The UK’s headline corporation tax rate is set to rise to 25% from April 2023 (with a commensurate increase in the diverted profits tax rate) – but, in the short-term, economic support will continue, including through an enhanced loss carry-back, and a super deduction will be introduced to encourage investment.
The Chancellor of the Exchequer presented the Budget as a fair deal for the whole of the country. Given the profound economic damage caused by COVID-19 – last year saw the highest level of borrowing since the Second World War – recovery will take a long time, but the Chancellor’s emphatic message has been that “we will recover” – according to a three-part plan to protect jobs and livelihoods of British people.
- Do whatever it takes to support the British people, including through the extension of the furlough scheme until the end of September 2021 (albeit with additional contributions from businesses as they reopen), a new recovery loan scheme for businesses of any size which will, subject to review, be open until the end of 2021, an extension of the period during which the cut in business rates, the reduced rate of VAT for hospitality, holiday accommodation and attractions and the increased nil rate band for stamp duty land tax on residential property purchases apply.
- Fix public finances in the medium term: the Chancellor announced a rise in the corporation tax rate from April 2023 and the freezing of certain personal tax allowances and nil-rate bands until April 2026 and of the VAT registration threshold until April 2024, whilst noting that it was premature to set detailed fiscal rules – these would be developed according to the following three principles: the State should not normally borrow to finance everyday expenditure, public debt cannot be allowed to rise over the medium term and it is sensible to take advantage of low interest rates to finance capital projects.
- Start to build the future economy, including through the establishment of a UK infrastructure bank in Leeds with an initial capitalisation of £12bn and the introduction of free ports – eight locations in England for the establishment of these special economic zones were announced.
Corporation tax changes
From April 2023, the UK corporation tax rate will be increased to 25% - which, the Chancellor stressed, would still be the lowest rate in the G7. Moreover, the increase will be felt in full only by the 10% of businesses that have profits of £250k or more. Only these businesses will be subject to tax at the full 25% rate. Businesses with profits of £50k or less will be subject to a special lower rate, set at the current corporation tax rate of 19%. A tapered rate will be introduced for businesses with profits between £50k and £250k.
The Chancellor recognised that, for companies subject to the bank surcharge of 8%, the application of the full increased corporation tax rate would mean an “uncompetitive” level of taxation. The government intends to announce in the autumn how it intends to ensure that the “combined rate of tax on banks’ profits does not increase substantially from its current level”.
Two measures were announced to encourage investment / support businesses in the short-term:
- Super deduction in the form of enhanced capital allowances. During the 2021/22 and 2022/23 tax years, companies will be able to claim a 130% super deduction for qualifying plant and machinery investments and a 50% first year allowance for qualifying special rate assets.
- Enhanced loss carry-back: losses of up to £2m may be carried back for an extended period of 3 years (rather than the usual 12 months).
Interestingly based on the Red Book costings the loss carry-back are net tax positive over the forecast cycle – presumably on the assumption that it will encourage people to use the losses at the 19% rate resulting in future tax paid at 25%. Similarly, the super deduction is predicted to be tax positive from the 2024/25 tax year, although the net result over the forecast cycle would be negative.
Diverted profits tax (DPT)
In order to maintain the differential between corporation tax and DPT rates (and ensure that DPT remains an effective deterrent), the DPT rate will also increase from April 2023 - namely from 25% to 31%.
The rate of DPT charged on profits which would have been subject to the bank surcharge will, however, remain unchanged at 33% reflecting the intention to also maintain banks' corporate taxation at the current level.
Personal tax changes
The Chancellor confirmed that income tax, national insurance and VAT rates would not be raised, but certain personal tax allowances and nil-rate bands frozen:
- Following the planned rise in the income tax personal allowance and the higher rate threshold for the 2021/22 tax year which will go ahead, these will be frozen until April 2026.
- The annual exempt amount for capital gains tax and the pensions lifetime allowance will remain, respectively, £12,300 and £1,073,100 until April 2026.
- Inheritance tax thresholds will be maintained at 2020-21 levels until April 2026.
For further information on key implications for employees and their employers, have a look at my colleagues' 2021 HR Budget Briefing.