Budget 2021 | Corporate Tax changes announced

Corporate Tax announcements from the 2021 Budget

Increase in Corporation Tax rates

• The Chancellor in his Budget recognised that business has benefited from unprecedented support during the Coronavirus. In the spirit of fairness, it therefore recognises the role that business have in repaying the historical borrowing costs, by raising the level of corporation tax from 19% to 25% from 1 April 2023.
  
  
• This higher rate will apply where company profits are in excess of £250,000, with the low rate of 19% being retained for those with profits under £50,000. For those companies with profits between £50,000 and £250,000, there will be marginal relief applying to bridge the gap between the lower and upper limits.
  
  
• These limits will be divided by the number of associated companies; in other words, where one company controls another or both are under the same control. This associated company definition is also going to replace the 51% group company test previously used to identify which companies are required to pay tax by quarterly instalment. This may well increase the number of companies being required to pay tax by instalment and the cash flow impact of this will need to be considered.
  
  
• To maintain the penal nature of Diverted Profit Tax, the rate that this has been charged has been increased from 25% to 31%, to provide a differential to the corporation tax rates.

This is a return to the days of 2014, when multiple rates of corporation tax was last in use. The difference now, is that the level at which the higher rates apply is much lower (£250,000) compared with £1,500,000 back in 2014. This means that more companies will be drawn into paying the higher rate of corporation tax, than in 2014. Retaining the lower rate will however be welcome relief for those companies recovering from the Pandemic, albeit that having multiple rates of corporation tax increases the complexity when forecasting tax costs of your business.

Temporary extension to carry back of trading losses for Corporation Tax

• This is a welcomed cash-flow benefit for all companies and unincorporated businesses that may now be able carry back losses, that have arisen recently due to reduced demand for their goods and services, to earlier years. The current rules are restricted to only offsetting losses to the previous 12 months profits.
  
  
• The measure applies to companies with accounting periods ending in the period 1 April 2020 to 31 March 2022, and for tax years 2020/21 and 2021/22 for unincorporated businesses. 
  
  
• The effect of the measure will to be extend the period for which the trading loss can be carried back against earlier profits and will be extended from the current one year element to a period of three years, with losses being carried back against later years first.
  
  
• Although there are no restrictions on the amount of the loss to be carried back to the previous year, there will be restrictions on the amount of losses to be carried back to the earlier two years, where a £2m cap will apply for each of the two year periods to 31 March 2022. The £2m cap will apply to groups, where the limit will be shared, and this will need to considered in detail and the submission of a formal allocation statement. There are also measures introduced to allow certain loss carry backs to be claimed outside the company tax return.

A welcome cash boost to taxpayers whose profits may have been fundamentally impacted by the COVID-19, which could provide an immediate cash-flow injection. This will need to be balanced with the potential additional benefit of carrying the losses forward where they could offset profits which would suffer corporation tax at the new higher rates. The measure also introduced more complexity to SME’s in managing their tax affairs with the interaction of the cash-flow boost, impact on R&D claims they may have made and the fact that there is now a small company corporation tax rate.

Super-deduction for companies investing in new plant and machinery

• The Chancellor has announced a new tax deduction aimed to stimulate investment by UK companies.
  
  
• Between 1 April 2021 and 31 March 2023, companies will be able to claim a corporation tax deduction at 130% of qualifying expenditure. This has not been extended to unincorporated businesses, or other structures such as LLPs.
  
  
• This measure only applies to main rate pool assets, but 50% deduction also announced for expenditure on most new assets that would ordinarily qualify for 6% special rate pool.
  
  
• Although this is a welcome announcement, as with much of this Budget, the complexity is in the small print. This measure, in particular, is a super-complex super-deduction. For example, certain assets are excluded, so it only applies to new assets and not second hand purchases, which is a shame for businesses that may wish to sell assets to improve cash-flow during difficult times.
  
  
• Further complexities arise where assets are sold having previously benefitted from the super-deduction.
  
  
• Timing for expenditure is going to be key. Whilst we would encourage companies to delay expenditure until April, contracts entered into before 3 March will not benefit from the super deduction even if the date of the expenditure is delayed.
  
  
• Whilst the rate of super deduction does not appear to be affected if expenditure is incurred in accounting periods which straddle 1 April 2021, the rate of deduction is reduced for periods straddling 1 April 2023. It may be worth considering changes to accounting periods to mitigate a loss in the deduction if expenditure is planned to be significant in late 2022 or early 2023.
  
  
• Additional conditions will be imposed on expenditure on assets acquired under hire purchase or similar contracts.

From a cash flow perspective the benefit of the enhanced deduction, whilst welcome, will not be felt until the company is due to pay its corporation tax liability and also again introduces increased complexity to the tax system.

Temporary increase in Annual Investment Allowance

• There was confirmation that the Annual Investment Allowance will increase from £200,000 to £1m from 1 January 2021, for expenditure on plant and machinery incurred during the year ended 31 December 2021.
  
  
• This is another boost for businesses who will be able to obtain a 100% tax deduct when they invest in plant and machinery. 

This temporary increase together with the announcement of the super deduction, could play an important factor to help kick-start business investment, and may also attract foreign companies to invest in the UK.

Corporate interest restriction

• Companies are generally allowed to claim tax relief for up to £2m of net interest costs in the UK.  Where the total interest cost is more than this, the maximum is computed by reference to the profitability of the company or the group. This measure is meant to restrict tax relief for companies with excessive debt particularly where groups lend money instead of injecting share capital. 
  
  
• The Budget confirmed two previously announced minor technical changes to the rules.
  
  
  • Each year a company may have to file an Interest Restriction return to HMRC. The Government have confirmed that there will be no penalties if there is a reasonable excuse for the late filing of that return. 
    
    
  • The second change clarifies the way the rules apply in the context of a Real Estate Investment Trust. 

Hybrid and other mismatches

• Companies in the UK which are part of a multinational group will have many transactions between them, for example, interest payments, royalty payments or management charges. In certain cases, a payment made by a UK company may not be taxed in the recipient company based in another country because of the nature of the foreign entity or because of the way in which it is taxed. This would be a “mismatch”. 
  
  
• Mismatches can involve either double deductions for the same expense, or deductions for an expense without any corresponding receipt being taxable.
  
  
• This Budget confirmed a number of technical changes to the hybrid and other mismatches regime. These changes are designed to ensure that the regime operates proportionately and as intended.

Repeal of provisions relating to the Interest and Royalties Directive

• With the UK recent withdrawal from the EU, the Budget announces the Governments intention to repeal the effect of the EU Interest and Royalties directive from UK domestic legislation.
  
  
• The repeal of these provisions will result in UK companies ceasing to benefit from withholding tax exemptions for interest and royalty payments between EU companies.
  
  
• Where companies make or receive such payments, they should review their withholding tax exposure, as unless there is a lower rate provided for in specific country treaties, this would likely result in an additional tax burden.
  
  
• The new rates of withholding tax applicable will be dependant on which country the UK entity is making payment to / receiving payment from.

Change to Loss Reform rules

• In 2017, the UK implemented significant changes to the use of corporate tax losses. The operation of these rules has been evaluated since 2017, and a number of corrective amendments to the rules have been proposed.
  
  
• These changes are largely procedural, however should be reviewed when making loss claims from 1 April 2021. The areas impacted include:
  • group relief for carried forward losses
  • amendment to correct a group relief circularity issue
  • amendments to the time limits and requirement to submit a group allowance allocation statement
  • the amendment of the formula for allocation of the deductions allowance.