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Budget response

Budget 2021: a pathway to recovery

Tom Rathborn Tom Rathborn

As the UK enters what it hopes are the last few significant months of COVID-19 disruption, the Chancellor announced his three-part plan to take the economy forward. Tom Rathborn takes us through a summary of what was said and what it means for you.

The Chancellor's 2021 Budget was ambitious, with business being served a spoon full of sugar today, with the medicine to follow.

Pledging to do "whatever it takes", the Chancellor announced a further £65 billion, across a range of measures, to support businesses through what we all hope will be the final few months of major economic restrictions.

Alongside these were initiatives designed to help kick-start the economy, with extensions to business rates holidays and stamp duty reductions, as well as the introduction of a new super deduction tax incentive.

Recognising that the government’s response to coronavirus has not come cheap, costing upwards of £400 billion, the Chancellor made clear that the job of rebuilding public finances will be long and slow.

Tax rises will not come immediately, though there are significant changes being brought in over the course of this parliament; none more so than the 6% rise in the corporation tax rate from 1 April 2023. Looking further ahead, the Chancellor outlined plans to build a greener, more regionally prosperous UK.

Here are the key takeaways from today’s announcement:

An improved economic outlook

The light at the end of the tunnel is getting brighter.

The Office for Budget Responsibility (OBR) issued revised forecasts for the UK economy and the news is positive. The rapid roll-out of the vaccine and planned easing of restrictions should see the economy return to pre-coronavirus levels six months earlier than expected.

Forecasts for growth have been revised up - with GDP expected to rise by 4% in 2021 and 7.3% in 2022 - and unemployment revised down. The usual caveats apply, with the recovery potentially being slower or faster depending on the evolving situation.

This good news gave the Chancellor more room for manoeuvre than he might have expected.

More support for businesses and individuals

With the UK still very much on a wartime footing in response to the coronavirus situation, and the rollback of lockdown far from set in stone, the Chancellor has little choice but to continue offering support. Businesses in industries most affected by restrictions will welcome the news nonetheless. 

The range of extensions and new measures announced should provide some short-term certainty for those most impacted. The tapering of several measures also removes unwelcome cliff-edges in support that were coming into view all too quickly for some.

Extending the Coronavirus Job Retention Scheme (CRJS)

Furloughed employees will continue to receive 80% of their wages until the scheme winds down at the end of September. Employers will have to contribute more as the economy opens up - 10% in July and 20% in August and September.

Introducing a new restart grant worth £5 billion

Aimed at helping businesses re-open, the restart grant will provide non-essential retail businesses up to £6,000 per premises. Those business in hospitality and leisure (including personal care and gyms), which will open up later, will receive up to £18,000.

New recovery loan scheme

As the Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) programs come to an end, the government is introducing a new initiative that will provide loans from £25,000 up to £10 million. Businesses of any size can apply and the government will guarantee 80% of the finance to lenders.

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Dave Munton, Partner and Head of Markets and Clients

“This Budget is cause for some optimism from a business perspective, with extensions to COVID-19 support measures against a backdrop of improving economic forecasts. In unleashing significant additional firepower to help businesses get through the pandemic, the Chancellor has rightly deferred action to reduce debt levels until business, and the wider economy, is on a stronger footing."

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Measures to boost economic activity and investment

Businesses will also be glad to see the Chancellor prioritising growth and incentivising investment with pro-business measures, such as tax breaks, to unlock £20 billion worth of business investment and the deduction of investment costs from tax bills. Some of these measures might be described as 'experimental', but the hope will be that these accelerate the recovery. 

If all else fails, the freezing of duties on spirits, wine and cider will be welcome. 

Super-deduction and first-year allowances

Between 1 April 2021 and 31 March 2023, companies investing in qualifying, brand-new plant and machinery assets will benefit from a new 130% first-year capital allowance. They will also benefit from a 50% first-year allowance for qualifying special-rate assets. Any purchases already contracted before 3 March will not be eligible.

This generous allowance alone could have a significant impact, unlocking or bringing forward significant levels of investment. 

Extending business rates holiday

The business rates holiday for retail, hospitality and leisure will continue until the end of June.

For the following nine months, it will be discounted by 66% up to the value of £2 million for closed businesses, with a lower cap for those who have been able to stay open.

Extending the reduced VAT rate

The reduced VAT rate of 5% for hospitality and tourism will be extended until 30 September.

It will then revert to an interim rate of 12.5%, not returning to the standard rate until next April.

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Lee Holloway, Tax Partner

“Extensions for the furlough scheme and business rates relief are vital for the recovery of consumer businesses, particularly those in leisure, hospitality and retail, which have been disproportionately affected by the pandemic. It’s positive to see support targeted specifically at the businesses that most need it, with the restart grants, VAT-cut extension and the extension of profit-loss carry-back rules, all being welcome measures."

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A boost to housing, but at what cost?

As expected, the housing market received another boost, with the extension of the stamp duty land tax rate cut and the introduction of a mortgage guarantee scheme. This will run from April 2021 to December 2022 to provide guarantees to lenders offering mortgages to people with deposits of 5% on homes with a value of up to £600,000. 

The stamp duty nil-rate band will then fall from £500,000 to £250,000 from 30 June until the end of September, before returning to its usual level of £125,000 from 1 October.

This will provide a soft-landing to the market, which is welcome to prevent unfairness for those caught out by a cliff-edge return to previous rates. 

