Budget 2021: Real Estate sector to benefit from significant reliefs to incentivise investment in infrastructure

The main corporation tax rate for company profits over £250,000 will be 25%, with companies with profits under £50,000 continuing to be taxed at 19%. Profits in between these limits will be taxed at a tapered rate. A rise in corporation tax rates was widely expected, though this will not come into effect until the financial year starting 1 April 2023.

The main corporation tax rate will remain at 19% until 1 April 2023, when it will increase to 25% for companies with (non-ring fenced) profits over £250,000.

A new small profits rate of 19% will also come into effect on 1 April 2023 for companies with profits lower than £50,000. Companies with profits between £50,000 and £250,000 will be charged corporation tax at a tapered rate.

These profit limits will be proportionately reduced for short accounting periods or where a company has one or more associated companies.

In addition, close investment holding companies will become liable to corporation tax at 25% from 1 April 2023 regardless of their profits.

Our comment

Many tax practitioners will remember the previous small profits and main rate corporation tax rates. The Budget brings us back to this, only with lower upper profit levels than before. The Treasury announced that they expect only 10% of companies to pay tax at the higher rate.

Associated companies, and not 51% group companies, will reduce the upper and lower rates. This will make both profit limit bands smaller for companies under common control and corporate groups, bringing more companies within the tapered or higher rate of tax.

We expect businesses to give more consideration to group structuring, the payment of dividends compared to bonuses, and the use of group relief when looking to reduce taxable profits to access the 19% rate.

Once this change has been substantively enacted under the Finance Bill 2021, businesses will need to ensure their deferred tax calculations reflect the change in tax rate.

When will it apply?

From 1 April 2023

To help businesses weather the economic impact of COVID-19, the corporation tax and income tax trading loss carry back rules will be temporarily extended. The amendment will allow relief to be carried back to the previous three years rather than the usual one year.

What it means for companies

The Government has announced an extension to the carry back of trading losses for corporation tax made in accounting periods that end between 1 April 2020 and 31 March 2022.

In addition to the usual one-year carry back against total profits, the losses may be carried back a further two years against profits of the same trade. Losses are carried back against later years in preference to earlier years.

There is a £2m cap for trading losses being carried back more than one year. Losses carried back one year are unlimited, as before. A separate £2m cap applies for each period of 12 months within the duration of the extension. For example, a company with a 31 March year end will have one £2m cap for its 2021 year end and a second £2m cap for its 2022 year end.

If the amount of the claim is not (and could not be) more than £200,000, the claim can be made outside of the tax return. In calculating if the £200,000 threshold is exceeded, the company must consider all capital allowances or any other claim or reliefs available to it.

The £2m cap applies to groups of companies, unless all group companies’ claims are individually below the threshold, so loss-making groups will need to decide how best to utilise losses amongst members. Groups subject to the £2m cap must submit an allocation statement showing how it has been allocated between its members.

What it means for unincorporated businesses

For income tax, trading losses made in the 2020/21 and 2021/22 tax years are subject to these new rules. Sole traders must offset losses against profits of the same trade. Losses are carried back against later years in preference to earlier years.

There is a separate cap of £2m for each tax year of loss. A sole trader therefore has a £2m cap for 2020/21 and another £2m cap for 2021/22.

Sole traders can make a claim in their tax return, or if the claim affects more than one tax year, a standalone claim may be made.

HMRC will not give effect to claims and make repayments until Finance Bill 2021 receives Royal Assent.

Our comment

This is good news for certain businesses struggling because of COVID-19, enabling them to offset trading losses against earlier years of profit to obtain a tax repayment to aid their cashflow.

For companies, the ability to claim outside a tax return is also a welcome simplification for losses of £200,000 or lower. This should allow companies to obtain repayments without having to wait for the submission of the tax return for the loss making period.

For sole traders, these new rules mean they may be able to reduce their marginal rates of income tax in the earlier years.

The extension to the relief does not, however, apply to property businesses who may be struggling because of loss of tenants, especially those in the retail sector.

When will it apply?

For companies, it will apply to losses made in accounting periods ending between 1 April 2020 and 31 March 2022.

For unincorporated businesses, it will apply to basis periods ending in the 2020/21 and 2021/22 tax years.

The Government has announced technical changes to the corporation tax loss relief rules, which were relaxed from 1 April 2017.

