Budget 2021 commentary from accountancy firm Azets on implications for SMEs

March 4, 2021

Below are a number of comments on various aspects of  the Spring 2021 Budget from Matthew Hall, Partner, Head of Tax at Azets, a Top 10 accountancy firm and the UK’s largest regional accountancy and business advisors to SMEs.  Matthew is based in the Heathrow office, and Azets has offices throughout the South East of England including in Peterborough, Cambridge, Kettering, Bicester and Witney. 

The comments are:

Budget 2021: Furlough extension
“The furlough extension reflects the need to extend support to employing businesses and follows the ‘success’ of the scheme to date. Unemployment is now expected to peak at 6.5 per cent and not the projected 11.9 per cent. This is a reduction in people terms of 1.3 million workers. This justifies the extension aimed at keeping people in work. The extension protects the employee whilst requiring gradually increasing contributions from the employer in July, August and September through to closure on 30 September. Once businesses are required to contribute however, will this increase unemployment as the cost to employers grow? The number of employees kept on the books will depend on how quickly the economy picks up post lockdown.”

Budget 2021: Extended VAT reliefs only of value if businesses can reopen
“The extension of the five per cent VAT relief for hospitality businesses and an interim rate of 12.5 per cent is only of any value if the hospitality sector can reopen.  The economy needs to reopen first, and hospitality businesses allowed to trade so the sector can benefit – and we seem to be a long way from that point. Clarity is also needed on rules relating to advance bookings.”

Budget 2021: The impact of the rise and age change in the NLW on SMEs
“From 1 April the National Living Wage will increase by 2.2 per cent to £8.91, and will apply for workers aged 23 and over for the first time, down from aged 25 and over.  The increase in the NLW is positive news for workers but will add to employer costs and could also impact, inadvertently on jobs. Those sectors most impacted by Covid will be at particular risk. With more people coming into scope for NLW purposes and increased compliance activities by HMRC, there will be an increased risk to companies. Employers should review these changes to ensure they do comply.”

Budget 2021: Budget is good news overall for SMEs in property and construction
“The continuation of the cut in stamp duty land tax (England and NI only), the new scheme to guarantee some mortgages of 95 per cent LTV will all help boost the property market, including  for SMEs such as estate agents, mortgage brokers and suppliers of goods and services to the housing market.  The increase in funding for apprenticeships will help with the current shortage of skilled labour particularly for SME construction companies.  We welcome the establishment of the Modern Methods of Construction (MMC) Taskforce, backed by £10 million of seed funding, to accelerate the delivery of MMC homes in the UK which is also good news for the housing market.

“The increase in capital allowances to 130% is great news for construction SMEs, allowing them to invest in new equipment for growth at a reduced cost of £75.30 for every £100 of expenditure.  The good news is obviously diluted to some extent by the future increase in corporation tax rates. However, it is disappointing for the sector not to have seen a VAT reduction for  home improvements to help it recover from COVID restrictions.”

Budget 2021: Some good news for the agricultural industry – But outlook mixed
“The extension of the reduced rate of VAT is good news for farm shops. Farmers who operate through limited companies will still benefit from corporate structures, although corporation tax rates will increase from April 2023 on profits above £50,000 rising to a rate of 25 per cent when over £250,000. The enhanced capital allowances will benefit farmers investing in plant, particularly if losses can be carried back two years. Farmers should delay investment until 1 April 2021 when the ‘Super deduction’ commences.  There are no immediate changes to Inheritance Tax, but those farmers and landowners with a clear succession path should still look to pass on property now under the favourable existing legislation.

UK farmers can lead the agriculture world in the Green Recovery.  The agricultural industry is in an excellent position to spearhead this if the Government provides clarity and support. Today’s announcement on the Green Investment Bank seems to be focused on larger infrastructure projects and offshore wind, rather than the SME businesses which are the backbone of the UK rural economy. However, it is hoped the community investment fund may help breathe new life into remote rural areas, including pubs and community facilities.

Finally, we welcome the new digital investment, as rural parts of the UK are desperate for this, as well as the creation of freeports which will also help the industry.

Budget 2021: Recovery Loan Scheme provides lifeline to SMEs

“Many SMEs will continue to be able to obtain lifeline loan cash to help them with recovery.  The new recovery loan scheme being launched will help those businesses who have either not borrowed enough cash under the existing CBIL arrangements or where they depleted their cash reserves over the last 12 months. The recovery loan scheme is available for any legitimate purpose and coupled with the new 130 per cent investment allowance for plant and machinery expenditure will help businesses invest for the future.  One thing the last 12 months has taught us is that the pace of change in technology is relentless and SMEs need to pivot quickly to change business models.”