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David Farr, Real Estate Director

“These measures will likely prop up demand and, therefore, house valuations, which will help with public confidence and businesses linked to the housing market. The stamp duty land tax measures provide a soft-landing to the market, which is welcome to prevent unfairness for those caught out by a cliff-edge return to previous rates.

“However, these measures do not address the chronic undersupply of new housing and could lead to concerns regarding the levels of debt taken on by individuals wanting to get on the housing ladder. While this measure may help promote "generation buy", an unintended consequence could be a ‘generation debt’."

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Tax increases with the potential for more to come

The Chancellor had to begin to take steps to balance record public spending, the likes of which has not been seen in peacetime. In this sense, rises were inevitable, though he did manage to keep his promise to avoid raising income tax, VAT or National Insurance.

Pushing the well-trailed rise in corporation tax to 2023 may make it a little easier swallow but it’s still a large relative increase and a potential threat to investment in the long term, particularly as the UK looks to become a hub for multi-national businesses after Brexit.

Measures announced today will bring the tax burden in 2025/26 to their highest levels since the 1960s. With an election on the horizon, we can't be sure these will be delivered. 

Here is an overview of the key changes:

Frozen thresholds

Personal tax thresholds will be frozen until 2026. The tax-free allowance will rise to £12,570 next year until 2026, and the higher-rate level goes to £50,270, then freezes.

The nil-rate band of inheritance tax, the capital gains tax annual exempt amount and the pension lifetime allowance will also be frozen until 2026.

Corporation tax up to 25%

The headline corporation tax rate will rise to 25% from April 2023. There will be some exemptions and tapering, however, with the small profits rate maintained at the current rate at 19%. A taper above £50,000 will mean that only businesses with profits of more than £250,000 will be taxed at the full 25% rate.

New taskforce to crack down on fraud

The government has pledged to invest over £100 million in a Taxpayer Protection Taskforce to combat fraud within COVID-19 support packages. In addition, the government will raise awareness of enforcement action in order to deter fraud and will significantly strengthen law enforcement for Bounce Back Loans.

More detail to come from upcoming consultations

On the 23 March, the Treasury will publish a number of consultations relating to tax policy. These consultations could include some new revenue raising measures, which is something to keep an eye on.

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Karen Campbell-Williams, Head of Tax

“While an increase in corporation tax was always expected, many were anticipating a more-staggered rise across a number of years, not a sharp jump. But, as the rate change won’t be effective until April 2023, this should allow time for companies to accurately forecast and plan for the impact to their cashflow.

“In planning for the future, businesses will now need to consider the impact of the new loss carry-back rules, the super deduction for qualifying capital expenditure and the interaction with their future deferred tax liabilities given the increase in the headline rate of corporation tax. In certain circumstances this could, for example, lead to a decrease in earnings per share (EPS) and so early attention to forecasting is critical to manage wider stakeholder expectations."

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A continued focus on skills 

Businesses will welcome the government persisting with its agenda to expand skills, especially given recent changes to the UK immigration regime.

Alongside new help to grow schemes aimed at boosting management and digital skills, there were announcements on new visa reforms. These measures will make it easier for firms to develop existing skills and access new ones.  

Increased funding and support for apprenticeships

For each new apprentice hired between 1 April 2021 and 30 September 2021, employers will receive an increased government payment of £3,000 regardless of their age. 

From July 2021, government support will be provided in the form of a new £7-million fund to employers in England to enable apprentices to benefit from high-quality and diverse training by working on multiple projects with several employers. Employers may have the opportunity to put forward any proposals in relation to this support.

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David Hare, Director of Growth Services

“It's good to see that the government continues its unwavering support for apprenticeships as a key way for supporting the UK economy.

"The economic impact of COVID-19 has affected individuals and businesses alike and it's important that apprenticeships are available to provide opportunities for people to enter the labour market and also to learn new skills.

"The announcements in the budget will provide the training sector and business with a boost in confidence.”

An investment-led recovery aimed at ‘levelling up’  

The ‘levelling-up’ agenda is not new. It formed a key part of Boris Johnson’s first speech as Prime Minister, but today we got a bit more information about what it means in practice.

Although a lot of the detail is yet to filter through, the Chancellor signalled his intent to rebalance the economic geography of the UK, with significant moves to support projects outside of the capital. 

There were notable absences too. Local government continues its wait for an update on timing for this years Spending Review and there was no indication on the future funding for social care. 

Moving activity out of London

The Treasury will set up an economic campus in Darlington – the first step in its commitment to move 22,000 officials out of London by the end of the decade.

Treasury North, as the campus will be known, is expected to have 750 officials, including 400 from the Treasury and others from business, transport, and international departments.

Leeds will see the creation of a new UK Infrastructure Bank to support green projects from across the public and private sector. It will have an initial capitalisation of £12 billion and will help to deliver the UK’s commitment to reach net-zero carbon by 2050.

There were also 45 new town deals worth over £1 billion.

New freeports across England

Continuing the trend of regional announcements, there came news that eight freeports will be established. These are expected to begin operations from late 2021 and further freeports are planned in Scotland, Wales and Northern Ireland in due course.

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Phil Woolley, Head of Public Services Consulting

“Local government featured in a limited way in this year’s Budget, but it’s positive to see that the Chancellor confirmed there will be no step back into austerity measures.

“The numerous programmes, initiatives and additional funding announced to support the economic and societal recovery are welcome and much needed and will help support towns and communities as they start to recover from the pandemic. While some measures are targeted at specific regions, new economic development funding for local government appears to be limited to the funding from the new UK Infrastructure Bank.”

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