As announced in March 2021, the Corporation Tax rate will remain at 19% until
31 March 2023. It will then increase to 25% for companies with profits over £250,000. Since 1 April 2015, all corporate profits have been taxed at the same rate; the ‘small profits rate’ that was familiar before that will be reintroduced at 19% for companies with profits of up to £50,000. Between £50,000 and £250,000 there will be a tapering calculation that produces an effective marginal rate of 26.5% on profits between these limits, but an average rate on all profits of between 19% and 25%. The limits will be divided between companies under common control.
Capital allowances for plant and machinery
The March Budget introduced enhanced allowances for qualifying expenditure on plant and machinery (P&M) contracted for from 3 March 2021 and incurred from 1• April 2021 to 31 March 2023 by companies. They can claim:
- a ‘super-deduction’, providing allowances of 130% on new P&M investment that would ordinarily qualify for 18% writing down allowances (WDAs) in the main capital allowance pool
- a first-year ‘special rate allowance’ of 50% on new P&M investment that would ordinarily qualify for 6% WDAs in the special rate pool.
The rate of the super-deduction will require adjustment if an accounting period straddles 1 April 2023 to ensure that the super-deduction cannot be relieved at the 25% rate of corporation tax. Adjustments will also be required on the disposal of assets on which a super-deduction or special rate allowance has been claimed.
No further changes were announced in relation to this measure in October 2021.
The 100% Annual Investment Allowance (AIA) will be available for qualifying expenditure on P&M up to £1 million until 31 March 2023, rather than being reduced to its former level of £200,000 after 31 December 2021 as previously announced.
The limit will be subject to transitional rules where accounting periods straddle
31 March 2023.
The AIA may produce more tax relief for companies than the 50% FYA available
for special rate expenditure described above. As the main corporation tax rate will increase from 19% to 25% on 1 April 2023, advancing expenditure to enjoy the 100% deduction will also reduce the benefit of the tax relief available.
Cultural tax reliefs
The Small and Medium-sized Enterprise (SME) R&D relief (a 130% enhancement of the expenditure) and the R&D expenditure credit (currently 13%) apply to ‘qualifying expenditure’ as defined in the legislation. At present, this comprises:
- Staff costs
- Software used directly for the R&D
- Relevant payments to the subjects of clinical trials
- Consumable or transformable materials
- Subcontracted R&D costs
- Externally provided workers
At present there is no limitation on incurring the expenditure outside the UK, for example by subcontracting work to suppliers in other countries. The legislation will be amended to focus support towards innovation in the UK, which is likely to require qualifying expenditure, or at least a large percentage of it, to be incurred within the UK.
Other changes will be made to target abuse and improve compliance. The changes to the law are intended to take effect for expenditure incurred from 1 April 2023.
Cross-border group relief
‘Group relief’ allows losses to be surrendered from one company in a group for
relief against profits of another company. The rules currently distinguish between companies established in European Economic Area (EEA) states and companies from non-EEA states. In specific circumstances, EEA companies can surrender losses as group relief to UK companies.
For accounting periods ending after 27 October 2021, the law will be amended to remove the separate rules for EEA-resident companies so that all non-UK resident companies can only surrender losses of a UK permanent establishment as group relief if it is not possible for the loss to be deducted from non-UK profits of any person for any period.
Where a company’s accounting period straddles 27 October 2021, it will be notionally split into two separate accounting periods for these purposes, one up to 27 October and the second from 28 October to the end of the period.
Uncertain tax treatments
The law will be changed to require very large companies and partnerships to notify HMRC where they take a tax position in their returns for VAT, corporation tax or income tax (including PAYE) that is ‘uncertain’. An ‘uncertain treatment’ is defined as arising either where a provision has been made in the accounts for the uncertainty, or the position taken in the accounts is contrary to HMRC’s known position (as stated in the public domain or in dealings with HMRC). Taxpayers will only need to notify where the tax advantage of the position taken, when compared with HMRC’s view,is expected to be over £5 million in a 12-month period. The new rule will apply for returns filed with effect from 1 April 2022.