Spring Budget 2021: A Seesaw Budget

Spring Budget 2021: A Seesaw Budget

Gerald Montagu, Counsel at GIDE LOYRETTE NOUEL LLP and member of Lexis PSL Consulting Editorial Board comments on Spring Budget 2021. 

With many childrens' playgrounds sadly still closed due to Covid, a seesaw may seem a slightly incongruous image to represent yesterdays' Budget. And yet, it seems appropriate in a number of ways:

  • the Chancellor clearly hopes to spark a corporate investment boom, with a 130% super deduction for expenditure incurred on certain plant and machinery, a 50% first year allowance for expenditure on special rate assets prior to April 2023 and an extension of the annual investment allowance to £1 million for 2021. However, in April 2023, the seesaw tips the other way and the rate of corporation tax payable on the increase in activity which that investment is intended to foster, rises to 25% (other than for small companies, which the Institute for Fiscal Studies has described as "unfortunate" and lacking a distributional motive) and the diverted profits tax to 31%. The price tag of some £26 billion attached to the investment measures over the next two years and the protected claw back of around £7 billion in the following years illustrate the way in which the Treasury is thinking.
  • the approach taken to the EU Interest and Royalties Directive which allows interest and royalties to be paid gross to a recipient resident in an EU Member State also has a slight up and down feel to it. Back in 2019 the message from Government seemed to be that even in the event of a hard Brexit the benefits of the Directive would remain available. Although there was a caveat that this position could change if UK domestic law was amended, the mood music seemed to be that there would be no sudden break and disruption. Now, such a break is to occur on 1 June 2021 and, in the case of interest, it will be necessary at the very least to write to HMRC to establish an entitlement to pay gross under a treaty. The anticipated Exchequer impact prior to 2026 is £35 million and, unless diverging from the EU is a policy objective in itself, one may be left wondering what lay behind the apparent change in heart?

The big unanswered question remains what, apart from the increase to corporate taxes, combined with the effect of fiscal drag on personal tax (income tax, capital gains tax and inheritance tax) allowances and bands from April 2021 to April 2026, might the Chancellor need to do to balance the books? Yesterday (perhaps unsurprisingly) quite how the fiscal seesaw will ultimately be brought in balance was not answered, with much weight seemingly being given to spending restraint that may prove challenging to deliver. It may be that more is revealed in the consultations to be published on 23 March 2021, or perhaps we have to wait a little longer than that.

Gain access to our free in-depth analysis of the key business tax announcements made in the Chancellor’s Budget on 3 March 2021via the budget hub today

Related Articles:
Latest Articles:
About the author:
Gerald's practice involves both international and UK tax planning. The sectors in which Gerald has a particular focus include financial services, funds (private equity and real estate), leisure, life sciences and natural resources. Gerald specialises in advising in relation to financing arrangements (including inward and outward investment), M&A, insolvency, property development and investment and tax disputes (including where the tax at stake is owed by individuals rather than companies).