In 2017, legislation was introduced to allow companies to use carried forward losses with greater flexibility than was previously permitted. Since that time, HMRC has identified some areas where the rules were not working as intended and companies were not accessing the loss relief to which they were entitled. For example, some groups were unable to claim the loss reliefs that they should have been entitled to following certain types of restructuring.

The Government proposes some changes to the detailed rules to correct these anomalies.

The areas subject to the changes are:

• where there has been a transfer of trade following a change of ownership;
• group loss relief;
• the computation of the loss restriction; and
• the group loss allowance allocation statement and its administrative requirements.

Our comment

These largely technical and administrative changes are to be welcomed as they are aimed at ensuring the loss relaxation rules work as originally planned, as well as reducing the compliance costs for corporate groups.

When will it apply?

Certain changes will apply retrospectively with effect from 1 April 2017. Other amendments will apply with effect from 1 April 2021.

A 130% super-deduction for expenditure on new, qualifying plant and machinery will be introduced for two years from 1 April 2021. A first year allowance of 50% will also be available for expenditure which ordinarily qualifies for special rate relief.

A temporary 130% super-deduction will be introduced for two years for companies that incur qualifying plant and machinery expenditure from 1 April 2021. A first year allowance of 50% will also be available for expenditure on items that would usually attract the special rate of relief of 6%. These reliefs will not be available for expenditure in connection with contracts entered into prior to 3 March 2021.

The super-deduction will provide companies with a deduction that exceeds the cost of the qualifying asset. Not all expenditure will qualify. Used and second-hand assets will be excluded and the general first year allowances exclusions will apply.

Companies will also be required to recognise disposal proceeds as balancing charges, where the super-deduction has been claimed.

Our comment

The introduction of these reliefs is welcome and demonstrates the Government’s commitment to encouraging investment. The additional tax deductions, when applied with the enhanced trading loss carry back provisions, could generate substantial tax savings and tax repayments for companies to reinvest.

While the introduction of these reliefs is a positive move, they only apply to companies. The reliefs exclude sole traders, partnerships and LLPs who will need to rely on the extended £1 million Annual Investment Allowance and will not benefit from enhanced deductions above this amount.

It is also unfortunate that the general exclusions that apply to first year allowances have not been amended. The leasing exclusion is particularly wide and is likely to result in commercial landlords being restricted from claiming the enhanced deductions without further modification.

Understanding the interaction between these temporary reliefs and existing reliefs, such as the Annual Investment Allowance, and Research and Development allowances, is going to be important to ensure companies make the best use of the allowances available to them.

While there may be an additional compliance burden for companies in understanding what expenditure qualifies, and the impact of these reliefs on future disposals, these reliefs will be welcomed by many companies and will incentivise spending in the short term.

When will it apply?

From 1 April 2021 for two years.

It has been confirmed that the temporary increase in the Annual Investment Allowance (AIA) for plant and machinery to £1m has been extended by a year. This limit will have effect from 1 January 2021 to 31 December 2021.

As announced in November 2020, the Government will legislate to extend the £1m AIA limit for a further year. The AIA limit was temporarily increased from £200,000 to £1m in January 2019 to stimulate business investment. This increase was originally intended to be for two years, but it has now been extended by a further 12 months to 31 December 2021.

Our comment

The Government remains keen to encourage capital investment in the UK and this extension will be welcome news for many businesses investing in qualifying plant and machinery.

This extension allows businesses further time to plan their capital investment and maximise the 100% relief available for qualifying expenditure. It will be particularly valuable to sole traders, partnerships and LLPs, who cannot benefit from the new super-deduction introduced for companies.

When will it apply?

For expenditure incurred from 1 January 2021 to 31 December 2021

The implementation of the PAYE cap for small and medium enterprises (SMEs), postponed in last year’s budget, is set to launch on 1 April 2021.

For research and development claims from 1 April 2021, SMEs will experience a limit to the payable R&D tax credit they can receive.

The payable R&D tax credit is capped at £20,000 plus 300% of its total PAYE and national insurance contributions liability for the period.

There is an exemption to this cap, provided the company can meet both of the following conditions:

• the company must be creating or actively managing intellectual property; and
• it must not spend more than 15% of its qualifying expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons.

Our comment

The implementation of the cap was a logical step forward for the Government as a similar cap already exists in the Research & Development Expenditure Credit scheme. The introduction of this cap will reduce the risk of fraudulent claims being submitted to HMRC and should not adversely affect genuine claimant companies.

