2021: how was it for SMEs?

2021 continued to be ‘interesting times’ for SMEs: for many, no doubt, it was rather more ‘interesting’ than they might have wished for. And tax made its contribution to that.

Writing for Tax Journal, BKL tax consultant David Whiscombe examines this mixed bag.


Having seen significant tax increases in the March Budget, especially in the effective rate of tax on distributed corporate profits, owners of SMEs may regard themselves as having ‘dodged a bullet’ with no CGT or pension tax changes in the Autumn Budget: but for how long? Abolition of basis periods for unincorporated businesses brings an accelerated tax charge for some and adds to the compliance burden for the few businesses unwilling or unable to change accounting date. Meanwhile there is the usual mix of the welcome and the unwelcome in the year’s crop of court and tribunal decisions.

Policy announcements

Probably the single most striking change affecting SMEs was the announcement in the March Budget that the corporation tax rate will increase to 25% in 2023. Only the very smallest companies, with annual profits of less than £50,000, will be wholly unaffected, with marginal relief available to those with profits between £50,000 and £250,000 (subject in each case to counting in associated companies). Logically, this ought to be reflected in a corresponding reduction in the rate at which income tax is charged on dividends; but the successive moves away from a classic imputation system have afforded the chancellor an opportunity for a ‘stealth increase’ in dividend taxation. Thus, the cumulative effect of the increase in the rate of CT, the dividend tax changes made by FA 2016 and the health and social care levy brought in by the Autumn Budget is that the effective rate of tax on corporate profits distributed to a higher-rate taxpayer will have increased from 40% in 2015/16 to 54.5% in 2023/24 (and for a basic-rate taxpayer from 20% to 31.5%). These increases are significant enough to cause any SME owner considering incorporation to have second thoughts.

The capital allowances super-deduction introduced at the same time is no less welcome for the fact that a little reflection reveals that the chancellor’s apparent generosity is a necessary consequence of the pre-announced increase in corporation tax rates. At a tax rate of 19% the 130% super-deduction delivers for each £100 of expenditure virtually the same tax relief in cash terms as will be available after 2023 at a tax rate of 25%. The objective thus seems to be to counter any temptation that might otherwise exist to maximise tax relief for capital expenditure by deferring it. Of course, where revenue expenditure (or at least the recognition of it) can legitimately be deferred so as to maximise tax relief, it remains possible to do so.

Further tax rises in the March Budget freezing personal allowances, CGT allowances and the IHT nil rate band until April 2026 were not especially targeted at SMEs but will hit them. And the health and social care levy has been described as a triple hit for entrepreneurs and business owners. From next April they will be paying the 1.25% NIC increase on their own salary; an additional 1.25% on employer contributions; and they will also pay an additional 1.25% on dividends taken.

By contrast, the second Budget statement of the year had little or nothing of interest to SMEs (except, of course, those in line to take advantage of the substantial increases in public expenditure announced in the Budget). Of more interest was what the chancellor didn’t say: no alignment of CGT and income tax rates and no restriction to basic rate of tax relief for pension contributions – both prominent among ‘smart money’ predictions ahead of the Budget. For how long, though?

Of potentially long-term significance was the removal of the ‘tampon tax’ on 1 January 2021. The importance of this change lies not in the specific effects wrought by it, but in the fact that it was possible to make it at all, with the ending of the Brexit transition period. Will we in future see increasing divergence between the UK and the EU not only in VAT but in taxation generally? And what opportunities (in terms of more targeted relief) and costs (especially where cross-border transactions are involved) may this bring to SMEs?

The other major change announced in the year, this time affecting non-incorporated businesses, was the abolition of basis periods and the substitution of a strict fiscal year basis. This must surely set some kind of record for expeditious implementation, moving as it did from a first ‘call for evidence’ in March to the publication of legislation in November, with the briefest of formal consultation periods intervening. The change is likely to create an additional (or, more accurately, an accelerated) tax charge on businesses which currently have an accounting date other than 5 April, the amount of the charge being determined mainly by where in the tax year the accounting date falls (those with a 30 April year-end being most affected); and how long the business has been established (the older the business, the less valuable, in general, will be the overlap relief that will become available). Most such businesses will now want to change to a 5 April or 31 March year-end; those which, for whatever reason, do not, will suffer the additional compliance cost of time-apportioning profits and, in some cases, of having to make returns on a provisional basis

Decisions, decisions…

Meanwhile, the courts and tribunals continued to deliver decisions aplenty to keep tax advisers on their toes.

IR35 cases keep coming (this year’s crop included Atholl House Productions [2021] UKUT 37), Northern Light Solutions [2021] UKUT 134 and Mantides [2021] UKUT 205) though gleaning general principles from such fact-sensitive decisions remains just as difficult as it has ever been. A preliminary procedural skirmish before the First-tier Tribunal involving Gary Lineker and his ex-wife was a reminder that IR35 can apply to partnerships as well as to companies. Though there are doubtless many more IR35 cases in the pipeline, the extension of the ‘off payroll working’ rules to (most) private sector engagers from 1 April 2021 shifted from intermediaries to ‘end-users’ the burden of deciding whether PAYE needs to be operated: anecdotal evidence is that decisions are often being made on a conservative basis such that the SME contractor is becoming a threatened species.

