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Budget business tax summary: Rates and R&D reform

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​The November 2021 Budget and spending review lived up to its billing as a light touch Budget for taxation changes. 

27th Oct 2021
Editor at large AccountingWEB
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Apart from business rates reform plan and revisions to R&D tax credits, the Chancellor’s speech and Treasury paperwork were notable as much for business tax measures that didn’t appear as those that did.

Improving economic forecasts gave the Chancellor some space to sit on his hands and let March 2021 announcements such as the corporation tax rate increases and freezes in personal tax thresholds percolate through to bigger receipts for the Exchequer for the next few years.

As a result, VAT, national insurance and corporation tax barely merited a mention in the Budget paperwork.

Reinforcing the steady-as-she-goes message on corporation tax rates, Sunak commented, “Now is not the time to remove investment” as he revealed his decision to hold the annual investment allowance at £1m for another year.

Get the latest business tax update at AccountingWEB Live Expo. Register now to hear from Rebecca Benneyworth in person.  

Richard Farnsworth, private business tax director at PwC in the East Midlands, commented: “On corporation tax I think we have had enough change for the time being with the major announcements in March on the capex super deduction and increase in rate to 25% from 2023.”

Farnsworth noted that the 1.25% health and social care levy NIC increase announced earlier this month was the extent of any tinkering in this area.

“Could this bad news have [come] early in order to make the Budget speech more bullish and palatable, asked Philip Fisher in his light-hearted instant analysis.

Rebecca Benneyworth stuck a similar note on Twitter during Wednesday afternoon:

Turning to the substance of what was announced, the biggest impact on business will come from the business rates reform package, but there were still enough unexpected plot twists on the day to retain the interest of tax professionals.

Business rates reform dashes high street hopes

Following the conclusion of the government’s business rates review, rates will not increase in line with inflation during 2022/23. Hardly living up to hopes for root and branch reform, the review was accompanied by several other related announcements, which only apply in England:

  • As a result of the multiplier freeze, the rates will remain at 49.9p and 51.2p.

  • An additional 50% business rates relief will be available for retail, hospitality and leisure properties for 2022-23 up to a cap of £110,000 per business.

  • A 100% improvement relief for business rates will exempt occupiers from paying extra rates where improvements increase the property’s rateable value. The improvement relief will take effect in 2023 and be reviewed in 2028.

  • 100% business rate exemptions for onsite renewable energy generation and storage equipment, and a 100% relief for eligible heat networks.

  • Starting in 2023, business rates revaluations will take place every three years instead of every five. This will make the regime more responsive to economic changes, the Treasury said.

£1m annual investment allowance extended to April 2023 

The Chancellor decided to extend the £1m 100% annual investment allowance (AIA) threshold until April 2023. The limit was due to fall on 1 January 2022 from £1m to £200,000, just when transitional rules could have restricted the effective AIA limit for some businesses to less than £200,000 for a period.

By delaying the AIA threshold reduction for one year and three months, Sunak can align the end of the £1m limit with the end of the 130% super-deduction. “But that does kick the transitional issues down the line,” warned Gateley Capitus director Stephen Bone.

Cloud and data to qualify for R&D relief

Playing to the “high-wage, high-skill, high-productivity economy” theme peppered throughout his Budget speech, the Chancellor vowed to boost the UK’s R&D spending to £20bn a year by the end of this Parliament. He threw in some additional tweaks to the R&D tax credit regime from April 2023 to support this pledge:

  • Cloud computing and data costs will be added to the list of eligible expenditures for R&D tax relief.

  • The criteria will be amended to ensure that relief is only given for R&D activity undertaken in the UK. 

How these conditions will be defined and enforced has not yet been explained, but will emerge in “further tax administration and maintenance announcements” later in the autumn.

The R&D tax credits were one of several areas where the Chancellor enjoyed a new freedom to diverge from European Union rules, which had no no territorial limitations in place. Now that the UK has left the EU the government has clearly decided that the time is right to limit relief to work undertaken in the UK, noted Andy O’Keefe in his analysis of the changes.

Sunak uncorks alcohol duty reform

The booze industry was another beneficiary of the Brexit dividend as Rishi Sunak popped one of his biggest Budget surprises with a package of reforms to alcohol duties.

Dispensing with 16 different tax bandings, the teetotal Chancellor said current duty rates on beer, cider, wine, and spirits will be frozen for the next 12 months and organised into four bands organised around alcohol by volume (ABV) ratings. 

“Our new system will be designed around a common-sense principle: the stronger the drink, the higher the rate,” Sunak said.

Also on the Budget drinks menu:

  • A new small producer relief for smaller/artisanal producers of alcohol products with an ABV below 8.5% with the aim to encourage innovation in products from smaller producers.

  • A 5% cut in dutry for draft beer to support the role pubs play within the community. The cut will be introduced for draft beer and cider kegs of 40 litres or more to target the savings at pubs and restaurants rather than home drinkers.

Fuel duty

Fuel duty has also been frozen for the next 12 months, but no further guidance was issued about initiatives to encourage electric vehicles use and other greener modes of transport. 

Air passenger duty (APD)

Thegovernment plans to introduce a new APD rate of £6.50 per flight on routes between England, Scotland, Wales, and Northern Ireland. Currently there are two bands based on distance from London. Band A is under 2,000 miles and band B is over 2,000 miles. These bands will be reorganised into three international categories covering distances of 0-2,000 miles (£13), 2,000-5,500 miles (£87) and 5,500 and above (£91).

Residential property developer tax

Stop if you’ve heard this one before, but the Chancellor confirmed the residential property developer tax (RPDT) unveiled earlier this year will come into effect from April 2022. In a similar fashion to the bank levy, if not at the same rate, an additional 4% of corporation tax will be charged on the profits of companies earning profits of more than £25m from UK residential property development. The measure is likely to raise more than £1bn over the next five years, the Treasury estimated.

Tonnage tax

Shipping and logistics have been all over the news recently, so the Chancellor sought to play up the UK’s nautical heritage by announcing tonnage tax reforms to reward shipping companies for registering in the UK and flying the Red Ensign.

Finance Bill 2021-22 clauses will simplify flagging rules and conditions covering the treatment of dividends or other distributions of overseas shipping companies in relevant shipping profits. It will also reduce the period for which a Tonnage Tax election remains in force from eight to 10 years from the beginning of the accounting period in which it is made. HMRC will be able to admit elections made outside this period if there appears to be a good reason to do so.

The appeal of this somewhat obscure tax lay perhaps in the opportunity it gave Rishi Sunak to fire off an unscripted quip at the Labour front bench. “I’m sure opposition will be pleased that red flags are still flying, even if they are all at sea.”

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