Corporation tax: Budget 2021 updates

The Chancellor said that this would be a Budget that “meets the moment” and, as most commentators predicted, it included corporation tax rises designed to start bringing down the debt the Government has incurred during the pandemic.

However, it was not all bad news for companies as some tax giveaways were also announced.

Corporation tax loss extension

Currently, companies can only carry back losses against profits arising in the previous year subject to certain restrictions in some cases. This first give-away applies to trade losses only arising in accounting periods ending between 1 April 2020 and 31 March 2021. These trade losses can be carried back three years, and will benefit those trading companies, that previously had healthy taxable profits but struggled with heavy losses during the pandemic.

Losses will be carried back to the latest accounting periods first, so for companies with a 31 May 2020 year end, losses are first carried back to 31 May 2019 and then any surplus trade losses can be carried back to the years ended 31 May 2018, and then 31 May 2017.

As you would expect, there are some restrictions:

  • There will be unlimited carry back to the preceding year. There will be a cap of £2 million on the total losses that can be carried back to the earlier periods. This cap applies to each accounting period within the extended carry back period.
  • There will be a requirement for groups that have companies with losses exceeding a de minimis of £200,000 trading losses to apportion the £2 million cap between companies.
  • Any repayment claims exceeding £200,000 will need to be made through an amended corporation tax return.

Tax Planning:

If your company has trade losses for this period, and has previously had taxable profits, consider whether you can increase the amount of tax you are repaid by utilising this relaxation to the loss carry back rules.

Capital allowance super deductions

This second give-away will benefit companies that plan to purchase certain types assets between 1 April 2021 and 31 March 2023.

Currently companies that incur capital expenditure may be able to obtain a tax deduction for these costs through the capital allowance scheme. The super deductions scheme adds a new first year allowance on certain types of new plant and machinery. The amount of the super deduction will be either 130% or 50% of the cost of the new asset, depending on the type of asset purchased. The 130% rate will apply to main pool additions, while the 50% to special rate pool additions.

Exclusions will apply to claims for super deductions, including:

  • Those already existing for increased allowances, including permanently discontinuing business activities, cars or plant or machinery used for leasing.
  • Expenditure on used and second-hand assets.
  • Expenditure on contracts entered into prior to Budget Day, 3 March 2021.

These super deductions can be claimed through your corporation tax return and will be available to reduce your taxable profits for the year in which they are claimed, and therefore will reduce the amount you need to pay to HMRC (see the corporation tax rates section for more information on why this might be great news!) Alternatively, they can be used to increase tax losses, which can be carried back to the previous accounting period (resulting in a tax repayment) or carried forward and utilised against future profits.

Tax Planning:

There will be additional rules concerning acquisitions on hire purchase contracts, disposals, accounting periods straddling 31 March 2023, among others. The Chiene + Tait capital allowance specialists are on hand to guide you through the process of claiming these new super deductions, as well as discussing your expenditure with you to ensure all claims are maximised.

Corporation tax rate rise

From 1 April 2023, companies with profits over £250,000, as well as ‘close investment holding companies’, will see their corporation tax rate rise from the current rate of 19% to 25%. There will also be the re-introduction of marginal relief for corporation tax, which will see the corporation tax rate of companies with profits between £50,000 and £250,000 rise to a hybrid rate between 25% and 19%. The tax rate will depend on these companies’ circumstances and HM Revenue & Customs have yet to announce full details on how these rates will be calculated.

The ‘profit thresholds’ for each corporation tax rate will be adjusted for shorter accounting periods, as well as for the number of associated companies. Whilst we do not yet have full details, these two caveats are likely to see the corporation tax rates rise hit a wider range of companies.

Tax Planning:

Companies paying their corporation tax liabilities in instalments will need to consider these rate changes early. The rules will be complex, and likely even more so for groups of companies.

Speak to our tax experts who are on hand to answer any questions you may have on the new corporation tax rates. We can help ensure that your company is claiming all tax reliefs it is eligible for, as well as advising on tax planning opportunities arising from your future plans.

The Budget: key points from today’s Budget speech

Much of the content of today’s Budget was trailed in advance, so there were few surprises. Indeed, the shift in news consumption (not to mention the demands of the pandemic) may mean that we say goodbye to the traditional big announcements on one day in favour of smaller piecemeal policies.

We also need to consider the impact of the ‘Tax Day’ due on 23 March. This is expected to see the publication of tax consultations which would traditionally have been published alongside the Budget. It remains to be seen how much of government tax strategy and policy will be laid down then, and how the Tax Day and Budget Day interplay.

We’ve summarised key points from today’s Budget speech below – but, as ever, the devil is in the detail so do contact us for clarification, or if you have any questions.

