Budget 2021: Predictions & Wishlist

The Chancellors Spring Budget announcement in March will set out the next stage of the Governments’ plan to further move the UK economy out of the effect of lockdown and support businesses and the country to get up and running again.

In January 2021, the Chancellor announced an extension to the Furlough scheme, as well as committing £4bn in new grants to support retail, hospitality, and leisure firms. An additional £594m for struggling firms in other sectors was also committed, so will there be more to come in this announcement?

In this exclusive article, our experts give their views on what could be expected from the Spring Budget, and the potential impact on rebuilding the economy in a post-Covid and post-Brexit environment.

Consumer sector

You cannot hold back the tide of online retail with a tax

Chris Denning, Corporate & International Tax Partner

There have been recent reports that the Chancellor is considering imposing an online sales tax to shift the balance back in favour of the high street. However, the Chancellor risks jumping the gun and a thorough analysis of the societal shift against ‘bricks and mortar’ retail is needed.

The key question about an online sales tax is whether we are witnessing a permanent shift away from the high street model. If we are, simply introducing a single tax measure is not going make a fundamental difference to the high street’s difficulties.

The best way to help ‘bricks and mortar’ retailers is to conduct a full and informed analysis of the societal factors which are driving both business and consumer behaviour and the likely future direction of travel. This should help the high street adapt. Ultimately changing to suit consumer needs is a more viable strategy than trying to hold back the online tide with a tax.

It is unlikely to be all bad for traditional retail. The current pandemic has clearly highlighted people do not want to spend their lives cooped up in their homes, so there is no doubt a place for the high street where people can meet, socialise and spend their disposable income - the question is what form the high street should take to respond to societal needs. A new tax will not absolve us of the need to find an answer to that question.

Business Rates

Joe Sullivan, Partner, and Alison Conley, Corporate and International Tax Partner

The business rates holiday in England is currently due to end on March 31. An overhaul of the current regime, something already needed in a pre Covid-19 existence, would be of great benefit – indeed, after observing a clear divergence in the financial fortunes of ‘non-essential’ retail businesses, the pandemic effectively mandated it as essential.

The government has urged councils not to issue business rates bills ahead of the new 2021/22 financial year, signaling that further support for occupiers of commercial property, like shops, pubs and restaurants is coming.

This can only be welcomed as a boost to the struggling high street although a more fundamental reform of business rates is needed for the future.

Leisure & Hospitality sector

We need bold and sweeping measures to save UK hospitality, extending 5% VAT rate alone is not enough.

Sue Rathmell, VAT Partner

The Chancellor is under pressure from the UK hospitality sector to extend the 5% VAT rate, which is due to revert to 20% with effect from 1 April 2021, for at least another 12 months. However, this move won’t be enough on its own as most hospitality businesses have not seen a huge benefit from the VAT reduction since it was introduced last year. This is because the UK has been in lockdown for long periods and many people have not been able or wanted to travel away from home and spend money in the hospitality sector. Failing to extend the lower VAT rate will force more restaurants and pubs to close their doors as they await the anticipated easing of the lockdown. They desperately need a good summer 2021 season to help save jobs and shore up their finances to be able to survive the current crisis.

In order to bounce back, the hospitality sector needs the government to step up and increase support. An extension of the furlough scheme is essential, together with more government help for the sector similar to the innovative £100m fund set up by the Scottish government to provide grants directly to tour operators, visitor attractions, hostels and other hospitality businesses in Scotland. The travel industry in other parts of the UK need grants like these. The government could also extend the 5% VAT rate to alcohol in pubs and restaurants or reduce duties on alcohol. Businesses that cannot offer takeaway or do not have gardens or outside space should also be given additional grants. Another ‘Eat out to help out’ scheme should be on the cards when it is safe to do it. In addition, government backed campaigns to encourage people to holiday in the UK should be considered by Rishi Sunak.

The regrowth of the hospitality sector is also closely dependent on the successful reinvigoration of the UK’s high streets and city centres – encouraging people back into towns and cities will support pubs, restaurants, hotels, cinemas and theatres. The Chancellor and the government need to be fearless and creative with how they get the UK back up and running again as Covid-19 restrictions are lifted. Our hospitality and tourism sectors depend on it.

