One of the major headlines from the March 2021 Budget was the increase in Corporation Tax from April 2023. This is a significant rise from the current rate of 19% to 25%. For us very experienced accountants (we’re not saying ‘long in the tooth’), a sense of nostalgia for the days of a two-tier system is wafting through the office.

Back to basics

Corporation Tax is paid on a company’s profits, investments and selling assets and currently stands at 19%. From 2023, if your company makes £50,000 or less profit, your rate of Corporation Tax will remain at the ‘small profits rate’ of 19%, whereas businesses that make £250,000 or more profit will pay the full 25% rate. There is a tapered rate for those that fall between these profit amounts.

The marginal rate of tax for profits in the band £50k-£250k will be 26.5%.  This means that for companies with profits in this band, the effective after-tax cost of spending money on tax deductible items reduces. This mean revisiting the salary/dividends calculations and the timing of items like staff bonuses, directors’ pension contributions and discretionary spend on marketing, websites and capital expenditure, is worth consideration.

The Chancellor announced that around 70% of actively trading companies will continue to be taxed at 19%. The changes to Corporation Tax were introduced to claw back £22billion in revenue and begin to balance the books. As Corporation Tax is charged on profit, not turnover, the premise is that the rise will only really affect prosperous businesses.

‘Super deduction’ for capital investment

For two years from April 2021 to March 2023, a First Year Allowance of 130% will be available for expenditure qualifying for capital allowances in the main pool, or 50% for expenditure in the special rate pool. In other words, for every £100 you spend on new plant and machinery, you get to reduce your taxable profits by £130. The super deduction is a welcome move for some, such as the infrastructure sector, but it is not seen as a long-term solution, more of an initial boost for the economy.

With a 19% Corporation Tax rate, this gives an effective tax saving of 24.7% on investment. It could be advantageous to make any significant investment in 2021-23 to secure a higher rate of tax relief. The super deduction is not available for second-hand assets and isn’t available on expenditure contracted before 3 March 2021 (even if the actual expenditure is incurred after 1 April 2021).

Loss relief

Effective for both Income Tax and Corporation Tax, losses in 2020/21 and 2021/22 can now be carried back up to three years, an increase from the usual one year, to secure tax repayment to assist cashflow, rather than having to wait to offset against future profits.

For example, a business that loses £100k in 2021 which normally makes profits of £40k would normally be able to carry back £40k loss and obtain a tax refund of the amount paid in 2020.  The remaining £60k loss would be carried forward to set against future profits. Under the new scheme, the loss is carried back £40k to 2020, £40k to 2019 and £20k to 2018, meaning a tax refund (or offset of amounts unpaid) is available immediately.

Losses are subject to a cap of £2m, which is split amongst group companies where there is a group structure. These adjustments can only be made once your accounts are submitted, so it’s worth completing them asap to accelerate this cash flow benefit.

Associated companies

The two-tier Corporation Tax rates has an impact on associated companies, where one has control over the other or where both are controlled by the same person/people. The upper limit of £250,000 and the lower limit of £50,000 profit are divided by the number of companies so this may be an issue for small business owners with multiple ventures.

Whether you feel you’ve dodged a bullet or are dreading the next two years of tax planning, call the tax experts at CRM on 01865 379272 for an uncomplicated guide to the upcoming changes.

Sage Accountant Partner Logoiris kashflowFreeagent