03 March 2021

Hot on the heels of todays Budget announcements by Rishi Sunak, here is your Cows and Money update!

Ahead of today’s Budget I ran a quick poll on twitter asking what taxes people would like to see raised! The chart here shows respondents clear preference for raising corporation tax, and a lack of appetite for increased inheritance tax, (sample size may be an issue but I suspect this reflects the thoughts of most people in the UK).

So did Rishi deliver for you?

The bulk of Budget was about returning the economy to normal, supporting businesses through grants and furlough, while this has benefited many hospitality businesses, and farm based tourism businesses, it has provided little for farms directly. So what about the tax changes that he announced and how will they impact your farm business.

Corporation tax

Well the widely anticipated corporation tax increase materialised, but it won’t hit until 1 April 2023, so those trading through companies have time to get used to the idea. Whilst the headline rate increases to 25%, we also see a return to the ‘small companies’ rate so that profits at up to £50,000 will remain at 19%. The flip side to this is profits between £50,000 and £250,000 will be taxed at 26.5%, before the main rate kicks in.

This means that whilst it has been beneficial to trade through a company, even when extracting all profits as salary/dividend, this will now look unattractive if you have profits over £50,000 and spend it all as drawings.

If marginal profits, taxed at 26.5% are then subject to a dividend tax of 7.5% (i.e. basic rate), then the effective overall tax rate becomes 32%. At present this compares with a self employed rate of 29%. Big question is will class 4 National Insurance increase before April 2023?

That said there is still a significant saving where profits are retained within the company to grow the business or repay debt.

What it does mean is that we will see a return to associated company rules most likely as HMRC presumably won’t want people to benefit from more than one 19% rate?

Super-deduction

The super-deduction which aims to grant additional tax relief to plant & machinery investments is unfortunately only available to companies! The rate of 130% means that 25% relief will be available rather than 19%. Whilst the relief is only available to 31 March 2023 we presume losses created through the relief will be available to carry forward against future profits taxed at 25%.

For example, a new rotary parlour at a cost of say £400,000 would attract a deduction of £520,000. If this simply saves tax at 19% and defers it to a 25% rate after 1st April 2023 then will it be that attractive? Probably, a bird in the hand….

Loss carry back

Also mentioned was the availability of loss carry back for three years rather than the standard one year, this will be available to both companies and unincorporated businesses, i.e partnerships etc, for losses incurred in 2020/21 and 2021/22. This could accelerate the repayment of tax from earlier years, if large losses are created by investment and large capital allowance claims.

For individuals, the provisions for carrying back against general income still apply, so you can only carry these losses back against profits of the same trade. Remember, all farming is treated as one trade.

What wasn’t in the Budget…

This could be along list, but things to watch out for in future consultation possibly coming before the end of the month will be;

  • Increase in class 4 National Insurance to increase the overall rate for the self-employed?
  • Removal of the Capital Gains Tax rebasing on death where assets attract APR/BPR for inheritance tax relief?
  • Increase in Capital Gains Tax rates?
  • Increase in IHT threshold for trading status to 80% from 50%?

Expect more changes in the next Budget, possibly coming up later this year.

You can read full Budget 2021 analysis here.

If you have any questions on how this Budget will affect your farming business please contact Rob Hitch or speak to your usual tax contact.