Business owners facing a taxing 2021: What do you need to know?

Owner-managed businesses, the backbone of the UK economy, have come through a tough year. And whilst the valued furlough scheme has been extended through to April, a Spring Budget scheduled for 3 March is likely to herald change and challenges, says accountants Mercer & Hole.

The accountants point to four tax changes that every fast-growing business may have to face.

Capital gains tax

The Office for Tax Simplification (OTS) recommendations on reform of capital gains tax (CGT) have been well-publicised and are likely to result in closer alignment with rates of income tax. That could see business owners looking to sell facing a CGT bill more than double the current rates. But when might the government adopt the OTS proposals, asked Jacqui Gudgion?

“It is widely expected that the Chancellor will announce changes to capital gains tax in his Spring budget. If changes take immediate effect, that could mean that if a business owner has not already started a business sale, they are unlikely to get such a deal over the line before the tax rates increase.

“But the UK economy is far from out of the woods yet with regards to COVID-19. The furlough scheme has been extended until the end of April and the moratorium on winding-up petitions has been extended until March 2021. Questions are being asked whether Spring 2021 is too soon for such a fundamental change. Change will come, but the big question is when.”

Business Property Relief

On 29 January 2020, the All-party Parliamentary Group (APPG) reviewing inheritance and intergenerational fairness published an informal report on reform of inheritance tax (IHT), following two reports from the Office of Tax simplification on the same matter. The direction of travel is focused on reducing the complexity in the system – a myriad of available reliefs are available but some view these are being outdated. One key relief under fire is business property relief which enables families to pass assets such as trading company shares to others free of inheritance tax.

“This could have a significant impact on succession planning, particularly within family-owned businesses,” explains Jacqui. “If the relief is completely abolished there is likely to be more relaxed payment terms for any tax arising, but will this result in an erosion on value of entrepreneurial businesses by creating a ‘dry tax charge’ – a tax bill where no cash has been realised to pay it?

“We can only wait and see what comes out of the review and what this means for business owners.”

Off-payroll working

The government’s much criticised off-payroll working rules will finally take effect from 6 April 2021 for medium and large businesses. Personal services companies may quickly fall out of favour, says Jacqui Gudgion.

“Personal service companies are commonly used in the technology sector by contractors often working on long-term engagements, and by television and media personalities. HMRC has long taken a dim view of personal service companies, believing that contractors are employees in all but name.

“The decision will now rest with businesses rather than personal service companies on the true nature of that relationship. In many cases, the tax advantages currently enjoyed may come to an end and many may choose to abandon their personal service companies. Businesses that employ contractors through personal service companies may also find the new regime increases their costs of engagement along with the inherent risk of making the wrong judgment call and resulting fines from HMRC.

“Companies are advised to address this issue sooner rather than later if they may be affected.”

Caps on R&D tax relief

R&D tax credits are a valuable relief for qualifying businesses, but from 2021 they may be less so for some businesses, says Jacqui Gudgion.

“Under the current rules, qualifying businesses can claim up to 230% of research and development expenditure either as a cash payment or a reduction in corporation tax. From April next year, small and medium sized businesses will only be able to claim £20,000 plus 300% of its PAYE and NIC liabilities over the qualifying period. For many businesses this cap on relief will have no impact, but for some there may need to be some consideration of the business model and whether the new rules will bite.”