The U.K. Chancellor’s theme for this budget—that the economy was entering a “new age of optimism”—sounded attractive, but the high-spending measures he announced were based on assumptions of future growth from the Office of Budget Responsibility (OBR) that may themselves turn out to be optimistic. And, unsurprisingly, the overall U.K. tax burden will have to remain high, back to the highest levels since the early 1950s, for the foreseeable future, despite the Chancellor saying that his instinct is to cut taxes.
So What Can We Be Optimistic About?
Among the long list of spending pledges, the new policies that stand out as positive for business are: the continued funding for innovation and research and development (R&D) in the U.K., the funding for regional transport networks, and the funding for the new “T Levels” qualifications and further education and adult skills training.
From April 2023, businesses will be able to include data and cloud computing costs in R&D claims, a sensible move to support the digital economy. Whether it is also sensible to restrict R&D claims to work carried out solely in the U.K. is not so clear, if the U.K. is to remain attractive to global businesses—although this does mirror the regimes in many other countries.
While the 50% business rates relief for 2022–23 was good news for small businesses in the retail, hospitality and leisure sectors, the absence of major long-term reform was disappointing. The Chancellor made it clear that business rates are here to stay, and although more frequent revaluations and a limited exclusion for investments that enhance property values are welcome, I suspect that the majority of businesses were hoping for more significant and permanent reform.
Online businesses will be anxiously awaiting the consultation on proposals for an online sales tax that are expected to be published soon—probably alongside the draft Finance Bill. Indeed, other documents that might prove controversial, such as the government’s responses to the basis period reform consultation and R&D reform, are also expected at that time.
The temporary increases in creative sector relief and the extension of the 1 million-pound ($1.4 million) annual investment allowance (AIA) limit are very welcome, as is the long-overdue reform of the tonnage tax for shipping.
One of few other post-Brexit initiatives in the budget was the proposal to freeze and then reform alcohol duty, which seems a highly sensible move that will be beneficial to much of the sector for the long term.
Alongside announcing the location of the first three freeport sites to commence operating in November 2021 (Humber, Teesside and Thames), the government has announced that it will legislate to introduce a free zone exit charge, a change to the previously announced value-added tax (VAT) rules for freeports. The existing proposals include a new zero rate for sales of goods within a free zone regime, which differs from the VAT treatment in, for example, tax warehouses.
The legislation announced will implement a free zone exit charge to ensure businesses do not gain an unintended tax advantage.
Confirmation of the proposed rule changes for asset holding companies and real estate investment trusts (REITs) will help to make the U.K. more attractive for property investors.
The government also launched an interesting consultation on ways to make it easier for foreign companies to domicile themselves in the U.K. without making major changes to their corporate structure, which looks like a positive move.
Reducing air passenger duty for internal flights within the U.K. will benefit regional airports, although with COP26 looming it was perhaps not an obvious policy move. Indeed, there were very few green proposals in the budget and surprising policy choices, such as continuing the fuel duty freeze, that were clearly economically, rather than environmentally, driven.
Banks will be relieved that the current 8% surcharge on their profits will be cut to 3% from April 2023—although this still means that they will be paying a collective rate of 28% on their profits. The fourfold increase in the surcharge allowance has taken many of the challenger banks out of this additional tax, which will be a welcome relief for those impacted.
House-building companies are also facing a significant tax increase, with a 4% charge being imposed on their profits from residential property development projects from April 2022, to help the government fund corrective work to cladding on high rise blocks.
This will only apply to the large firms, thanks to the 25 million-pound profit threshold that will apply, but those that are affected face another hit because the liable profits which must be calculated ignore interest deductions. By 2023, this means that affected house builders will be paying an effective rate of 29% on their profits.
So perhaps it is just as well that the government is planning to invest 2 billion pounds in supporting house building on brownfield sites in the next few years.
The increase in the national minimum wage will be popular with low-paid employees and campaigners who point to the rising cost of living.
However, it is important to remember that for businesses struggling to make a profit, there will be challenges ahead with national insurance contribution costs going up at the same time as businesses are experiencing wage cost rises due to inflation.
Increases to the tax rates on dividends from April 2022 will also be of concern to company owners who want to take profits from their business, although it was noticeable that there were no anti-forestalling measures announced in the budget.
Some saw the autumn budget and spending review as the Chancellor’s best opportunity to overhaul the tax system to make it simpler and easier for businesses, before electoral concerns limited his scope to make radical changes.
For example, in a digital age where many work and trade remotely, the tax system should be reformed in order to keep pace with technological changes. Continuing to tax businesses unevenly dependent on bricks and mortar will seem inequitable to those adversely impacted.
Most would agree that the budget did not include a plan to rethink the U.K.’s archaic tax system, but given the challenges the government has faced following Brexit and then Covid-19, it perhaps is not surprising to see an emphasis on steadying the ship.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Paul Falvey is a Tax Partner at BDO LLP.
The author may be contacted at firstname.lastname@example.org
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