Budget 2021: Super Deduction announcement
“The scheme is a welcome measure, but as with much of this budget, the complexity is in the small print and this measure, in particular, is a super-complex super-deduction – timing for expenditure will be key. Whilst we would encourage companies to delay expenditure until April, contracts entered into before 3 March will not benefit from the super deduction even if the date of the expenditure is delayed.”

Budget 2021: Impact of taxpayer protection taskforce on SMEs
“The government are spending £100m on a new Taxpayer Protection Taskforce. The aim of which is to tackle fraudsters who have exploited and abused the COVID related support schemes such as the Job Retention Scheme (JRS). Such investment by the government will of course increase the number of investigations they carry out on previous JRS claims to ensure compliance. With an increase in investigations brings the likelihood of more fines as the government look to recoup some of the £100m outlay which is on top of the £53.8b they have paid out through the Job Retention Scheme. It’s therefore worth spending some time now double checking the accuracy of the claims you have made.

We are already seeing a significant number of claims being investigated by HMRC and this further investment is a clear notice of intent that they are now going to increase and intensify their approach in this area. This follows an expectation that initial processing by HMRC would be followed by selective and detailed reviews. This is clearly now being implemented and indicates that HMRC have to date identified significant incorrect claims, justifying further investment in this area.”

Budget 2021: Corporation tax freeze and R&D changes a double edged sword for SMEs
“For SMEs, the freeze on corporation tax is welcome, however there is a complexity around the tax regime with the increases to 25 per cent set to appear in 2023. The initial measure, plus various grants and loans announced today, gives a cash boost and enhancement in the short term, however it does seem to be introducing more complexity in the long run, such as the potential for inflation and the impact of this. The enhanced tax deduction for capital expenditure brings a dilemma for companies as to whether to delay investment and save tax at 25 per cent or bring it forward and benefit now.  It will be interesting to see the impact the rate increase will have on the behaviour of company owners, as for example, bonuses may become more tax efficient than dividends.

“Tax Relief in the UK for Research and Development becomes more attractive with Corporation Tax Rates rising to 25% as it makes the R&D tax relief more beneficial.  Using current data available, this will impact and help more than half the SME R&D claims made. Not only does this mean good news for companies currently claiming but hopefully will attract new claimant companies. Moving against this is the cap on tax rebates on offer to loss-making SME’s who surrender their R&D credits to the Government in return for cash. There will be a maximum tax rebate on offer by reference to the company’s PAYE and NIC bill.”

Budget 2021: Complex IR35 arrangements may come under detailed scrutiny
“With the impending extension of IR35 rule changes to the private sector in April 2021, many businesses may have been hoping to hear the Chancellor delay the changes, or indeed cancel them. However IR35 implementation will now go ahead as expected next month.

One footnote is the reference in the Budget document to measures the government are considering to tackle promoters and enablers of avoidance schemes: ‘We are aware of IR35 “solutions” being marketed to businesses.’  Whilst many of these are legitimate it does demonstrate that HMRC are generally intent on reviewing complex or intricate structures. Complex arrangements within the IR35 may well therefore come under detailed scrutiny.”

Budget 2021: Temporary extension to carry back of trading losses offers lifeline for businesses
“Trading losses made by all businesses, including unincorporated business, in tax years 2020/21 and 2021/22 will be eligible for loss carry back relief. The losses can be carried back against the profits of the same trade for a period of three years, extended from one year.  With the temporary closure of businesses during consecutive national lockdowns, this measure could prove to be an additional lifeline for some unincorporated business to obtain tax repayments from prior years and ease cash flow.”

Budget 2021: Impact of flexible measures to attract and engage apprentices
“A number of measures have been introduced intended to provide further flexibility for businesses attracting and engaging apprentices. The Government has announced an additional £126m in England for high quality work placements and training for 16 – 24 year olds in the 2021/2022 academic year. Employers who provide trainees with work experience will continue to be funded at £1,000 per trainee. Employers who hire a new apprentice between 1 April and 30 September 2021 will receive £3,000 per new hire compared with £1,500 (£2,000 for those aged 24 or under) for new hires under the old scheme. This is in addition to the existing £1,000 for all new apprentices and those aged under 25 with an Education, Health and Care plan. The Government is also introducing a £7m fund from July 2021 to help employers in England set up and expand “portable” apprenticeships. This should help people work across multiple projects with different employers. Employers themselves will benefit from access to a more diverse apprenticeship talent pipeline. These extensions should encourage businesses to more flexibly engage, and help to support the costs of engaging new and developing talent.”