Despite public sector borrowing predicted to be at £354.6bn by the end of 2020-21, as expected, Rishi Sunak delivered a budget supportive of the UK economy – the prime focus on continuing support measures and measures to encourage investment in the economy. There was very little in the way of tax rises for 2021/22. However, the Chancellor did announce increases in future years, by no means enough to repay the ‘Covid’ debt. The main announcements affecting farming business were:
Many farming businesses operate through limited companies. We have seen an increased use of limited companies in the rural sector over the last few years. In our firm alone the use of limited companies in the farming sector has more than doubled with 25-30% of businesses having a company involved in the business structure in some way. This is partly due to the low corporation tax rate of 19% but also due to the limited liability protection a company offers.
1) Corporation tax rate
The Chancellor announced that the corporation tax rate will increase from 19% to 25% from April 2023. However, for companies with profits below £50,000 the tax rate will remain at 19%. The Chancellor said there would be a tapered rate for profits above £50,000 so that only businesses with profits of £250,000 or more will be taxed at 25%. However, the detail behind his report suggests we will see a return of marginal corporation tax rates. As a result, for profits between £50,000 and £250,000 the tax rate could be 26.5%, higher than the main rate.
For a farming business making profits in a company, the additional annual corporation tax bill could be:
|Additional corporation tax
For businesses considering transferring into a limited company, the tax benefit of doing so will decrease. However, where profits are retained in the company to fund debt repayments and investment in the business, and not drawn out by the owners, there should still be a tax benefit of running the business in a limited company.
2) Super-deduction for companies
To soften the blow of the increased corporation tax rate, and to encourage investment in the economy over the next two years, a new 130% ‘super-deduction’ capital allowance will be introduced for purchases of plant and machinery from 1 April 2021 until 31 March 2023. In addition, there will be a 50% first-year allowance for qualifying special rate assets.
The super deduction will only apply to purchases of new machinery, not used or second hand. Further where plant which benefited from the 130% deduction is later sold the sale proceeds must be grossed up by 1.3 before tax is charged.
The annual investment allowance will continue to apply for second hand purchases up to 31 December 2021. The annual investment allowance provides 100% relief for plant and machinery purchases of up to £1,000,000.
As always, the decision to purchase machinery must be a commercial one, and not based on tax. The same remains applicable as to whether you buy a new or second-hand machine. The net of tax cost of purchasing a new tractor for £80,000 compared to a second hand one for £60,000 is £60,240 and £48,600 respectively. Plus, on the future sale of the new machine there will be a higher tax charge. If the sale takes place post April 2023, when the corporation tax rate is set to rise to 25%, there will be an additional 7.5% tax charge.
Where new machinery is purchased the timing of the purchase will be important to ensure benefit is made of the super-deduction particularly where the business accounting period straddles 31 March. Consider the timing of purchases now.
3) Trading losses
There will be an extension to the loss relief provisions allowing trading losses for the next two years to be carried back for three years, rather than just one year, against all company income. This will be subject to a £2M cap.
Partnerships and sole trade businesses
1) Income tax and national insurance
In line with their manifesto, there will be no rises in income tax or national insurance rates, which is good news for farming businesses running as sole trades and partnerships. However, whilst the personal allowance will increase to £12,570 and the higher rate threshold to £50,270 for 2021/22, there will be a fiscal drag by the freezing of the personal allowance and higher rate threshold, as well as the national insurance upper earnings and profits limits. They will continue at the 2021/22 levels up to April 2026. Thereby increasing the tax take over the four years.
For self-employed basic rate taxpayers, depending on inflation, this could be an increase over the four years of approximately £700. However, for higher rate taxpayers the additional cost could be in the region of nearly £4,000.
2) Trading losses
The Chancellor also introduced a temporary extension to the period over which businesses may carry trading losses back for relief in earlier years.
Currently, farm losses can only be carried back one year and the losses are restricted to £50,000 a year when offset against other income.
The temporary extension for 2020/21 and 2021/22 will allow losses to be carried back for up to three years, but only against trading profits in those earlier years. In addition, the losses relieved in this way will not be restricted to £50,000 but to £2M.
Relief against all other income will remain as currently, restricted to carry back to one year and up to £50,000.
3) Capital allowances
The annual investment allowance will continue to apply for purchases of plant and machinery up to 31 December 2021. The annual investment allowance provides 100% relief for plant and machinery purchases of up to £1,000,000.
Partnerships and sole trades will not qualify for the super-deduction of 130%.
For hospitality businesses, many of which are in the rural sector, there will be a very much welcomed continuation of support in the form of:
- Business rates holiday to 30 June followed by a 66% discount for 1 July to 31 March 2022.
- Extension of the reduced 5% VAT rate to 30 September, increasing to 12.5% from October until 31 March 2022.
- Restart Grants of up to £18K.
The inheritance nil rate band (£325,000) has been frozen along with the capital gains tax annual exemption (£12,300). There were no other changes to either of these taxes.
The stamp duty land tax nil rate band of £500,000 has been extended to 30 June 2021 when it will reduce to £250,000 to 30 September 2021 when it will return to the previous level of £125,000.
The Chancellor mentioned two new initiatives which may be of benefit to landowning businesses. More detail is required but they include:
1) Carbon markets working group – Dame Clara Furse will establish a new group with the aim of positioning the UK and the City of London as the leading global market for high quality voluntary carbon offsets, which can play an important role in addition to international efforts to reduce carbon emissions. The working group will draw on the UK’s financial expertise and entrepreneurship and build on the work of crossing-cutting initiatives such as the Taskforce for Scaling Voluntary Carbon Markets.
2)Energy innovation – In line with the commitment to double spending on energy innovation, the government is announcing support for the development of new solutions to cut carbon emissions and accelerate near-to-market low-carbon energy innovations:
- the launch of a £20 million programme to support the development of floating offshore wind technology across the UK
- the launch of a new £68 million UK-wide competition to implement several first-of-a-kind energy storage prototypes or technology demonstrators
- a £4 million UK-wide competition for the first phase of a biomass feedstocks programme, to support the rural economy in making improvements to the production of green energy crops and forestry products.