UK Budget 2021: corporation tax to rise but 'super-deduction' announced

Corporate tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law, said: "The super-deduction will be welcome, especially in the infrastructure sector, but it is, and is meant to be, a quick injection to help restart the economy, not surgery to reconfigure the UK's business tax landscape".

The new 'super-deduction' will be available for companies investing in qualifying new plant and machinery between 1 April 2021 and 31 March 2023. Investments in assets qualifying for capital allowances at the 18% main rate will benefit from a 130% first-year allowance, whilst investments in 'special rate' assets normally qualifying for allowances at only 6% will benefit from a 50% first-year allowance. Special rate assets include long life assets and integral features in buildings such as lifts and air conditioning.

The super-deduction will not be available for used or second hand assets. It will also not be available for expenditure incurred under a contract entered into prior to 3 March 2021, even if the expenditure is incurred after 1 April 2021.

"Whilst the enhanced allowances are welcome, they will add considerable complexity to the system as the enhanced allowances will need to be factored in when the assets are subsequently sold," Walker said. "The policy paper giving details of the new regime even goes as far as to say the measure could 'negatively impact customer experience' because of the additional tax admin tasks to be completed when assets are sold."

The current 19% rate of corporation tax will continue until April 2023 when it will be increased to 25%, the chancellor announced. Companies with profits of £50,000 or less will continue to pay at 19% even after 1 April 2023. Those with profits between £50,000 and £250,000 will pay tax at the main 25% rate reduced by a marginal relief providing a gradual increase in the effective corporation tax rate.

The small profits measure re-introduces a rate which previously applied but was abolished in 2015 when the main rate of corporation tax reached the then small profits rate of 20%. In 2014 the small profits rate applied to profits of £300,000 or less and marginal relief was available for companies with profits of less than £1.5 million.

"The re-introduction of the small profits rate gives one a sense of déjà vu. However, the new small profits rate is much less favourable than the old one and so many more companies will be paying the 25% main rate of corporation tax," Walker said.

Under current rules banks are subject to an 8% surcharge on their profits, on top of the normal corporation tax rate. The government has announced a review of the bank surcharge to be carried out this year as it would "make UK taxation of banks uncompetitive and damage one of our key exports" if the 8% surcharge continued to apply on top of the new 25% rate of corporation tax from April 2023. It intends to report back in the autumn.

The government also intends to temporarily extend the period over which businesses may carry-back trading losses from one year to three years for company accounting periods ending in the period 1 April 2020 to 31 March 2022.

Under current rules a company incurring a trading loss in an accounting period can make a claim to offset the loss against total profits of the previous 12 months after first having set the losses against any profits of the accounting period in which the loss occurred. Trade loss carry back will be extended from the current one year entitlement to a period of 3 years, with losses being carried back against later years first.

The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. However, after carry back to the preceding year, a maximum of £2m of unused losses will be available for carry back against profits of the same trade to the earlier 2 years. This £2m limit applies separately to the unused losses of each 12 month period within the duration of the extension. For companies which are members of a group the £2m cap applies on a group basis.

The rate of diverted profits tax will be increased from 25% to 31% for the financial year beginning 1 April 2023, in order to maintain the current differential of 6% between the diverted profits tax rate and the main rate of corporation tax.

When the Brexit transition period ended, the UK was no longer subject to EU Directives. One such directive is the Interest and Royalties Directive which eliminates withholdings for intra-group payments of interest and royalties. Although UK companies no longer benefit from the directive, the exemption from withholding was still in UK law so that EU companies benefited from the UK withholding tax exemption. It was announced in the budget that this legislation will be repealed from 1 June 2021 so that withholding tax rates on interest and royalties paid to EU companies will then depend upon the terms of the relevant double tax treaty.

The government also announced the location of the first eight English 'freeports'. Once designated tax sites within these freeports have been confirmed, the enhanced rate of structures and buildings allowances of 10% will be available on the construction of new, and renovation of existing, non-residential structures and buildings. In addition a 100% enhanced capital allowance will be available for companies investing in plant and machinery in the designated tax sites.