Budget 2021: Corporation tax

As was widely trailed in the press prior to the Budget (and so should come as no surprise), the Chancellor announced an increase in the corporation tax rate. The secret kept by the Chancellor until today, however, was the proposed rate, which has been set to increase to 25% on profits over £250k and will take effect from 1 April 2023. The current corporation tax rate of 19% will continue to apply for the remainder of this financial year and for the financial year beginning 1 April 2022. For businesses with less than £50k of profits, a small profits rate of 19% will apply; and for those with profits between £50k and £250k, a taper will apply to profits between £50k and £250k to increase the rate proportionately from the small profits rate to the main rate, as described in (2) below.

The Budget 2021 predicts that the main rate change (together with the reduced rate for small companies and the taper relief that are outlined below) will yield over £17bn by the financial year 2025-26, despite the increased rate still being the lowest corporation tax rate in the G7.

Notwithstanding the revenues from the raise that are predicted to contribute to the Treasury's coffers in the coming years, the corporation tax rate that businesses will ultimately pay has to be factored in alongside the plethora of other announcements which may impact their effective rate. Examples include the 130% super deduction for capital allowances, the proposed changes to R&D reliefs, and the proposed further changes to the loss relief rules.  

Other announcements that have a direct impact on tax on certain types of company are set out in further detail below, including (i) an extension to the period for which trading losses can be carried back to offset corporation tax, (ii) a review of the bank surcharge and (iii) an increase in the rate of diverted profits tax.

To review the policy paper on the changes for the main corporation tax rate change and the small profits rate see here.

Businesses with profits of £50k or less will pay a small profits rate from April 2023 which will continue to be at the current corporation tax rate of 19%. For companies that have profits between £50k and £250k, the government will introduce marginal relief provisions such that a business can claim an amount of relief that bridges the gap between the 25% and 19% rates, resulting in a gradual increase in the corporation tax rate between those margins.

Where companies form part of a group, the £50k and £250k limits will be proportionately reduced based on a new associated company test. The associated company test is yet to be introduced but companies will be associated if, broadly, in the preceding 12 months one company has control of the other or both companies are under common control. Proportionate reductions will also apply for short accounting periods.

Interestingly, the cost for implementing the changes to the corporation tax rates are estimated to be £5.1m - it is likely that the bulk of that expenditure will be used by HMRC in developing and monitoring the reduced rate and taper relief, rather than the in implementing the headline change to the main rate.

The trading loss carry-back rules (which allow a company or unincorporated business to make a claim for unused trading losses to be set off against its profits for the preceding 12-month period) will be extended from one year to three years for accounting periods ending between 1 April 2020 and 31 March 2022.

Relief will not be subject to additional restrictions for the current rule permitting losses to be carried back for one year, but caps will apply to the extended period (beyond that usual one year) of trading loss carry back as follows:

• £2m cap of losses for each of the financial years 2020-21 and 2021-22; and
  
  
• where companies form part of a group, the cap is expected to apply across the group as a whole for each relevant year. A nominated company will be required to submit an allocation statement to HMRC showing any companies that have been allocated an amount of the £2m cap, in each case where that amount exceeds a de minimis limit of £200k (taking into account any other reliefs that would result in an increase in the amount of the loss).

Where losses are carried back, they must be set off against the profits of the most recent year first. Claims will need to be made in the relevant tax return, except where the claim is below the de minimis limit of £200k of losses, in which case it may be made outside a return.

The extension is available for incorporated businesses (as outlined above) and broadly similar rules will apply for unincorporated businesses.

To review the policy paper on the extended loss carry back for businesses see here.

In the more immediate term, the government will legislate so that businesses that were entitled to business rates relief and made a repayment in respect of the same will be permitted to deduct those repayments for corporation tax purposes (such that businesses that made relief repayments are no worse off than if they had paid the business rates in the first place).

To review the policy paper on the tax deductibility of business rates repayment see here.

For further detail on other coronavirus-related support measures that were announced at the Budget, please see this page.

If the main corporation tax rate were increased to 25%, the additional bank surcharge would lead to an overall taxation rate of 33% on banks in the UK. The government views this rate as uncompetitive and accordingly has committed to reviewing the bank surcharge. The expectation is that in Autumn 2021 the government will set out how it aims to ensure that the combined rate of tax on banks' profits does not "increase substantially from its current level".

The DPT rate will increase from the current rate of 25% to 31% from 1 April 2023. The policy rationale behind the increase is to maintain the differential between the DPT rate and the corporation tax rate. The increase will not apply to DPT on diverted profits which are ring-fence profits or notional ring-fence profits (which will continue to be taxed at 55%) nor will it apply to DPT on taxable diverted profits which would have been subject to the bank surcharge (which will continue to be taxed at 33%).

To review the policy paper on the change to DPT see here.

For further details on how businesses are likely to be affected by the Budget 2021 announcements, please see our briefing here.

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