Construction & Real Estate

Brendan Sharkey, Partner

Some measures that would benefit the Construction & Real Estate sector, and should be considered:

• Zero Vat charge on products / services designed to reduce Carbon emissions on retrofits
• Revamp the Green Initiative – make funding easier to access 
• Stimulate regional building activity to ensure SME’s have opportunities to support local projects ; hospital , schools , community , infrastructure
• Timely rundown of Stamp Duty relief for those contractually in the system and subsequently complete- replicate what has been announced for Help to Buy  
• Improve employer apprenticeship incentives- national insurance employee and employer reduced
• No SDLT where anyone is downsizing – freeing up more family accommodation for those that need it and creating increased volume as the stamp duty relief
• General Rates – make a decision on the future of general rates – procrastinating is not helping
• Support off-site construction – rate exemption + CT refunds on tax losses which are recoverable on future profits

Legal Services

What do we expect to see that would generate a positive effect on legal practices?

Karen Hain, Partner - Head of Professional Practices

Residential property lawyers have seen an increased workflow generated by the reduction in stamp duty land tax rates, as homeowners look to take advantage of lower tax charges on property purchases. An extension to the timeframe of these tax reductions should continue those new work instructions.

The Office of Tax Simplification has recommended equalising capital gains tax rates with income tax rates. This will impact on individuals who own capital assets such as investment properties, as well as business owners. If the Chancellor gave notice that rates will increase from a point in the future, say April 2022, then this would give individuals time to plan to sell assets to take advantage of lower tax rates or the beneficial tax rates under entrepreneur’s relief. As long as there is a sufficient lead time, asset sales could benefit property lawyers, and business sales could generate corporate legal work.

Our recent legal survey has seen that staff recruitment has continued during the pandemic. Any reduction in employment taxes would assist this further. But the Budget is more likely to focus on employment of younger people, including schemes like apprenticeships being extended. This would hope to encourage firms to train up the lawyers of the future.

R&D Incentives

Jay Bhatti, R&D Tax Reliefs Specialist

There are a number of ways that R&D schemes and incentives could be improved to benefit the economy:

Cash Credit Cap for Loss Making Companies claiming under SME R&D Tax Relief:

• The upcoming cap on cash credits paid out to companies is to be set at three times the PAYE + NIC contributions the company or group made in the period. This cap can only be unlocked where IP can be demonstrated. Therefore, it would help immensely to clarify how the IP position of a company will be verified. Where there is no direct reference to IP - companies should be allowed to demonstrate genuine technological problem-solving activities. The cap would discriminate against these smaller companies. The cap should be expanded to enable claimant companies to include UK subcontractors (proposed legislation only allows for PAYE + NIC of related parties to be included).

R&D Schemes Being Used as Part of ‘Levelling-Up’ & Innovation Strategy:

• The South-East region dominates in terms of the claims being put in. However, the government have a target of ‘levelling-up’ post-industrial regions outside large metropolitan areas. A useful mechanism for this might be to increase the level of Benefit within certain regions of the UK that need this injection of innovative companies being based there.
• The UK Government have a target of encouraging R&D Expenditure in the UK, such that it reaches 2.4% of GDP by 2050, up from 1.4% currently. The only way this would be achievable is if the R&D Tax Relief Scheme is further opened up and made more generous, as this will accelerate adoption by new claimants.
• Make the SME R&D Tax Relief Scheme independent of EU based State Aid rules – this will ensure companies that used Coronavirus Business Support such as CBILS and BBLS last year will not have their SME R&D Claims unfairly affected.
• National government driven campaign for companies to claim for R&D Tax Relief – showcasing how these schemes have benefited the UK economy over the past 20 years.

Manufacturing sector

Chris Barlow, Partner, and Alastair Wilson, Partner

Going on the assumption that lockdown measures will reduce as vaccination progresses, the focus should be on “recovery” and sustainable measures (not just short-term emergency measures). There are several measures that the Chancellor could announce in the Spring Budget which would benefit the Manufacturing sector, these include:

1. A focus on job creation, particularly for younger members of society – any policies must enable SME’s to participate easily (the Kickstarter program for examples is very unwieldy)
2. Address the issues caused by the Trade & Co-Operation Agreement (aka Brexit). Lots of businesses are just giving up on exporting because of all the red tape involved now – which will impact on growth
3. There is a suggestion that corporation tax may go up – most manufacturers pay less than the mainstream rate of corporate tax (e.g.: due to capital allowances and R&D claims, etc) but anything which discourages investment should be avoided.   
4. We’ve seen a trend over recent years of manufacturers shortening their supply chain (onshoring / reshoring etc), and with the current situation this has gathered pace. Several manufacturers are looking at what isn’t available in this country and investing money to see if they can develop it themselves. They can gain R&D tax relief to do this, but it needs to be safeguarded for the process to be able to continue and all it means for inward investment in the UK.
5. The move toward further automation within the manufacturing process should be encouraged by way of reliefs perhaps linked to the whole skills debate.

Find out more

Visit our Budget 2021 hub for our latest commentary and to pre-order our exclusive Budget Summary and Tax Card.