Joint Budget and CSR 2021: unpacking tax reform

Whilst there were some welcome improvements, overall it was not the bold Budget – with a focus on unlocking investment – that business had hoped for. We saw welcome reform on R&D tax credits and also significant announcements on business rates, with the final report on the Business Rates Review published today, including considerations on a potential Online Sales Tax. For further details, see our article.

However, delving into the detail of the “Red Book” and the Overview of Tax Legislation and Rates “OOTLAR” published alongside the Budget, there are a number of announcements that should not be overlooked by business.

R&D tax credit

The government has announced the expansion of the R&D Tax credit regimes to include data and cloud computing costs as eligible expenditure, and to exclude overseas R&D activities from the scope of the reliefs.

The CBI welcomes the expansion of eligible expenditure for R&D Tax credits purposes to include data and cloud computing costs, which we’ve been calling for. As the nature of R&D continues to evolve in line with rapid technological developments, the expansion of R&D tax credits will allow more companies and businesses to scale up and speed up their digital transformation – helping the UK economy recover quicker and boosting resilience and digital adoption. The exclusion of overseas R&D activities is evidence of a balanced approach to the expansion of the scheme, however business will be eager to see the detail of how this will work in practice to determine its impact on their business.

The CBI recognises that this announcement is a starting point for further evaluation of R&D Tax credits and welcomes continued discussions on the expansion of the scheme to include capital expenditure as an allowable expense, the establishment of a tax credit ‘green’ uplift to help unlock private sector investment to reach net zero, and simplification measures which would provide scope for added flexibility within the scheme.

Notification of Uncertain Tax Treatment for large business

HMRC have announced an amendment to the Notification of Uncertain Tax Treatment legislation for large business to remove the “substantial possibility” hallmark. Albeit, it is noted that this hallmark remains ‘under further consideration for possible inclusion at a later date’.  Removal of this hallmark for now, which triggers a notification requirement when there is a “substantial possibility” that tribunal or court may find the tax treatment incorrect is welcome. As currently drafted, the CBI has been highlighting that this hallmark its unduly broad and subjective in nature, which gives rise to significant uncertainty for business in respect of their compliance requirements.

Capital Allowances

The government announced the extension of the temporary £1m level of the Annual Investment Allowance until 31 March 2023.  Whilst this will be welcomed by some businesses whose expenditure currently does not qualify for the super-deduction there is still much to be done post-March 2023, on translating the temporary boost provided by the super-deduction into a long-term strategy, with a focus on green investment at its core, to permanently place the UK as a world leading tax regime.

Banking surcharge

Following the Chancellor’s previously announced review into the Banking Surcharge at the Spring Budget, the government will legislate in Finance Bill 2021-22 to reduce the rate of the surcharge on banking companies from 8% to 3% and increase the surcharge allowance from £25m to £100m. This measure will have effect from 1 April 2023.  Whilst a step in the right direction, with the overall increase in Corporation Tax set for 2023, the combined tax rate on the financial services sector risks becoming uncompetitively high.