In terms of business tax this is where the most significant direct tax changes can be found from this Budget. The principal changes are two more immediate reliefs to aid business growth, and a longer term tax increase for companies to plan for.
Corporation Tax Rates
From 1 April 2023 the main rate of Corporation Tax will increase from 19% to 25%, however smaller companies with taxable profits of up to £50,000 will pay the 19% “small profits rate”. Companies with taxable profits between £50,000 and £250,000 will pay 25% less a “taper” so that the overall effective rate will fall between the two rates.
This is a return to the two rate system which was abandoned for a single rate back in 2015, and will mean more tax planning opportunities for companies whose profits are expected to be in that transitional bracket, where the additional tax per pound of profit will actually be higher than 25% (a marginal rate of 26.5%) due to the “catch up” effect of the rules.
Although not effective until April 2023, companies can start planning for this rate change now, in terms of planning use of corporate losses, for example. In addition, larger companies that are required to pay tax earlier by quarterly instalments may have to start using the new rates for their tax payments as early as Spring 2022.
Super-deduction for capital investment
A new “super-deduction” will come into effect for companies from April 2021 for a two year period. It does not appear this will be available to unincorporated businesses.
Currently all businesses enjoy a £1 million Annual Investment Allowance (AIA) which gives full, up front tax relief (100%) for up to £1 million per year spent on plant and equipment, fixtures, fittings and commercial vehicles. This will continue until 31 December 2021 for unincorporated businesses.
The super-deduction will sit alongside the AIA for limited companies from 1 April 2021, and would appear to have no upper limit. This will enable companies to claim a 130% allowance for “general pool” machinery. So a company spending £100,000 on machinery would get a deduction of £130,000 from their profits, saving them Corporation Tax at 19%, a tax reduction of £24,700. (An effective relief rate for companies of approximately 25%, lasting until the main rate changes to 25%… a coincidence? Probably not!)
The super-deduction for “special rate pool” items will be 50% – this is integral features within buildings typically, such as electrics, heating, ventilation and plumbing. This is therefore not as generous as the current AIA. We await further details as to whether companies can continue to claim AIA in preference for special rate expenditure, as the interaction between the two reliefs is unclear from the immediate guidance.
Importantly, the super-deduction is only claimable for new and unused equipment – used or second hand equipment will need to be claimed under the existing rules but will still be eligible for AIA. There are also transitional rules for companies whose accounting periods straddle 1 April 2021, and also special rules where items are sold having had a super-deduction claim previously.
Extended loss carry back for businesses
Businesses (whether limited companies or sole trade/partnership/LLP) will be able to benefit from the ability to carry back trading losses for up to three years, in the same way as the temporary extension introduced in the 2008 recession. Unlike the previous recession though, the maximum amount that can be carried back is considerably higher at £2 million for each of the 2020-21 and 2021-22 years.
This relates purely to trading losses, so investment companies (including property rental companies) will not be able to benefit from this extended relief.
For limited companies this extended relief applies to accounting periods ending between 1 April 2020 and 31 March 2022, meaning there is scope for a significant number of companies who have already filed their 2020 Corporation Tax Returns to review these and potentially claim additional loss relief.
This is principally a cash flow benefit relief only – so in theory this will not cost the government anything in the long term. Without this relief the losses would have been relieved against future profits instead, so actually the government may well gain here in the long term (because for companies the loss relief now will be at the current Corporation Tax rate of 19%, whereas from April 2023 the tax rate will have increased).
The detailed rules are likely to be a lot more involved and will undoubtedly contain a lot of anti-avoidance measures. There will also be restrictions on the relief in a corporate group scenario.
If you have any questions for our Tax experts as a result of this Budget, please contact us on 01242 776000 or firstname.lastname@example.org.