Carry back of losses
Companies and unincorporated businesses can normally set their trading losses against profits of the current or the previous 12-month period, or else carry them forward against future profits. Where a business has made a large loss because of the pandemic, or makes losses in two successive periods, the 12-month carry back may not be enough to relieve the whole amount. The Budget has extended the normal 12-month carry-back to three years, for both unincorporated businesses and companies, for trading losses of 2020/21 and 2021/22. For example, a loss of 2020/21 can be carried back against pre-pandemic profits of 2019/20, 2018/19 and 2017/18; without the extension, the claim could only have been made against 2019/20.
There is a limit on the total amount to be carried back to the second and third earlier year of £2 million in each year of loss for unincorporated businesses and companies that are not part of a corporate group. A group with companies that have capacity to carry back losses in excess of £200,000 will have to apportion the cap between its member companies. The way in which this ‘group cap’ will operate will be announced in due course.
Corporation Tax rates
The Corporation Tax rate will remain 19% until 31 March 2023. It will then increase to 25% for companies with profits over £250,000. Since 1 April 2015, all corporate profits have been taxed at the same rate; the ‘small profits rate’ that was familiar before that will be reintroduced, at 19% for companies with profits up to £50,000, in April 2023. Between £50,000 and £250,000 there will be a tapering calculation that produces an effective marginal rate of 26.5%. The limits will be divided between associated companies under common control.
The two measures described above and below, which allow losses to be carried back for immediate relief rather than carried forward and give enhanced relief for investment in plant up to 31 March 2023, will help with cash flow; however, it should be borne in mind that both of them will give rise to tax relief against liabilities charged at 19%, and will tend to increase later profits that may be taxed at 25%. Such a sharp increase in a tax rate gives rise to planning opportunities and pitfalls to avoid.
‘Super-deduction’ for plant and machinery
For qualifying expenditure on plant and machinery (P&M) contracted for from 3 March 2021 and incurred from 1 April 2021 to 31 March 2023, companies can claim:
- a super-deduction, providing allowances of 130% on new P&M investment that would qualify for 18% writing down allowances (WDAs) in the main Capital Allowance pool;
- a first-year allowance (FYA) of 50% on new plant and machinery investment that would qualify for 6% WDAs in the special rate pool.
The rate of the super-deduction will require apportioning if an accounting period straddles 1 April 2023.
Cars are excluded (with certain exceptions, such as dual-control vehicles used by driving instructors), as are contracts entered into prior to 3 March 2021, even if expenditure is incurred on or after 1 April 2021.
Expenditure incurred under a hire purchase or similar contract must meet additional conditions to qualify for these extra reliefs.
Where the super-deduction has been claimed, there will be a proportionate increase in the proceeds of sale for Capital Allowances purposes. For both the super-deduction and FYA, the proceeds will be treated as balancing charges (i.e. immediately taxable profits) rather than being deducted from pool expenditure.
Annual Investment Allowance
Companies and unincorporated businesses can continue to claim the 100% Annual Investment Allowance on qualifying expenditure up to £1 million until 31 December 2021, subject to transitional rules where accounting periods straddle that date. This may produce more tax relief for companies than the 50% FYA available for special rate expenditure, where it is incurred between 1 April 2021 and 31 December 2021.
Research and Development (R&D)
Small or medium-sized companies conducting qualifying research and development can claim an enhanced deduction of 230% (i.e. £230 for each £100 of qualifying expenditure). Where this produces a loss, it can be surrendered for a payable tax credit of 14.5%.
For accounting periods beginning on or after 1 April 2021, the amount of payable credit that can be claimed is capped at £20,000 plus three times the company’s PAYE and NIC liabilities for the period. This definition also includes some PAYE and NIC liabilities of connected persons doing subcontracted R&D for, or providing workers to, the company.
There are no changes to the R&D Expenditure Credit (RDEC) rules for large companies. However, the Government has announced a review of R&D tax reliefs, with a consultation published alongside the Budget. The intentions are that the UK should remain a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.