A guide to the Finance Bill 2021

Finance (No. 2) Bill 2019-21, commonly known as Finance Bill 2021 (FB 2021), issued on 11 March 2021, is much longer than recent Finance Bills. This article highlights some of the measures contained in the Bill. Clause and Schedule numbers are based on the 11 March version of the Bill.

COVID-19 easements

Given that the country was still in lockdown on Budget Day, many of the pandemic-related support schemes and easements were extended and new incentives were introduced. While the coronavirus job retention scheme (CJRS) and self-employment income support scheme (SEISS) are governed by Treasury directions made under ss 71 and 76, Coronavirus Act 2020, many other measures are included in FB 2021. These include:

• the temporary extension from one year to three years for which trade losses may be carried back for companies with accounting periods ending between 1 April 2020 and 31 March 2022, and for the 2020/21 and 2021/22 tax years for unincorporated businesses (cl18 and Sch 2). Despite the impression given in the FB 2021 explanatory notes (see ICAEW REP 36/21), the government has laid an amendment to clarify that losses arising from furnished holiday lettings are not included;
• the 130% super-deduction for expenditure that would normally qualify for main rate writing down allowances, and the 50% first-year allowance for special rate expenditure (subject to certain exclusions including leased assets, see ICAEW REP 35/21) for companies in the charge to corporation tax for expenditure incurred from 1 April 2021 up to and including 31 March 2023 (cls9–14);
• extending the temporary increase of the maximum amount of the annual investment allowance from £200,000 to £1m until 31 December 2021 (cl15);
• the introduction of the VAT deferral new payment scheme for VAT deferred until 31 March 2021 from the period 20 March to 30 June 2020, together with an associated 5% penalty if a business has not paid the deferred VAT in full by 31 March, opted into the VAT deferral new payment scheme or otherwise sought help from HMRC concerning its tax payments (cl95 and Sch 18);
• extending the temporary reduced VAT rate of 5% for supplies of hospitality and tourism until 30 September 2021, and introducing a temporary 12.5% reduced VAT rate for supplies of hospitality and tourism from 1 October 2021 until 31 March 2022 (cl92 and 93);
• relaxing the working time requirements in the enterprise management incentive rules where employees are unable to fulfil the requirements because they were not required to work for reasons connected with coronavirus disease for periods from 19 March 2020 to 5 April 2022 (cl24);
• relaxing the requirement that the employer-provided cycles exemption only applies where the cycle or cycling equipment is used mainly for qualifying journeys (to or from work or in the course of work) in the period from 16 March 2020 and ending with 5 April 2022 where the equipment was provided on or before 20 December 2020 (cl25);
• an income tax exemption for the provision, advance payment or any reimbursements made to an employee for the cost of a relevant coronavirus antigen test made in the tax years 2020/21 and 2021/22 (cl26);
• switching off the anti-avoidance legislation in the long-funding lease rules when a lease is extended due to coronavirus where a relevant change in consideration is implemented between 1 January 2020 and 30 June 2021 (cl17);
• an income tax exemption for the one-off £500 payment being made in 2021/22 to eligible households receiving tax credits (cl31); and
• extending the temporary increase in the stamp duty land tax (SDLT) nil rate band to £500,000 for residential property in England and Northern Ireland until 30 June 2021, which then reduces to £250,000 until 30 September 2021 before returning to £125,000 from 1 October 2021 (cl87).

Finance Act 2020 had provided that all SEISS payments would be taxable income of 2020/21. However, as SEISS has been extended into the 2021/22 tax year, cl32 provides that SEISS payments will instead be taxable in the year of receipt. Clause 32 also introduces a tax charge if a person ceases to be entitled to retain all or part of a SEISS payment due to a change in circumstances (like the CJRS charge).

Some businesses that originally obtained business rates relief or other support from public authorities and that were not adversely affected by the pandemic chose to return the payments. Under normal principles, such repayments are not deductible, but cl33 provides a statutory relief for these repayments.

Paying for COVID support

The financial support provided to businesses and individuals during the pandemic comes at significant cost. The freezing of allowances and a future increase in corporation tax rates announced at the Budget mark the start of the recovery of these costs. FB 2021 includes the following measures:

• freezing the basic rate limit and personal allowance at the 2021/22 amounts of £37,700 and £12,570 respectively for the 2022/23–2025/26 tax years (cl5);
• increasing the main rate of corporation tax to 25% for the financial year 2023 and, at the same time, introducing a small profits rate of 19% and marginal relief (cls6 and 7 and Sch 1);
• increasing the rate of diverted profits tax to 31% for accounting periods beginning on or after 1 April 2023 (cl8);
• freezing the standard pension lifetime allowance at its 2020/21 level of £1,073,100 for the tax years 2021/22-2025/26 (cl28);
• freezing the capital gains tax annual exempt amount at its 2020/21 level of £12,300 for the tax years 2021/22-2025/26 (cl40); and
• freezing inheritance tax thresholds at their 2020/21 levels of £325,000 for the nil-rate band, £175,000 for the residence nil-rate band (RNRB) and £2m for the RNRB taper threshold for the tax years 2021/22-2025/26 (cl86).

