Mixed news for corporation tax payers in today’s Budget

The Chancellor’s announcements in today’s Budget bring a mixture of good news for the short term and bad news in the longer term for corporation tax payers.

Following the recent press speculation it is no real surprise that the rate of corporation tax will be increased. The new 25% rate will apply from 1 April 2023 for companies with profits over £250,000. For companies with profits of below £50,000 the current 19% rate will continue to apply, and the rates will taper where profits are between the £50,000 and £250,000 thresholds. This 6% increase will clearly have a significant impact on companies’ tax costs in the longer term.  The rate of diverted profits tax (currently 25%) will correspondingly rise to 31% to maintain its deterrent effect.

Before the tax rate increase takes effect, corporation tax payers can benefit from temporary changes to the loss carry back rules and capital allowances rules.

Greater flexibility in the use of trading losses should provide extra tax repayments for some loss making businesses. Under the current rules trading losses can be carried back and set off against profits in the previous 12 months. For accounting periods ending between 1 April 2020 and 31 March 2022, the loss carry back rules are extended, allowing trading losses to be carried back for three years. This will give companies with losses as the result of the pandemic an opportunity to claim repayments of tax paid in previous years. There will be some restrictions on the use of carried back losses. The loss carry back for the first 12 months is unlimited, but losses carried back more than 12 months are subject to a cap of £2 million for each accounting period. Also, losses should be carried back to be used against the most recent profits.

The new “Super Deduction” capital allowances will be very welcome to taxpayers looking to invest in plant and machinery during the period from 1 April 2021 to 31 March 2023. Purchases of plant and machinery that would usually qualify for the 18% allowance will instead qualify for the new first year allowance at 130%. Plant and machinery that would qualify for the 6% allowance will also benefit from a new first year allowance at 50%. In addition, the Annual Investment Allowance (which provides a 100% allowance for purchases of plant and machinery) will be increased from £200,000 to £1 million for qualifying expenditure from 1 January 2021 to 31 December 2021.

The extraordinary economic situation has given us a somewhat strange budget: giving to corporation tax payers in the short term and taking away in the longer term. It will be interesting to see what future developments there will be as the government looks to repay the borrowing that has funded the response to the pandemic.

For more information, please contact Helen Coward.