The year saw the ‘mixed member’ partnership case of Walewski [2021] UKUT 133 advance to the Upper Tribunal, where the First-tier Tribunal decision in favour of HMRC was upheld. In particular, the Upper Tribunal agreed that in principle the legislation could operate so as to tax an individual on the whole amount of partnership profit allocated to a company for an accounting period, even if the individual had been a partner for no more than a ‘moment of time’ in the period – and, apparently, even if there had been no time in the accounting period at which both the individual and the company were members of the partnership. Some will have found that a surprising conclusion.

Partnerships also figured in the case of Wilson [2021] UKUT 239, which discussed (but ultimately side-stepped) the knotty question whether an individual can be both a member and an employee of the same LLP. Mr Wilson was a member of an LLP but had sought to argue that his membership had been ‘hollowed out’ to such an extent that he fell to be regarded not as a member but as an employee of it. The Upper Tribunal agreed with the First-tier Tribunal and found against him. For years after 2014 (Mr Wilson’s case was concerned with earlier years) the position is largely (though perhaps not quite completely) determined for tax purposes by ITTOIA 2005 s 863A, but the question remains of potential significance for non-tax purposes.

The year saw not one but two cases on transfers of assets abroad. In each the question of the identity of the ‘transferor’ figured. Right at the end of 2020, the Upper Tribunal in the case of Rialas [2020] UKUT 367 decided that Mr Rialas was not the transferor in circumstances in which he had procured the formation of an offshore trust which had then borrowed from an unconnected third party to acquire shares from a willing vendor at market value. In the tribunal’s view, the crucial point was that, however closely Mr Rialas might have been involved with the structuring, the fact was that he did not have any influence over the vendor’s decision to sell the shares. He was, therefore, not a ‘transferor’.

Rialas took into account the earlier Upper Tribunal decision in Fisher; and Fisher itself came before the Court of Appeal in October [2021] EWCA Civ 1438. The case raised too many issues for us to do justice to them here. In reversing the Upper Tribunal decision which had markedly influenced the outcome in Rialas the Court of Appeal had much new to say about transferors and quasi-transferors. And the case is also notable for the finding that despite the legislation having been enacted expressly ‘for the purpose of preventing the avoiding of liability to income tax’ it is capable of applying to transactions that have not resulted in any avoidance or even reduction of income tax payable by any person.

In Fisher, the question whether there had been a ‘discovery’ by HMRC (there had) was something of a supporting act. But in the long-awaited Supreme Court decision in Tooth [2021] UKSC 17 it was the main event. Three points came out.

The first was the Supreme Court’s comprehensive dismissal of the concept that a discovery, if not acted upon promptly by HMRC, can become ‘stale’ such that it can no longer justify the making of an assessment. It simply doesn’t. That is not to say that HMRC has carte blanche to delay indefinitely in making assessment once a discovery has been made. Where the necessary conditions are satisfied, HMRC has a discretion whether to issue an assessment but, like any public body exercising a discretion, they must act rationally and must not abuse their powers. If HMRC fails in those duties, the taxpayer may have a remedy in judicial review proceedings. But that is very different from asserting that a discovery may become stale by effluxion of time and greatly weakens the position of taxpayers in challenging discovery assessments.

The second point, also a set-back for taxpayers, was the rejection of the notion that discovery was to be judged against HMRC’s ‘collective knowledge’: that once one officer of HMRC had made a discovery, that was it: no other officer could discover the same matter. That, said the Supreme Court, was wrong: a discovery was made by an officer, not by HMRC as a body. It followed that a succession of officers could make the same discovery and become ‘entitled serially to issue a discovery assessment’.

The third element of the decision is, however, helpful to taxpayers. This was the question of ‘deliberate inaccuracy’ – relevant both for discovery assessments and penalties. The Supreme Court determined that this does not mean simply a deliberate statement which is (in fact) inaccurate: rather, ‘for there to be a deliberate inaccuracy in a document within the meaning of section 118(7) there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so.’ And the onus is on HMRC to demonstrate such an intention.

Looking ahead

Looking forward to 2022, what can SMEs expect? The worry is that the government will need to raise the money to repay the enormous debt racked up over the past couple of years. Despite that, the chancellor commented in the Autumn Budget: ‘My goal is to reduce taxes. By the end of this Parliament, I want taxes to be going down not up. I want this to be a society that rewards energy, ingenuity and inventiveness. A society that rewards work. That is what we believe on this side of the House. That is my mission over the remainder of this Parliament’.

Fingers crossed then.

The article was published in Tax Journal Issue 1557 and is available in full to subscribers on the Tax Journal website.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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