.