Rate of tax
As announced in March 2021, the Corporation Tax rate will remain at 19% until 31 March 2023. It will then increase to 25% for companies with profitsover £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 of up to £50,000. Between £50,000 and £250,000 there will be a tapering calculation that produces an effective marginal rate of 26.5% on profits between these limits, but an average rate on all profits of between 19% and 25%. The limits will be divided between companies under common control.
Companies with an accounting period that straddles 31 March 2023 will time apportion the profits of that period to be taxed at the two different rates. It may be worth considering a change of accounting date to produce a lower tax charge: for example, a company with a 30 September 2023 accounting date that makes a large profit on a transaction before 31 March 2023 will pay 25% tax on 6/12 of it. If a short accounting period is ended on 31 March 2023, that large profit will all be taxed at 19%.
Capital allowances for plant and machinery
The March 2021 Budget introduced enhanced allowances 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 by companies. They can claim:
- a ‘super-deduction’, providing allowances of 130% on new P&M investment that would ordinarily qualify for 18% writing down allowances (WDAs) in the main capital allowance pool;
- a first-year ‘special rate allowance’ of 50% on new P&M investment that would ordinarily qualify for 6% WDAs in the special rate pool (e.g. integral plant in buildings).
The rate of the super-deduction will require adjustment if an accounting period straddles 1 April 2023 to ensure that the super-deduction cannot
be relieved at the 25% rate of corporation tax. Adjustments will also be required on the disposal of assets on which a super-deduction or special rate allowance has been claimed.
The 100% Annual Investment Allowance (AIA), which is available to companies and unincorporated businesses, will also be available for qualifying expenditure on P&M up to £1 million until 31 March 2023. The limit will be subject to transitional rules where accounting periods straddle 31 March 2023.
The AIA may produce more tax relief for companies than the 50% FYA available for special rate expenditure described above. However, as the main corporation tax rate will increase from 19% to 25% on 1 April 2023, advancing expenditure to March 2023 in order to secure 100% deduction will result in a smaller amount of tax relief – the tax reduction will come sooner, but it will be given at the lower tax rate.
Research & Development (R&D)
The Small and Medium-sized Enterprise (SME) R&D relief (a 130% enhancement of the expenditure) and the R&D expenditure credit (currently 13%) apply to ‘qualifying expenditure’ as defined in the legislation. At present, this comprises:
Software used directly for the R&D
Relevant payments to the subjects of clinical trials
Consumable or transformable materials
Subcontracted R&D costsExternally provided workers
Following a consultation launched in March 2021, R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs.
At present there is no limitation on incurring the expenditure outside the UK, for example by subcontracting work to suppliers in other countries. The legislation will be amended to focus support towards innovation in the UK, which is likely to require qualifying expenditure, or at least a large percentage of it, to be incurred within the UK.
Other changes will be made to target abuse and improve compliance. The changes to the law are intended to take effect for expenditure incurred from 1 April 2023; the Spring Statement included a declared intention to reform, refocus and increase the incentives for R&D spending.
Uncertain tax treatments
The law has been changed to require very large companies and partnerships to notify HMRC where they take a tax position in their returns for VAT, corporation tax or income tax (including PAYE) that is ‘uncertain’. An ‘uncertain treatment’ is defined as arising either where a provision has been made in the accounts for the uncertainty, or the position taken in the accounts is contrary to HMRC’s known position (as stated in the public domain or in dealings with HMRC). Taxpayers will only need to notify where the tax advantage of the position taken – when compared with HMRC’s view – is expected to be over £5 million in a 12-month period. The new rule will apply for returns filed with effect from 1 April 2022. This is a difficult and controversial area, but it only affects businesses with turnover of more than £200 million a year, or a balance sheet total of more than £2 billion.