Budget 2021 | Implications for UK Business | Ignition Law

Despite a headline corporation tax rise on the horizon, the Budget also brings positive news for businesses, particularly those at scale-up stage who stand to benefit from the “super-deduction” for qualifying capital expenditure

Budget 2021: overview

A wartime Budget

With the UK Budget running at a peacetime record deficit of £355bn, or 17% of GDP, and the committed cost of COVID-19 relief efforts standing at £407bn, the 2021 Budget announced on 3 March by Chancellor of the Exchequer, Rishi Sunak, is as close to a wartime Budget as we will (hopefully) see in our lifetimes.

As the Chancellor made clear in his remarks, recovery from the economic aftermath of COVID-19 is something that will require careful action by many successive governments, over many decades.

It is no surprise, then, that the Budget includes tax increases and the freezing of tax thresholds. It is not, however, as stark an austerity Budget as many had feared. Individual employment earnings have been spared the rod, leaving aside the marginal effect of modest inflation on effective tax thresholds.

Ongoing stimulus measures

The Chancellor demonstrates prudence by not withdrawing COVID-19 stimulus measures too abruptly, with the extension of furlough payments and hospitality incentives, coupled with the announcement of £5bn of new restart grants and a new government-supported business loan scheme.

In all, the Budget reflects a prudent step on the path back towards prosperity, consistent with its cautiously optimistic projections for both GDP growth and unemployment over the coming 5 years.

Budget 2021: summary of key items

No change to personal income tax rates or thresholds

Employees and employers alike will be relieved to note that there will be no change to personal income tax or national insurance contribution rates, and no reduction of personal allowances. On the other hand, income tax and national insurance thresholds and personal allowances will be frozen and will see no inflation-linked rises from April 2021 until 2026.

On balance, this is good news for employers and individuals. With the current climate of very limited inflation widely projected to continue in the medium term, any threshold increases would have been modest, and the real win is that the Government has not chosen to impose further income-related taxes on individuals or employers in order to mitigate spiralling public debt.

Corporation tax increase

With national debt spiralling, something had to give. As was widely anticipated, a corporation tax increase was announced, with rates to increase from the current level of 19% to 25% from 1 April 2023.

The increase was neither as significant nor as abrupt as some feared, with businesses now having two years to prepare. Two points are also worth noting:

Small businesses are spared some of the pain, with only companies with profits in excess of £250,000 being subject to the 25% rate in full; companies with profits of up to £50,000 will remain subject to the 19% rate post-April 2023 and those with profits between £50,000 and £250,000 will benefit from tapered relief; and
Even at the newly announced rate, the UK’s corporate tax rates remain among Europe’s more favourable, though the rate increase may, together with Brexit-related issues, be enough to persuade some new businesses to look beyond the UK and choose to incorporate elsewhere, with Ireland likely to be the main beneficiary.

Nonetheless, there is no avoiding the fact that the Government clearly expects limited companies (and, by extension, their shareholders) to bear some of the initial brunt of bringing the country’s finances back towards a sustainable equilibrium.

“Super-deduction” for qualifying capital expenditure

On a more positive note – and one which stands to benefit growing businesses that rely on significant capital expenditure in particular – comes the surprise announcement of a 130% “super-deduction” for qualifying capital expenditure for a period of two years from 1 April 2021.

Intended to encourage businesses to make investments that will kick-start a post-COVID-19 economic recovery, the new incentive allows businesses to deduct 1.3x the cost of qualifying plant and machinery investments against taxable income. In practical terms, this amounts to a 24.7p corporation tax saving for every £1 invested.

Extension of furlough scheme

Those who remain unable to work during the pandemic will continue to receive furlough payments of up to 80% of their contractual income until the end of September 2021 at the earliest, with employers required to contribute 10% in July and 20% in August and September.

Hospitality incentives

As one of the worst affected sectors of the economy, the hospitality sector will welcome an extension of the 5% reduced VAT rate until the end of September 2021, followed by a 12.5% rate for the subsequent six months. This extends to businesses supplying hot takeaway food and beverages (cold takeaway items generally being subject to 0% VAT anyway), dine-in food and non-alcoholic beverages, hotel and holiday accommodation, and admission fees to certain attractions.

Hospitality and leisure businesses will also benefit from a 3-month business rates exemption from 1 April 2021, with rates for the subsequent 9 months of the fiscal year being subject to a two-thirds discount.

Businesses selling alcoholic beverages will also benefit from a freeze on alcohol duty.

For more information, please contact John McLean

John is a corporate tax solicitor with more than 15 years’ experience. Having spent 6 years in private practice in London, John moved to Abu Dhabi, where a brief secondment to Mubadala Investment Company became a decade in-house, latterly as Senior Vice President of Taxation at Mubadala Capital, supporting the business across a diverse range of M&A and funds matters.John returned to the UK in 2020 and has returned to private practice, where he now supports Ignition’s clients in matters from employment tax and incentive schemes to VAT and M&A transactions.

Relevant experience includes:

Closed the largest secondary staple PE fund transaction ever completed, a c$2.5bn secondary fund with $1.5bn stapled primary commitment, in a first-of-kind transaction for Mubadala.
Closed Mubadala’s US and European venture capital funds and Brazilian PE fund.Divestment of EMI Music Publishing to Sony ($2.3bn).
Negotiated Mubadala’s $15bn commitment to the SoftBank Vision Fund.
Oversaw tax issues relating to new office build-outs in New York, San Francisco, London, Hong Kong and Moscow, including management of permanent establishment risk and transfer pricing.
Formation of Abu Dhabi Catalyst Partners, a $1bn fund focused on attracting top tier investment firms and businesses to Abu Dhabi Global Market.
Acting for Ford Motor Company on the sale of Volvo Car Corporation for $1.6 billion to a sovereign state-backed SPV structure.

This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide a summary of the key elements of the 2021 Budget. This guide does not constitute legal advice and should not be relied upon. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.

Related Links

UK 2021 Budget