sky scrapers reflection

Budget 2021: Impact for companies

A tale of two halves

Simon Crookston, Partner, Corporate Tax
03/03/2021
sky scrapers reflection

Overall it was a good Budget from the Chancellor which goes a long way to setting out a road map for the country, as we start on a journey to recovery. Although clearly there is a long way to go. For businesses, the Budget was a tale of two halves as the Chancellor sought to protect, create and support jobs through his three part plan.

On the one hand, he is seeking to support British business through the crisis, while also laying the foundations for fixing the public finances and building our future economy once we are on our way to recovery.

Supporting business

Carry back of trading losses

The Chancellor announced a temporary extension to the carry back of trading losses from one year to three years, with the carry back being against later years first. The extension applies to losses which arose in the accounting periods ending between 1 April 2020 and 31 March 2021, and 1 April 2021 and 31 March 2022.

There is no restriction on the carry back that can be made to the immediately preceding tax year, although carry back to the two earlier years is subject to a maximum carry back claim of £2 million. Each of the above two periods has a separate £2 million carry back limit.

For groups of companies, the £2 million maximum limit is applied at a group level. Groups are therefore required to apportion this limit across the group to the extent that, companies in a group have capacity to carry back losses in excess of a de minimis of £200,000.

A similar loss carry back scheme also applies to unincorporated businesses, although the £2 million restriction is determined by each of the two self-assessment tax years up to 5 April 2022.

This additional relief will be welcome for business, many of whom have incurred losses as a consequence of the current pandemic, and will be able to claim back corporation tax which has previously been paid.

Other reliefs

The Chancellor announced other reliefs for businesses, including the 130% super-deduction for capital allowances and a consultation to revamp the current UK Research and Development (R&D) tax relief scheme to ensure that the UK remains a competitive location for cutting edge research.

Fixing the public finances

As part of the Chancellor’s pledge to stick with the ‘triple tax lock’ he limited his ability to change tax rates for income tax, NIC and VAT. As expected, he therefore focussed on increasing the rate of corporation tax. This will increase from the existing rate of 19% to 25% from 1 April 2023, for those businesses with taxable profits in excess of £250,000.

This delayed increase in rate is a welcome relief for many businesses and gives them some time to get back on track following the pandemic. It was also welcome that the Chancellor is exempting those companies with small profits, of less than £50,000, from this rate increase. They will still be subject to a small profits rate of 19%. This small profits rate will not apply to close investment holding companies.

For those businesses that have taxable profits between lower and upper bands of £50,000 and £250,000 a margin rate relief scheme will be introduced to bridge the gap between the 19% rate and 25% rate providing a gradual increase in rate throughout this band.

The lower and upper bands will be proportionally reduced for short accounting periods and also to take account of the number of associated companies. Broadly, companies are associated with each other if at that time or in the previous 12 months, one company has control of the other or both companies are under the control of the same person or group of persons.

The reintroduction of the associated companies rules will also have implications for other areas of the tax legislation, including determining whether a company is large or very large for quarterly instalment payments or whether small claims elections can be made, for example, for Patent Box.

In our view the reintroduction of a two tier corporation tax rate scheme, although supporting smaller businesses, will lead to additional administrative compliance for companies, particularly those which are in a group and the number of associated companies periodically changes.

As a consequence of the proposed rate increase, the diverted profits tax will also increase on 1 April 2023, from 25% to 31% to ensure that the 6% rate differential to the main rate of corporation tax remains.

It will be interesting to see the detail as it comes out and whether there are other unforeseen corporation tax changes arising from the Chancellor’s Budget announcements today.

For more information on how Crowe can help, contact Simon Crookston or your usual Crowe contact.

Budget 2021

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Simon Crookston
Simon Crookston
Partner, Corporate Tax
Kent