Corporation tax rates

  • Corporation tax to rise from 19% to 25% in April 2023
  • Rate to be kept at 19% for about 1.5 million smaller companies with profits of less than £50,000
  • Companies with profits between £50,000 and £250,000 will be subject to tapered rates

Personal tax rates

  • Personal income tax allowance frozen at £12,570 from April 2021 until 2026
  • Higher rate income tax threshold frozen from 2021 until 2026
  • No changes to inheritance tax nil rate band, lifetime pension allowance or capital gains tax annual exemptions until 2026
  • No mention of any increases to capital gains tax rates or inheritance tax reliefs despite much discussion on these prior to the Budget

VAT and duty

  • No changes to the main VAT rate
  • The VAT rate reduction to 5% for the hospitality industry has been extended until 30 September; thereafter, an interim rate of 12.5% will apply until April 2022
  • No change to the VAT registration threshold of £85,000 until April 2024
  • Planned increased to alcohol and fuel duties cancelled

EIS and R&D tax

  • The EIS system will be reviewed this year to enhance the benefit it brings
  • A consultation on R&D tax relief to ensure its is up-to-date and competitive

Tax reliefs in investment

  • A new ‘super-deduction’ form of capital allowances which will allow incorporated businesses to deduct 130% of expenditure that would normally qualify for main writing down allowances

Loss relief

  • Enhanced loss reliefs for businesses, both incorporated and unincorporated, to allow carry back of losses against earlier years’ profits

Brexit

  • Eight freeports to be established in England

COVID funding

  • Multiple initiatives relating to COVID in the Budget, from an extension of the furlough scheme to new grants for non-essential businesses
  • Sector-specific funding packages announced for the arts and sports
  • Business rates in England will continue their holiday until June, with a 75% discount thereafter
  • Access to grants for self-employed people is to be widened

The cost of COVID: tax rises in the Budget?

This post is part of our Entrepreneurial team’s regular series of blogs.

In seven weeks, the Chancellor will deliver a Budget to the House of Commons that is widely expected to contain tax rises. There is, as there always is, excitement as to which taxes and by how much. The majority of commentators over the last few months – me included in December – seem to align with the theory that Covid support must be paid for and that the two taxes most likely to face increases are Capital Gains Tax (CGT) and Corporation Tax (CT).

CGT is divisive. Politically troublesome at least. Some people believe that it should never have been introduced (as it was in 1965) because investments can only be made using income on which tax has already been paid – so CGT provides a second bite of the cherry for HM Treasury.

Others think that it is a legitimate tax, but is rightly assessed at lower rates than Income Tax.

Still others believe that it should be increased to align with Income Tax rates. At present, there is a considerable difference between these rates, with the majority of gains taxed at 10%-20% while Income Tax is charged at 20%-45% in most of the UK and 19%-46% in Scotland.

The Office of Tax Simplification recommended in November to move the CGT rates to 20%-40%, whilst simultaneously reducing the annual exemption from CGT from around £12,000 to around £3,000. Taxpayers paid £9.5bn in CGT in 2018/19, so, in theory at least, there is around £10bn a year in extra tax up for grabs, should the government choose to move on these recommendations.

CT is also divisive, but for different reasons. It provides an opportunity for governments to make their country a destination of choice for companies to base themselves – companies that then hire staff, who pay income tax, national insurance and VAT when they buy things, stimulating the economy. The net receipts from these taxes dwarf those from CT, thus, perhaps counter-intuitively, lower rates of CT are more commonly seen as progressive and opportunistic. Kind of a loss leader. Ireland, with its 12.5% CT rate, is the most relevant example of this as it has firmly established itself as a competitor, albeit a friendly one, to the UK.

So, that is the theory, but what about the practice?

Fact: the UK is going to need money. Lots of it. COVID support is running the UK – and the global economy – into a borrowing spree the likes of which has not occurred in my lifetime.

Ask ‘the man on the street’ what they’d prefer – owners of assets and companies paying more tax, or a penny on Income Tax? – and I will bet all the money in my pockets that they would say the former. So when tax rates need to move, it seems likely it will be CGT and CT.

But we find ourselves again in a national lockdown. Officially this will run until the end of January in Scotland, with the option to extend, and in England the Prime Minister hinted yesterday that maybe this would be closer to Spring. Millions are furloughed. Is 3 March, when there is every chance the country will still be locked down, really the time when Mr Sunak will make his move? I am not so sure.

I am sure, however, that the only way to guarantee the current CGT rates will apply is for assets to be disposed of before 3 March. It is, at least in part, for this reason that we are currently seeing unprecedented levels of corporate restructuring activity – Mergers and acquisitions, Management Buy Outs, Share Repurchases and Employee Ownership Trusts being established. It makes sense to move now, all things being equal. But seven weeks is not much time to get a transaction through. There is much to be done.