The cap will impact businesses with limited UK payroll costs, and in particular those who utilise third parties. This, unfortunately, is likely to reduce the benefit available to legitimate start-up or scaleup businesses.

The exemptions to the cap are generally welcomed as it ensures that highly innovative, and research and development intensive businesses are not restricted by the cap. An area that may cause concern is in relation to the second exemption condition which, although reasonable, may restrict businesses that are able to capitalise on the expertise of sister companies within its group.

When will it apply?

From 1 April 2021

The Government is continuing to progress its strategy to improve tax administration. Over the coming months, it will review large businesses’ experiences with UK tax administration with the aim of improving the UK's competitiveness and promoting investment.

In July 2020, the Government set out a 10-year strategy for the improvement and modernisation of tax administration in the UK. The review of large businesses’ experiences of UK tax administration is part of this wider strategy. It aims to help the Government understand the experiences and challenges large businesses face and collate ideas for improvements.

It is expected that the review will focus on the degree to which the UK’s tax administration provides large businesses with:

• appropriate and early certainty over tax matters;
• efficient dispute resolution; and
• a collaborative and constructive approach to compliance.

Our comment

This is a welcome update insofar as it shows a continued commitment from the Government to an effective and competitive tax administration. As is the case with all consultations, however, the real test is whether or not it actually leads to useful improvements in the tax system. The COVID pandemic has certainly highlighted the importance of a modern, digital tax system, and businesses will not be short on ideas for improvements.

When will it apply?

Initial discussions are expected over the coming months.

The Government is introducing changes to the hybrids and other mismatches rules to ensure the legislation operates proportionately and as intended.

Following consultation on draft legislative revisions published in November 2020, the Government is introducing a number of amendments to the hybrids and other mismatches legislation to ensure the rules do not result in disproportionate or unintended outcomes for the taxpayer.

The changes follow two consultations, the first of which was announced in the previous Budget, aimed at addressing a number of concerns raised by taxpayers with regards to the impact of the hybrids and other mismatches legislation following its introduction in 2017.

The changes affect various areas of the rules including:

• changes to dual inclusion income, allowing allocation between group members in certain cases and extending it to include income which is fully taxed with no corresponding deduction for tax;
• preventing the ‘acting together’ rules from applying broadly where a party has a less than 5% equity stake;
• amendments to the imported mismatch rules; and
• clarification to the definition of foreign tax to exclude amounts deemed to arise to, and taxed in the hands of, a different party to which the income arose.

Certain changes will come into effect from 1 January 2017, the date that the legislation originally came into force, with the remainder taking effect from Royal Assent of the Finance Bill.

Our comment

The hybrids and other mismatches legislation was introduced in the UK in 2017 as part of the UK’s response to the global effort to tackle Base Erosion and Profit Shifting (BEPS). The BEPS project, under Action Point 2, set out prescriptive measures to tackle mismatches involving either double deductions of the same expense, or deductions for an expense without any corresponding receipt being taxable, and the UK was an early adopter.

Since 2017 a number of jurisdictions have implemented similar rules and this, combined with a variety of disproportionate or unintended consequences of the regime, has resulted in regular dialogue between HMRC and advisory firms, representative bodies and businesses impacted by the rules. The amendments now being implemented result from two rounds of consultation and include several amendments which will be welcomed by businesses, though the rules remain highly complex to apply. Further, expected amendments to treat US LLCs akin to UK partnerships no longer seem to be present in HMRC’s outline of the changes and so we will need to wait for updated draft legislation to obtain clarity on this point, which could affect many businesses.

When will it apply?

Certain changes will come into effect from 1 January 2017, with the remainder taking effect from Royal Assent of the Finance Bill.

Technical amendments are being made to the Corporate Interest Restriction (CIR) legislation to ensure that no penalty arises for the late filing of an interest restriction return if the taxpayer has a reasonable excuse for the failure. Additionally, the changes clarify the way special provisions apply to Real Estate Investment Trusts (REITs) following the move of non-resident landlord companies to be within the charge to UK corporation tax.

As previously announced, HMRC has made two technical amendments to the CIR rules to ensure that the legislation works as intended.

The first amendment brings the administrative rules of the CIR in line with those for Corporation Tax Self-Assessment, ensuring that where there is a reasonable excuse for the late filing, that there should be no penalty for this.

