3 March 20214 minute read

UK Spring Budget 2021 – Finance

On 3 March 2021, Rishi Sunak delivered his Spring Budget, with key themes of job protection and economic recovery from COVID-19. Whilst the majority of the tax changes were expected, the Chancellor made some important announcements that will be relevant to the Finance sector.

Increase in corporation tax rate, and bank surcharge rate

From April 2023, the rate of UK corporation tax will rise to 25% on profits over GBP250,000. Businesses with profits under GBP50,000 will remain at the current 19% rate, and there will be relief for businesses with profits under GBP250,000 so that they pay less than the main 25% rate.

Furthermore, in light of the anticipated corporation tax rate rise to 25%, the government will review the additional bank surcharge of 8%, as the government believes that the increase in the main corporation tax rate to 25% from April 2023 would make UK taxation of banks uncompetitive and damage one of the UK’s key exports. In the autumn, the government will set out how it intends to ensure that the combined rate of tax on banks’ profits does not increase substantially from its current level, that rates of taxation here are competitive with the UK’s major competitors in the US and the EU, and that the UK tax system is supportive of competition in the UK banking sector. Changes will be legislated in Finance Bill 2021-22.

Repeal of provisions relating to the Interest and Royalties Directive

From 1 June 2021, UK domestic legislation that had incorporated the EU Interest and Royalties Directive will be repealed. In practice, this means that UK resident companies making payments of annual interest to connected companies resident in an EU member state, that have until now relied on the UK legislation incorporating the EU Interest and Royalties Directive, will now need to consider the terms of, and (as applicable) ensure that applications are made under, a relevant double tax treaty in order to pay interest gross or to claim a refund on tax withheld.

Hybrid mismatch rules

The hybrid mismatch rules, introduced in 2017, are aimed at counteracting tax mismatches where the same item of expenditure is deductible in more than one jurisdiction or where expenditure is deductible but the corresponding income is not fully taxable. In response to a consultation last year, the government has announced a number of legislative amendments to the hybrid rules. These include diluting the “acting together” test that could inadvertently bring third party lenders within the rules, excluding a counteraction under the rules where the recipient is a tax-exempt investor, and excluding from a counteraction payments to and from entities taxed as securitisation vehicles.

Recovery Loan Scheme

The government is launching a new Recovery Loan Scheme, which will allow eligible businesses in the UK to access loans of between GBP25,000 and GBP10 million, and will provide lenders with a guarantee of 80% on eligible loans. The scheme launches on 6 April and is open until 31 December 2021, subject to review. Most businesses are eligible to apply to the extent that they are trading in the UK, and it will need to be able to demonstrate, amongst other things, that they have been impacted by the COVID-19 pandemic.

Mortgage guarantee scheme

The government will introduce a new mortgage guarantee scheme in April 2021. This scheme will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of just 5% on homes with a value of up to GBP600,000. Under the scheme all buyers will have the opportunity to fix their initial mortgage rate for at least five years should they wish to. The scheme, which will be available for new mortgages up to 31 December 2022, will increase the availability of mortgages on new or existing properties for those with small deposits.

UK Infrastructure Bank

A new UK Infrastructure Bank will be established, providing financing support to private sector and local authority infrastructure projects across the UK, in order to help meet government objectives on climate change and regional economic growth. The UK Infrastructure Bank will, among other things, be able to deploy GBP12 billion of equity and debt capital and be able to issue up to GBP10 billion of guarantees.

Should you have any queries on the issues raised in this summary, please reach out to your usual UK tax contact or one of the contacts below.

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