On Wednesday 3rd March 2021 the UK’s Chancellor, Rishi Sunak, delivered the second budget of the Boris Johnson government. Unsurprisingly the priority was to get the economy back on track as the UK begins to build back after the Covid-19 pandemic. Announcements were made to extend the furlough and self-employment schemes until September 2021, along with an array of measures to encourage businesses to invest in people and growth.

First-time buyers received additional support in the form of underwritten 95% mortgages and the stamp duty relief was extended until 30th June 2021, being tapered again in 30th September 2021 and returning to normal thereafter. Further investment was announced in the green economy with the establishment of a new UK Infrastructure Bank (version 2.0) headquartered in Leeds. Furthermore, the Chancellor announced a major investment in eight freeports across the UK – an option available since departure from the EU. Once tax sites within these Freeports have been designated, businesses in those tax sites will be able to benefit from a number of tax reliefs.

We had anticipated potential tax changes for individual partners in LLPs as the Chancellor had hinted that the gap between employees and the self-employed needed to be corrected, however no such changes were announced. Instead, he chose to stick to Boris Johnson’s guarantee of a triple tax lock on income tax, national insurance and VAT rates. However, while rates will remain unchanged income tax brackets will be frozen from 2022 until 2026 meaning as wages rise a greater proportion of tax will be gathered. In addition, despite a review of the capital gains rules and whispers of an alignment with income tax rates the current regime remains unchanged for now, including the annual exemption. Stability seems to be a key theme as inheritance tax thresholds, lifetime allowance for pensions and ISA limited all remain untouched.

As a result, the expected tax increases were limited to corporation tax, with the Chancellor rolling back the years by imposing a 25% top rate on businesses from April 2023 and re-introducing a small profits rate which will be maintained at the current 19%. Marginal rates will apply between the £50,000 lower limit and £250,000 upper limit. Diverted profits tax also increases in line by 6% to 31% as a key deterrent to large businesses seeking to push the boundaries of their transfer pricing policies. This is balanced by a new “super-deduction” for the next two-years enabling up to 130% to be claimed on investment in certain plant and machinery, however the fact that office space and tech form the largest component of capital spend for asset managers this is unlikely to be that meaningful.

With many UK asset managers structured as LLPs, keeping the status quo on income tax and NIC will be widely welcomed. Despite the complicated anti-avoidance legislation that surrounds LLP structures, the headline rate of 47% looks increasingly competitive against the equivalent 49.9% (rising to 53.6% from April 2023) suffered on a combination of corporation tax and then dividend tax. LLPs should again refocus their attention on compliance with the salaried members rules as the end of the fiscal year. However, the widening gap of 6.6% feels ripe for filling with something equivalent to the employer’s NIC, albeit this needs to be balanced with the lack of optionality to roll-up profits under the mixed membership rules.

Conversely, if the rates remain as proposed, from 2023 the mixed membership rules that force partnerships to allocate profits to individuals will actually be forcing a significant tax saving for asset managers in LLP structures. This is quite a turnaround since 2014 when the rules were first introduced when equivalent effective tax rates for distributions via corporates were around 44-45%. Additionally, some recent tax cases (including two released last month) involving asset managers employing the kind of planning that the mixed membership rules were brought in to tackle fundamentally challenge the need for the rules on the statute. Commercially many in the industry would be glad to see the back of them.

Despite the usual reams of information released we have been advised to expect even more detail in the coming weeks, with the draft Finance Bill 2021 being published on 11th March. Additionally, on 23rd March we are promised further tax documents and consultations that form an important part of the government’s 10-year tax administration strategy to create a tax system fit for the challenges and opportunities of the 21st century. With the Chancellor already promising that future tax increases were needed to stop “irresponsible” debt the good news may be short lived. As always it will be a case of watch this space.