HMRC will usually consider that a ‘reasonable excuse’ will depend on the circumstances, but will be something that stops a company meeting its compliance obligations, despite taking reasonable care.

The second amendment clarifies that a non-resident company within a UK REIT group will be deemed to be carrying on a residual business within the charge to corporation tax. This change reflects the way the CIR rules are intended to work and was needed to reflect the move from income tax to corporation tax for non-resident companies with UK property businesses.

Our comment

These are welcome amendments that give companies comfort that they will not receive penalties unduly or unintentionally fall foul of the CIR rules.

When will it apply?

The change to allow a reasonable excuse for late filing retrospectively applies from 1 April 2017 and the change regarding the requirement of a deemed residual business will apply from 21 July 2020.

The Government has made some technical changes to the off-payroll working rules legislation. These include amendments to anti-avoidance rules, the rules on provision of information and the liability provisions where any party in the supply chain provides fraudulent information.

The off-payroll working or ‘IR35’ rules apply where, broadly, a worker contracts with an end user through a personal company or partnership (an ‘intermediary’). The general effect of the rules is that such workers can be taxed as employees. With effect from 6th April 2021, these rules can apply to end users in the private sector.

The following technical changes have been announced:

• anti-avoidance legislation was introduced in the 2020 Budget to structures where the intermediary was a company in which the worker held an interest of less than 5%. This legislation was considered to be too wide in its effect and will be moderated with a new targeted anti-avoidance rule;
• the existing requirement for workers to provide particular information to the end user will be expanded to the intermediary; and
• the existing legislation includes liability provisions where fraudulent information is provided. Broadly, these provisions will be amended to ensure that liability rests with the party in the supply chain that provided the fraudulent information.

Our comment

The extension of the IR35 rules to private sector end users was delayed by a year in 2020. There will be no further delay: the new rules will be enacted with effect from April 2021.

These amendments that have been announced are technical in nature but highlight that HMRC is continuing to focus on the rules.

When will it apply?

Several Construction Industry Scheme (CIS) rule changes, mainly to prevent abuse, will take effect from 6 April 2021.

There have been several technical changes to the CIS, mainly to prevent abuse. The Government has introduced rules that:

• empower HMRC to amend sub-contractors’ Real-Time-Information (RTI) Earlier Payment Summary (EPS) returns where incorrect CIS deductions have been claimed on their returns;
• change the rules for when entities outside the construction sector need to operate CIS – such businesses will only need to apply CIS when their annual construction expenditure exceeds £3 million (previously £1 million), although they will need to monitor expenditure more regularly than under the previous rules;
• clarify the rules around what is an allowable deduction for expenditure on materials; and
• expand the scope of the penalties for supplying false information when registering for gross payment status, or for payment under deduction.

Our comment

The above measures are mainly targeted at CIS subcontractors in order to reduce the scope for abuse. The second measure will result in fewer businesses outside the construction sector being required to register for CIS and submit monthly CIS returns, although such businesses will be required to monitor their construction expenditure more regularly than under the previous rules.

When will it apply?

From 6 April 2021

The annual tax on enveloped dwellings (ATED) rates will increase in line with inflation from 1 April 2021.

The rates for ATED, which is an annual tax applied to residential properties held by ‘non-natural’ persons, such as companies, increase each year based on the consumer prices index (CPI). The chargeable period for ATED begins on 1 April each year and the increase in rates is based on the CPI for the previous September. For the 2021/22 chargeable period, the rates will increase by 0.5%, although there will be no increase for properties with a taxable value up to £2 million.

Our comment

This is an annual increase, so was to be expected. Further details of the ATED rates and thresholds are set out in the tax rate card published alongside this Budget report.

When will it apply?

From 1 April 2021.

A new relief from annual tax on enveloped dwellings (ATED) and the 15% stamp duty land tax (SDLT) rate for properties acquired by non-natural persons has been introduced, where the holder or acquirer is a qualifying housing co-operative.

A 15% flat rate of SDLT applies to residential properties acquired for more than £500,000 by ‘non-natural’ persons, such as companies and other corporate bodies. ATED is an annual tax charge applying to residential properties held by such entities.

Both regimes are subject to a number of reliefs and exemptions. An additional relief has now been introduced for properties acquired or held by qualifying housing co-operatives. For ATED, the relief applies retrospectively from 1 April 2020, whereas for SDLT the relief will apply for acquisitions with an effective date on or after 3 March 2021.

