28 Oct 2021

What the Budget 2021 Announcement really means

I expect most businesses breathed a sigh of relief this week. Though we were already aware of the Health and Social Care Levy, which will see a 1.25 per cent increase in National Insurance (NI) contributions click here for more details, the Chancellor didn’t drop any other particularly nasty surprises.

In case you missed it – or haven’t been so inclined as to read the fine print, as we have – there will be no rise in corporation tax (at least not until 2023), capital gains tax, or inheritance tax, all of which were rumoured to be coming.

Instead, Rishi Sunak largely announced a wave of Government spending initiatives. So, what were the key points and what impact might they have?

Why haven’t taxes increased?
Apart from the increase to NI, taxation will largely remain the same, with new reliefs set out for certain businesses. The Government has been on a monumental spending spree since March 2020, in an attempt to shelter the economy while we fought off the pandemic.

But that spending will need to be paid for somehow, and many predicted a rise in several taxes to help cover costs. However, thanks to a revised GDP growth outlook from the Office of Budget Responsibility (OBR) and a more positive predicted employment rate, the Chancellor seems to have taken a different tack.

Coupled with what is called fiscal drag, ie a freezing of various allowances for a number of years, the Chancellor has avoided any headline grabbing tax hikes, while also managing to collect an additional £21 billion in the next five years as earnings grow but tax reliefs and allowances remain frozen, increasing the overall tax take, dare I say by stealth?

This Budget focussed on spending which would increase the number of taxpayers working more often for more money. More people earning more money means more Government income through taxation. Rather than increase the percentage of the Government’s takeaway from your earnings, the Chancellor hopes to increase earnings all round, theoretically benefitting all parties, although remember the freezing of allowances will also mean more tax is collected as proportion of income.

Business rate ‘reform’
The good news is that the planned multiplier increase for business rates tax has been cancelled, for now at least. Even better for hospitality, retail and leisure businesses, they will be able to claim a 50 per cent business rates relief.

This is a welcome change but cannot be called reform as the Chancellor claims. These measures are clearly being introduced as a reaction to the pandemic to help those businesses that have suffered most. Rightly so, but let’s not pretend this is the much-anticipated reform that has been talked about for more than a decade.

It’s becoming inescapably clear that our business rates tax is inequitable in the modern world. There was no mention of taxing online businesses more highly, for example, although we understand an internet sales tax is coming. Additionally, because these are reliefs they can also be taken away at any time as swiftly as they were introduced. This will no doubt offer a boost to businesses, but I hope to see greater change to the basis of business rates taxation in future budgets.

Changes to R&D tax relief
The Chancellor announced that R&D tax relief will be changing, with only research and development conducted in the UK eligible for a claim. The anticipation here is to promote highly-skilled and high-paying jobs in the UK, which in turn promotes taxation.

We know there will be a consultation on R&D tax relief in this regard and this suggests further changes are on their way. R&D tax relief in its current form is generous and promotes the growth of the knowledge economy, so we’d be surprised if these changes make the UK less competitive but it is one to look out for in future budgets.

A boost for pubs
As well as the business rates relief, pubs, bars and nightclubs can raise a glass to the announced changes to alcohol duty. Firstly, an increase in alcohol duty, earmarked for taking effect just hours after the announcement, has been cancelled.

Secondly, the Chancellor has changed the way alcoholic drinks are taxed – which even the Institute of Fiscal Studies dubbed ‘a mess’. In what seems to be a simplification of the previous system, stronger drinks will now carry a higher duty than their lower proof counterparts. It’s good news for rosé drinkers who could be saving 23p a bottle, but stronger beers will go up.

This should be good news too for producers. UK growing conditions are best for lower alcohol drinks and there is an additional relief for small producers.

National Living Wage (NLW) increase and changes to Universal Credit
In another attempt to increase the incomes of taxpayers, the NLW will increase by 6.5 per cent to £9.50 per hour. This could harm some businesses temporarily, particularly those in hospitality or retail where margins can be razor thin. But, in the long run, increased wages means increased spending power and that is a good thing for business.

There’s also the change to Universal Credit, which will see workers claiming this relief keep more of the money they earn. This provides a clear incentive to work more hours and again increases spending power. With organisations struggling to find staff, this could provide a real boost.

It’s not just what you spend, it’s how you spend it
The Autumn Budget Announcement was full of new initiatives which are designed to foster a higher skilled and higher wage economy. This is broadly a good thing, although the efficacy of this spending will depend on what happens next. Who will be eligible? How easy will it be to access funds? How will initiatives be rolled out? There are several unanswered questions.

We should feel cautiously optimistic about this budget and the heavy hints the Chancellor dropped that he’d like to reduce taxes before the next election. But if these initiatives don’t work, GDP growth is not as predicted, or the employment rate falters, we could see tax hikes in the future. And, of course, all of this assumes we will not have another major national lockdown.

For now, we can only move forward with the information we have at hand, so that’s what we must do. Let’s get to work making that growth happen, so we can all reap the rewards.

Monahans is here to help your business navigate the murky world of taxation and relief. For more information on what the Autumn Budget 2021 means for your business, please get in touch.