A Budget designed to support growth and investment for entrepreneurs
by Peter Ball, partner at Smith & Williamson in Bristol
The Government is seeking to lay the foundations for a recovery driven by the private sector and, for entrepreneurs, the announcements focused on recovery, growth & support rather than increasing taxes.
For entrepreneurs, the 2021 Budget was very much about what was not announced, following mounting speculation regarding capital gains tax (CGT) rate increases in the run up to the Budget. This was driven primarily by the November 2020 report by the Office of Tax Simplification (OTS) in which a key recommendation was to more closely align income tax and CGT rates; the OTS report followed a substantial erosion of Entrepreneurs’ Relief announced in the 2020 Budget.
Peter Ball, Partner, Smith & Williamson, Bristol
The retention of current CGT rates will be welcome news to entrepreneurs working to eventually realise capital value from their business, although the Chancellor could still revisit the issue in his Autumn Statement. The Government will also be releasing a number of tax consultation papers on 23 March, which may provide further insight on potential wider tax changes that could be introduced as the economy recovers. These consultations may include recommendations from recent reports on more wholesale reforms to capital gains tax and inheritance tax.
Looking at corporation tax, the headline was the increase in rates from 1 April 2023. The main rate will increase from 19% to 25%, where taxable profits are £250,000 or more. For taxable profits of £50,000 or less, the current rate will be retained. A taper will apply between these two numbers. As most other economies around the globe will have to raise their corporate income tax rates, the UK should not lose any competitive advantage in attracting foreign direct investment.
This will have an impact on how business owners extract cash from their company. For a number of years, dividends have had the edge over salary payments, with a circa3.5% lower tax rate. From 1 April 2023, that advantage disappears entirely, with dividends being fractionally more expensive in overall tax terms once the annual £2,000 dividend nil rate band is used.
Capital allowances have been given a boost with the introduction of an enhanced super-deduction of 130% for main rate (18%) asset investments, while assets normally qualifying for special rate relief (6%) will attract a 50% first year allowance. Both allowances apply from 1 April 2021, but will not be available for expenditure in connection with contracts entered into before 3 March 2021. The enhanced allowances do not apply to second-hand assets. These changes, along with the increase in corporation tax rates, turn back the clock somewhat, once again favouring capital-intensive companies.
From a cashflow perspective, the ability to carry back up to £2m in trading losses for up to three years, instead of one, for both 2020/21 and 2021/22 tax years will be welcome. For groups of companies, the £2m cap will apply to the group.
Pensions would appear to be unchanged; entrepreneurs can still make payments of up to £40,000 per year - either personally or from their companies - into their pension schemes. The standard Lifetime Allowance will, however, be frozen at £1,073,100 until 5 April 2026 at the earliest. In real terms, that provides a significant erosion of the amount that can be put into pension schemes. An increase in inflation rates would exacerbate this.
There were also no changes announced to tax reliefs available to individuals when they invest in businesses, including the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and the lesser known Investors’ Relief, which can enable investors to pay a 10% rate of capital gains tax on gains up to £10m. With Business Asset Disposal Relief (the replacement for Entrepreneurs’ Relief) having a reduced £1m lifetime allowance, Investors’ Relief may attract increased attention.
Two other areas are worthy of note.
The Enterprise Management Incentive (EMI) scheme is to be reviewed, with a possible extension of the scheme to support high growth companies. In the meantime, it was confirmed that the furloughing of staff will not affect the working time requirement for EMI share option holders. This remains a potent tool for businesses wishing to recruit, retain and incentivise key employees.
R&D claims by small and medium enterprises for a payable tax credit will, from 1 April 2021, be subject to a cap, being £20,000 plus a multiple of three times the annual PAYE and Employers’ National Insurance liability. This is an anti-avoidance measure to curb perceived abuses of the relief. On a larger scale, the new ‘Future Fund: Breakthrough’ initiative will help R&D-intensive businesses; where private investors lead funding rounds of £20m or more, the British Business Bank will take equity. £375m is committed by the Government for this initiative.
In summary, the Budget has sought to drive investment and growth, but recognises that not all businesses have had a smooth ride in the last twelve months. A resurgent economy will provide wealth and opportunity; it will also provide much needed additional revenue to the Treasury, not least in increased corporation tax rates.