Our comment

While this relief is relatively narrowly focused and is subject to some restrictions, it prevents the application of ATED and the 15% rate of SDLT to circumstances to which they were never intended. As such its introduction is to be welcomed.

When will it apply?

For ATED from 1 April 2020, for SDLT from 3 March 2021.

The stamp duty land tax (SDLT) nil rate band for residential properties will remain at £500,000 until 30 June 2021. It will then reduce to £250,000 until 30 September 2021 before returning to its previous level of £125,000 from 1 October 2021.

On 8 July 2020, the Chancellor announced that the SDLT nil rate band, being the first slice of consideration on which the SDLT rate is 0%, would increase from £125,000 to £500,000. This was a temporary measure and was planned to end on 31 March 2021.

The Government has now confirmed that the nil rate band will remain at £500,000 until 30 June 2021. It will then reduce to £250,000 from 1 July 2021 before returning to £125,000 from 1 October 2021.

When compared to the pre-8 July 2020 SDLT rates, this measure represents a tax saving of up to £15,000 for a property purchase in excess of £500,000. From 1 July 2021 until 30 September 2021, the potential saving will reduce to £2,500.

Our comment

When will it apply?

This is a continuation of an existing measure, to be adjusted from 1 July 2021 and to end on 30 September 2021.

As announced in Budget 2020, a 2% surcharge above existing residential stamp duty land tax (SDLT) rates will be introduced for acquisitions of residential property by non-UK residents from 1 April 2021.

The Government has confirmed that a proposed 2% SDLT surcharge will apply to purchases of residential property in England and Northern Ireland with an effective date from 1 April 2021. The surcharge will apply in addition to the existing rates, including the 3% surcharge that applies to acquisitions of second properties.

Draft legislation providing for the changes, which will apply to purchases by both individuals and ‘non-natural persons' such as companies, trusts and partnerships, was published in 2020. The draft legislation includes details on those treated as non-UK resident for the purposes of the charge, with definitions that differ from those for the purposes of other UK taxes.

The surcharge only applies to transactions involving residential property in England and Northern Ireland, as Scotland and Wales have separate land transaction taxes.

Our comment

This change was first proposed in Budget 2018 and consulted on in 2019, so has been expected for some time. The rate of the surcharge was initially proposed at 1%, but in Budget 2020 it was announced that it would be increased to 2%.

The policy aim of the charge is to improve affordability of residential property for UK resident purchasers. Whether or not this will have the desired effect on residential property demand remains to be seen, but the fact that the surcharge applies on top of existing charges such as the additional 3% charge for acquisitions of second properties and the increased rates for acquisitions by ‘non-natural persons’ means that the top rate of SDLT for non-UK residents will now be 17%.

When will it apply?

The change will apply from 1 April 2021

It has been confirmed that all VAT registered businesses must comply with Making Tax Digital (MTD) with effect from 1 April 2022.

As previously announced in July 2020, all VAT registered businesses must be compliant with MTD with effect from 1 April 2022.

Currently, VAT registered businesses that have never exceeded the VAT registration threshold are not required to comply with MTD, although can do voluntarily.

Our comment

VAT registered businesses that trade below the registration threshold and have not yet voluntarily joined MTD must ensure they make the necessary arrangements to be MTD compliant no later than April 2022.

The 1 April 2022 date coincides with a new penalty regime for late payment and late submission of VAT returns, which also includes failure to comply with MTD.

When will it apply?

From 1 April 2022

Businesses that used the VAT deferment arrangements can opt to spread the repayment over 11 instalments under the new payment scheme.

Businesses that deferred VAT payments that were due between 20 March and 30 June 2020 can choose to spread the payment over equal instalments up to an additional 11 months, rather than making the payment in full by 31 March 2021.

It was also announced that a penalty of 5% will apply for any amount that is still outstanding at 30 June 2021, unless the business has opted into the new payment scheme or alternative arrangements have been agreed with HMRC.

Our comment

While the measures will help businesses struggling to repay the deferred VAT in full, it is important that action is taken to pay the deferred VAT or opt into the new payment scheme as soon as possible. The 5% penalty for failure to take any action could be very costly and could wipe out any benefit gained by the deferment arrangements.

When will it apply?

Business can opt in from March 2021.