Tax increases and freezes, digital tax plans and MTD postponements, and short-term incentives with the promise of pain in the future. The biggest tax stories of 2021 broadly fit into one of the three areas above.
The 1.25% increase in NIC and dividend tax rates, for example, sets the stage for potential increases to come. The Conservative pledge-breaking announcement addresses one of the biggest issues in public sector funding at the moment: that of health and social care.
The temporary increase in class 1 (employee), class 4 (self-employed) and class 1 secondary, class 1A and class 1B (employers) NIC from April 2022 will be replaced with a separate health and social care levy in April 2023. This will be a hypothecated tax and will also apply to individuals over state pension age in employment or self-employment, who are exempt from paying NIC.
It’s a substantial increase in costs and administration for businesses and will be felt more acutely when the rate of corporation tax increases in 2023. As the health and social care levy proper comes into force, corporation tax will increase from 19% to 25% for the largest companies, bringing in an estimated £17.2bn in extra tax revenue by 2025/26. Businesses with taxable profits up to £50,000 will stay on the existing rate, however, and companies with profits between £50,000 and £250,000 will pay the main rate reduced by a marginal relief.
The government also looked to increase tax revenues elsewhere without raising the headline tax rates, announcing a freeze on several big taxes, including income tax, capital gains and inheritance tax. The income tax personal allowance and higher rate threshold will be frozen from 6 April 2022 until 5 April 2026, while the capital gains tax annual exempt amount, pensions lifetime allowance and the inheritance tax and residence nil rate bands are frozen at their current rates.
It also continued the working from home tax relief for costs not reimbursed by employers for 2021/22, though new claims need to be made for the current tax year. This is not likely to last into the following tax year, though if a new variant causes cases to rise well into next year, the government might want to consider another extension should the advice to work from home return.
One of the tax-related impacts of the end of the transition period out of the EU felt by travellers was the return of duty-free limits on alcohol. Worldwide duty-free limits for alcohol brought into Great Britain currently sit at 42 litres for beer, 18 litres for wine, and four litres for spirits and sparkling wine. If an individual goes over this limit, they lose the duty-free allowance entirely and have to pay tax on all of the alcohol of that given category. It spelled the end of the ‘booze cruise’ as we knew it.
With concerns expressed about fraudulent coronavirus support claims from a variety of sources, HMRC sent letters to some self assessment taxpayers asking for information to verify that repayment claims weren’t fraudulent. The Tax Faculty discussed these letters directly with HMRC to improve the tone and content of the letters.
The number of fraudulent mini-umbrella companies (MUCs) was also a pressing issue for HMRC, which issued guidance in response to a BBC investigation into the problem. According to that investigation, more than 48,000 MUCs have been created in the UK over the past five years in order to avoid tax. The use of umbrella companies remains on HMRC’s radar with HMRC issuing guidance to help businesses, agencies and workers spot avoidance and a call for evidence on the umbrella company market issued on Tax administration and maintenance day.
On the tax administration front, HMRC issued a very broad call for evidence, The tax administration framework: supporting a 21st century tax system, setting out its vision for a digital tax future. This includes an aim to build a completely digital system, from original transactions to processing and reporting and paying tax. This would all be done in real time, or as close to real time as it can get. The registration process, for example, would involve minimal manual intervention and would require taxpayers to input data just once.
However, one critical cog in HMRC’s drive towards digitisation, Making Tax Digital (MTD) has experienced further delays and MTD for income tax self assessment (MTD ITSA) was postponed until April 2024. While this may be a welcome relief to those businesses who felt unready for the change, ICAEW’s Tax Faculty urges them to use the extra time wisely to prepare.
Finally, in a small step towards digitalisation, HMRC started accepting electronic signatures on some forms, such as agent authorisation forms, marriage allowance claims and employment expenses. It may be a small update, but from a digital tax perspective, it’s a step towards that bold digital future that HMRC has set out for the coming decade.
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.
More from the Tax Faculty
Stay up to date with the latest developments in tax by signing up to the Tax Faculty's weekly enewsletter
Comprehensive support for Tax practitioners each month from the Tax Faculty and expert contributors.
Expert advice from the Tax Faculty's technical managers on all the developments in tax policy and practice.