What will the UK Corporation Tax rise mean for my business?

The corporation tax rise was one of the most talked about aspects of the UK Spring Budget 2021.  The measure is the UK Chancellor’s first step in repairing some of the damage done to the public purse by the unprecedented spending in response to the coronavirus.  Corporation tax is set to rise to 25% in April 2023, up from the current rate of 19%.

Some elements of the business community argue that 2023 is too soon to target businesses with extra tax but the two-year time window and the measures introduced to offset the rise create an interesting environment for short term investment.

Who is this for?

Not all companies will be affected.  Companies with profits of £50,000 or less will remain at the current rate of 19%.  There would then be a taper for firms earning above £50,000, with only businesses earning £250,000 or above paying the full 25% rate.  Chancellor Rishi Sunak was confident that around 70% of businesses would be unaffected by the changes.

‘To balance the need to raise revenue with the objective of having an internationally competitive tax system, the rate of corporation tax will increase to 25%, which will remain the lowest rate in the G7. In order to support the recovery, the increase will not take effect until 2023,’ Rishi Sunak said. Sunak also maintained that as the government was providing businesses £100bn of support during the pandemic, it was ‘fair and necessary for them to contribute to our recovery’.

Shoulder the tax burden

Corporation tax is a tax on profits, not turnover, and will therefore only affect businesses that are thriving.  Though many have suffered through the pandemic, it is clear that some businesses have emerged from the crisis as winners, and it is hoped that their shoulders will be broad enough to bear this tax burden.

To balance the measure, The Chancellor also announced a ‘super deduction’ rule for businesses when they invest. Businesses will be able to reduce their tax bill by 130% of the cost of their investment.  The ‘super deduction’, worth an estimated £29bn over the next four years, is aimed at spurring investment in the UK and looks likely to benefit industries such as infrastructure, manufacturing, utilities and construction.

The ‘super deduction’ will be introduced for two years for companies that incur qualifying plant and machinery expenditure from 1 April 2021. Alongside it, a first year allowance of 50% will also be available for expenditure on items that would usually attract the special rate of relief of 6%.  Companies will also be able to carry back losses of up to £2m for three years.

Investing in the UK

The introduction of these reliefs demonstrates a commitment to encouraging investment. The additional tax deductions, when applied with the enhanced trading loss carry back provisions, could generate substantial tax savings and tax repayments for companies to reinvest.  The reliefs look to incentivise spending in the short term, which could prove interesting, as they are targeted at sectors that generally take a longer-term view of investment decisions.

Other measures will soon be implemented to work in conjunction with the tax rise.  In line with the increase in the main rate, the diverted profits tax rate will rise to 31% from April 2023 so that it remains an effective deterrent against diverting profits out of the UK.  The Treasury Budget Red Book also indicated that the government will review the 8% bank levy and will announce plans on how to proceed in the Autumn. The aim is to keep the UK banking sector highly competitive, so it seems likely that the bank levy will be substantially reduced due to the corporation tax rise.

Certainty from chaos

The Budget announcements are a delicate balance, and they rely heavily on the UK meeting or exceeding the OBR’s economic forecast. However, perhaps most significantly, the 2021 Budget brings some certainty to businesses as they emerge from lockdown.  The cloud of coronavirus does appear to be lifting, but if you would like to further explore the implications of the corporation tax rise or the associated reliefs for your business in the UK, please do not hesitate to contact Briars.