Policy changes

The Bill also contains policy changes, many of which have been subject to consultations that ICAEW has responded to or featured in TAXline articles. The key changes are highlighted below.

Restricting R&D tax credits

Clause 19 and Schs 3 and 4 introduce a new restriction to the payable element of the research and development (R&D) tax credit for SMEs from 1 April 2021 (originally planned for 1 April 2020). The restriction limits the amount of payable R&D tax credit for SMEs to £20,000, plus 300% of the total PAYE and national insurance contributions liability for the period. The restriction does not apply to companies that:

• have employees creating, preparing to create or managing intellectual property that the company has the right to exploit (either alone or jointly with others); and
• do not spend more than 15% of their qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons.

Making tax digital (MTD)

Caroline Miskin provided an update on the MTD programme in the May issue of TAXline. The Finance Bill includes the legislation for: 

• extending MTD to all VAT-registered businesses from 1 April 2022 (cl94);
• the reform to late payment and late submission penalties, applying (subject to start dates being confirmed in regulations) initially to VAT return periods starting on or after 1 April 2022, before extending to income tax self assessment (ITSA taxpayers) who join MTD in the 2023/24 tax year, and all other ITSA taxpayers for the 2024/25 tax year onwards (cls112 and 113 and Schs 23, 24 and 25).

Construction industry scheme

Howard Royse provided an update in the February issue of TAXline on the changes to the construction industry scheme (CIS) due to come into force from 6 April 2021. The primary legislation for the changes is found at cl30 and Sch 6. However, the detailed rules concerning HMRC’s new power to restrict CIS set-off claims will be contained in regulations. ICAEW REP 38/21 recommends deferring commencement until April 2022 to give businesses time to prepare, given the lack of comprehensive guidance.

Plastic packaging tax

Part 2 of the Bill and seven Schedules are devoted to the introduction of a plastic packaging tax from 1 April 2022. The tax, charged at a rate of £200/tonne of chargeable plastic packaging, will apply to UK manufacturers and importers of plastic packaging that contains less than 30% recycled plastic content.

Members working in businesses affected by the tax will need to get up to speed with the details, including what is subject to the tax, what exemptions apply, who needs to register, HMRC’s powers, etc. However, it is one of those tax policies where many will seek to judge if it meets its objective of creating greater demand for recycled plastic, which should, in turn, stimulate increased levels of recycling and collection of plastic waste.

Tackling avoidance

There are various measures in the Bill designed to tackle avoidance and improve compliance, most of which have been subject to consultation and will take effect from Royal Assent. These include changes to:

• follower notice penalties (cl115 and Sch 27);
• the promoters of tax avoidance schemes (POTAS) rules to ensure HMRC can more effectively issue stop notices to promoters, prevent the use of corporate structures to avoid POTAS obligations and make other technical amendments to the POTAS regime (cl117 and Sch 29);
• the disclosure of tax avoidance schemes and disclosure of tax avoidance schemes, VAT and other indirect taxes rules to allow HMRC to issue a notice to anyone it reasonably suspects has failed to disclose arrangements or proposed arrangements of which HMRC reasonably suspects it is a promoter or other supplier. If the person is unable to satisfy HMRC that the arrangements or proposed arrangements are not disclosable, HMRC may allocate a scheme reference number to the arrangements or proposed arrangements (cl118 and Sch 30);
• penalties for enablers of defeated tax avoidance (cl119);
• the general anti-abuse rule as it applies to partnerships (cl120 and Sch 31);
• HMRC’s civil information powers to introduce a financial institution notice. The notice does not require approval from the tribunal or taxpayer before it can be issued to a financial institution to obtain third-party information or documents (cl122). ICAEW expressed concerns over this overwriting of established self assessment taxpayer safeguards in ICAEW REP 42/21.

Rewriting the past

Complex legislation applied to real-life situations can give rise to unintended consequences. It is common to find provisions in each Finance Bill seeking to overcome these.

This Bill is no different, making technical changes to the off-payroll working legislation that extended the rules to the private sector from 1 April 2021 alongside introducing a targeted anti-avoidance rule to prevent avoidance arrangements seeking to circumvent the conditions for a company or partnership to be an intermediary (cl21).

The rules for calculating the tax on termination payments were amended from 6 April 2018 by the introduction of the post-employment notice pay (PENP) provisions. However, two known inconsistencies in the tax treatment of PENP have been identified. Since October 2019, HMRC has exercised its discretion to allow an alternative calculation for PENP where the alternative calculation is advantageous to the employee. Clause 22 is designed to place this alternative on a statutory basis from 6 April 2021, but the Tax Faculty expressed concern in ICAEW REP 37/21 that, contrary to the apparent policy intent, the wording of the clause makes the alternative calculation compulsory.

Three regimes introduced in 2017 are also refined. The hybrids and other mismatches rules are amended by cl36 and Sch 7, the corporation tax loss relief rules are amended by cl37 and Sch 8 and the corporate interest restriction rules are amended by cl38. Interestingly, the hybrid provisions were subject to a variety of early government amendments proposed to remove some unintended consequences.

About the author

Lindsey Wicks, Technical Editor, Tax Faculty