Even before the Chancellor Rishi Sunak delivered his second Budget, we knew that it would be nothing short of interesting, as it attempted to strike a balance between continuing to support people and businesses with the overall economy and government spending. Rumours abounded for weeks that this would be a taxation-heavy statement, and that the government was likely looking for speedy ways to recoup the levels of spending not seen since the Second World War.
Addressing the economic outlook, Sunak said that the Office for Budgetary Responsibility (OBR) is now expecting a swifter and more sustained recovery than it had foreseen in November 2020, with the economy now anticipated to return to its pre-Covid level by the middle of next year – some six months earlier than forecast. However, he said that in five years’ time, the economy will still be 3% smaller than it would have been, had it not been for the pandemic. He stated that growth this year is forecast to be 4%, rising to 7.3% in 2022, followed by growth of 1.7%, 1.6% and 1.7% in the subsequent years.
There was plenty in the Budget about Coronavirus business support measures, but with that, the Chancellor warned, would come anticipated tax rises in the coming years.
Some of the highlights are as follows:
- Income tax: the income tax personal allowance and higher rate threshold will increase in line with the consumer prices index in April 2021 but will then remain at this level until April 2026, cancelling planned increases in line with inflation. The thresholds for inheritance tax, the pensions lifetime allowance and the annual exempt amount for capital gains tax will remain at their current levels until April 2026.
- Corporation tax: moving to business tax measures, it was confirmed there will be an increase in corporation tax from 19% to 25%, which will come into effect from April 2023. This unexpected delay in tax hikes was arguably the most surprising element to come out of the Budget: the government support schemes have been a lifeline for businesses, but there is obviously a huge financial burden for the country in delivering them. Looking back a few months, it seemed inevitable that the government would need to recoup this quickly, and that this would come in the form of immediate tax changes in the Spring Budget. I am pleased that they have seen fit to delay this, at least for now, and am optimistic about what this means for our overall economic recovery. My one note of caution is that accountants need to advise businesses on the importance of planning and the impact of increased taxes in the future, so that they can ensure sustainable economic growth, without creating financial problems further down the line.
It was also announced that there will be a new small profits rate of corporation tax for small businesses with profits below £50,000 of 19%, meaning they will see no increase. Businesses with profits of between £50,000 and £250,000 will see a tapered rate, while those with profits of more than £250,000 will pay the full 25% rate. The trading loss carry-back rule is being extended temporarily from one to three years. Loss-making unincorporated businesses and companies will be entitled to relief for up to £2 million of losses in 2020-21 and 2021-22.
- Capital allowances and VAT registration threshold: interestingly, it was also announced there will be a capital allowances “Super Deduction” of 130% for main rate assets such as plant and machinery as well as a 50% first year allowance for special rate assets. The current VAT registration threshold of £85,000 will remain in place for a further two years from April 2022.
- Business rates: there were also key changes for the hospitality sector, one industry that has taken the full brunt of the pandemic’s impact. The new rate of VAT for tourism and hospitality will be 12.5% from 1 October 2021 to 31 March 2022. In addition to this, the Treasury also announced eligible retail, hospitality, and leisure businesses pay no business rates for three months, with up to 66% relief for the rest of the year in 2021 to 2022, worth over £6 billion.
The Chancellor stated that business rates will still be discounted by two-thirds for the last nine months of the year, up to a value of £2 million for closed businesses, with a lower cap for those who have been able to stay open. Accountants who specialise in these industries should communicate these changes to clients and further adapt work practices to ensure compliance.
At first glance, most businesses will have gained great reassurance from the Budget, as short-term solutions are provided to their most pressing financial challenges. There are however two things that make this Budget extremely interesting, particularly compared with historic statements. First, the Budget has clearly laid out short-, mid- and long-term policies, far exceeding the normal level of forward-planning, in a bid to support economic recovery. This allows businesses time to revisit and align their growth and development strategies with these policies. Second, the devil really is in the detail. Many spring statements deliver broad stroke policies that are easily understood, but because we are now in unprecedented times, we need innovative solutions and that is what this Budget has potentially delivered. I think the impact and reality of this budget will therefore not be fully understood until several months from now, when more details have been released, and there has been time to fully understand and digest the impact.
As ever, what the Budget means for individuals and businesses will become clearer as more details of the specific policies are announced in the coming days and weeks, so accountants should ensure they are aware of the key changes to move forward efficiently. What this Budget represents for accountants is hope for the future, significant opportunity for them and their clients, and plenty to keep them in work for at least the next decade. Accountants are trusted advisers to their clients, and there is huge opportunity in this Budget to build on that trust, providing relevant advice on future policy impacts.
Commentary from John Edwards, CEO at the Institute of Financial Accountants
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