Corporation tax rates

The measure

Legislation will be introduced in Finance Bill 2021 to set the main rate of corporation tax at 19% from 1 April 2022 and 25% for non-ring-fenced profits from 1 April 2023. Legislation will also introduce a small profits rate of 19% from 1 April 2023.

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The small profits rate will apply to profits of £50,000 or less (the lower limit) and profits exceeding the upper limit of £250,000 will be charged at the main rate.

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Provisions will also be introduced so that a company with profits falling between £50,000 and £250,000 will be able to claim an amount of marginal relief such that there is a gradual increase in the effective corporation tax rate.

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The small companies’ rate will not apply to close investment-holding companies; these companies will continue to be subject to the main rate of corporation tax.

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Alongside the increase in the main rate of corporation tax, Diverted Profits Tax will increase from 25% to 31% from 1 April 2023.

Changes will be introduced in Finance Bill 2021-22.

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Linked to the increase in the corporation tax rate, the Chancellor commented that a review of the bank surcharge was needed to ensure this industry remains internationally competitive. The government will set out its approach on the bank surcharge in the autumn with proposed changes included in Finance Bill 2022.

Who will be affected?

Any company or permanent establishment subject to the UK corporation tax regime, and businesses preparing financial statements which include these companies or permanent establishments.

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Following substantive enactment of Finance Bill 2021, companies reporting under either UK GAAP or IFRS should use the new tax rates when measuring deferred taxes to the extent that temporary differences will reverse after 1 April 2023.

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For entities that expect marginal relief to be a significant factor, judgement should be exercised in determining the appropriate average tax rate to be used when measuring deferred tax assets and liabilities.

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For entities reporting under US GAAP, the changes will apply to the deferred tax calculations for reporting dates (full year or interim) ending on or after the date of full enactment of Finance Bill 2021. The 19% enacted rate should therefore continue to be used until Finance Bill 2021 receives Royal Assent, which is expected to be in summer 2021.

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Businesses falling within the bank surcharge legislation will reflect the changes in their deferred tax calculations in due course once the relevant legislation has been substantively enacted (IFRS) or fully enacted (US GAAP).

When will the measure come into effect?

The new rates will be effective from 1 April 2023.

Capital allowances super-deduction

The measure

The government has announced a new 130% first year capital allowance for qualifying plant and machinery assets (increased from the ordinary 18% annual rate) and a 50% first-year allowance for qualifying special rate assets (increased from the ordinary 6% annual rate).  

Who will be affected?

Companies incurring capital expenditure on plant and machinery assets. 

When will the measure come into effect?

The measure will come into effect from 1 April 2021 until 31 March 2023 in respect of plant and machinery expenditure incurred under contracts entered into on or after 3 March 2021. 

Temporary extension of loss carry back for companies

The measure

Legislation will be introduced in Finance Bill 2021 to temporarily increase the period over which companies can carry back trading losses from one year to three years. For companies, after carry back to the preceding year (which remains unlimited) a maximum of £2,000,000 of unused losses will be available for carry back against profits of the preceding two years. 

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Losses must be carried back in order, with set off against profits of the most recent year before earlier years. There is a total cap of £2,000,000 that applies as the maximum loss that can be carried back from each year of extended loss carry back. This means a cap of £2,000,000 of losses incurred in accounting periods ending in the period 1 April 2020 to 31 March 2021 and a separate cap of £2,000,000 on losses incurred in accounting periods ending in the period 1 April 2021 to 31 March 2022.

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In addition, there will be a group cap of £2,000,000 that will be apportioned between members of the same group of companies – the detail of this is yet to be published.

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There will be a de minimis limit of £200,000 per company which can be made outside of the group wide cap. Any group claims which exceed the de minimis will be limited by the amount of total claims, including de minimis amounts by the group.

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Only trading losses can benefit from the extended relief. 

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Who will be affected?

All standalone companies and groups (including companies within the oil and gas ring fence regime). 

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When will the measure come into effect?

The change will apply to losses arising in accounting periods ending between 1 April 2020 and 31 March 2022. Legislation will be introduced in Finance Bill 2021.

Interest & Royalties Directive repeal

The measure

It has been announced that there will be a repeal of the existing UK law that gives effect to the EU Interest and Royalties Directive.

Who will be affected?

This change will affect UK resident companies (or UK permanent establishments of EU resident companies) which make certain payments of interest or royalties to related companies resident in the EU. It may also impact the recipients of such payments.

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The relevant existing UK law, (which will now be repealed), removes the UK withholding tax obligation that might otherwise apply to such payments of interest and royalties.

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In many cases, the UK withholding tax obligation can still be reduced or eliminated by bilateral double tax agreements between the UK and its treaty partners. However the compliance obligations (in particular for interest payments) will differ. In some cases, bilateral double tax agreements will not offer equivalent protection and so increased UK tax liabilities may arise.

When will the measure come into effect?

The repeal will have effect in relation to payments of interest and royalties made by UK resident companies (or UK permanent establishments of EU resident companies) on or after 1 June 2021.

The draft legislation includes an anti-forestalling rule which deems an effective date of 3 March 2021 for any payments made in connection with arrangements with a main purpose of securing that the existing exemptions apply.

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