2021 Autumn Budget: Corporation Tax
Corporation Tax Rates
No further changes were announced to the corporation tax rate. As announced in the Spring Budget 2021, the rate of corporation tax will increase from April 2023 to 25% on profits over £250,000. The 19% rate will continue to apply where profits are below £50,000.
Although the increase in corporation tax in 2023 could decrease the UK’s competitiveness globally, this will depend on whether other countries may also need to increase their own rates in response to the COVID-19 fiscal demands.
Extension to Temporary Increase in the Annual Investment Allowance
The £1 million Annual Investment Allowance (“AIA”) limit for investment in plant and machinery will be temporarily extended to 31 March 2023.
The AIA limit is set at £200,000, but that limit was temporarily increased for calendar years 2019 and 2020 and subsequently extended to 31 December 2021.
Extending the temporary AIA limit is aimed as an investment stimulus by incentivising business to accelerate their investment plans to take advantage of the additional deduction available for expenditure on plant and machinery in the year it is incurred.
Treasury estimates the cost in 2021-22 to 2023-24 at £470 million.
Rules apply to group companies or businesses under common control which share a single AIA.
Whilst welcomed, the importance of AIA has been slightly diminished following the introduction of the temporary 130% super-deduction and 50% special rate first year allowances allowing businesses to claim higher rates of relief than otherwise would be available.
R&D Tax Reliefs
Following the Consultation launched at the Spring Budget 2021, the Government has announced three key reforms to the R&D tax reliefs. These changes will be legislated for in Finance Bill 2022-23 and take effect from 1 April 2023. Further details of these changes and next steps for the review will be set out in the Government’s further tax administration and maintenance announcements later in the autumn.
Inclusion of data and cloud computing costs
The scope of qualifying expenditure has been expanded to include data and cloud computing costs.
FTI Consulting initiated the lobbying for the inclusion of data in R&D claims in 2016, recognising the significance of these costs to R&D activities. The acquisition of data and use of cloud computing for research purposes have become increasingly prevalent and, to date, have fallen in between the definitions for consumable items and software, and have been excluded as qualifying expenditure. We are pleased that these will be included from April 2023.
Limitation on R&D outsourced to overseas territories
The Government has announced plans to introduce limitations on relief for R&D activities performed overseas. Data suggests that while UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, the ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK.
The details for this measure are still to be finalised but are expected to come into force from 1 April 2023. We anticipate that early stage life science companies taking new medicines through clinical trials may be adversely affected. Clinical trials are often needed for specific local markets due to the differences in profiling of patients and the prevalence of the disease in the area. Certain clinical trials often need to be conducted overseas to receive approval from the relevant local authorities. Depending on the limitations to be introduced, impacted companies may lose up to 21p/£ of R&D tax relief.
This may also impact in-house R&D where an overseas related party provides resource to a UK claimant as connected party externally provided workers.
Rules to target abuse and improve compliance
The Government will also set out plans to tackle abuse of and improve compliance with the R&D tax reliefs later in the autumn.
We understand that measures might include:
- The prohibition or mandatory disclosure on results-based fees for R&D work (e.g. fees paid to advisers based on a percentage of the R&D credit). This is in line with Hallmark 3 Disclosure of Tax Avoidance Schemes (DOTAS) where a contingent fee that is significantly attributable to the tax advantage needs to be disclosed.
- Mandatory minimum information requirements to support a claim.
One proposal that has also been put forward is to introduce a limitation for R&D claims to innovation relating directly to products and services rather than platforms for internal use.
Online Sales Tax
The Government has announced that a consultation will shortly be released to consider the potential for the introduction of a new tax on online sales.
Previous rumours have suggested that the Treasury was considering introducing an Online Sales Tax in order to “shift the balance” between the tax burden suffered by traditional high street retailers and their online cousins. The Government is clearly keen to explore this further and it will be interesting to see the scope of the consultation and the mechanics of how such a tax might operate. It is not yet clear whether it might be levied as a sales tax (a 2% levy has previously been suggested), which could effectively amount to an increased VAT charge for B2C sales, or whether it would be chargeable on some other basis. Other considerations include the level of any threshold and scope of the tax. Hopefully, it will become clearer once the consultation is released.
Restructuring Property Leases (IFRS 16) and Reform of Loss Relief Rules
The corporate loss reform rules enacted in 2017 provided for an additional deductions allowance for companies in financial distress where an onerous lease provision reversed. Changes in lease accounting means the exemption for distressed companies is no longer available where IFRS 16 has been adopted.
If a distressed company renegotiated its leases to reduce its future lease payments, the subsequent reversal of the onerous lease provision is treated as a taxable credit. For companies in financial distress where the renegotiation formed part of a corporate rescue, the loss restriction included an exemption from the 50% restriction and so increased the deductions allowance to enable the reversal to be offset with available tax losses brought forward.
Changes in lease accounting under IFRS 16 requires a right of use asset and separate lease liability to be recognised. The accounting changes under IFRS 16 effectively replaced onerous lease provisions with an impairment of the right of use asset. Companies which adopted IFRS 16 could not benefit from the additional deductions allowance (section 269ZX CTA 2010) as there would now be a reversal of the impairment of right of use asset. Amendments will be made so that the legislation is extended to reversal of right of use assets and other similar credits provided by IFRS 16 where companies enter into lease renegotiations to avoid insolvency.
The change is welcomed and will benefit companies seeking to restructure their financial liabilities including lease obligations and that have tax losses which include lease provision or impairment deductions taken in previous accounting periods. The changes will apply retrospectively with effect for accounting periods beginning on or after 1 January 2019 which aligns with the introduction of IFRS 16. Companies which restructured their leases since 1 January 2019 may wish to reconsider if this change may benefit them and seek to amend their tax returns.
Notification of Uncertain Tax Treatment by Large Businesses
Following the announcement in the Budget 2020 and the ongoing consultation process, the Government has confirmed that legislation to introduce a new requirement for large businesses to notify HMRC of uncertain tax positions will be introduced in Finance Bill 2021-22. The legislation will require businesses with turnover of more than £200 million or balance sheet total over £2 billion to notify HMRC when they take an uncertain tax position in their returns for VAT, corporation tax or income tax (including PAYE).
In addition to the current two criteria, that either a provision has been made in the accounts for the uncertainty or that the position taken by the business is not in accordance with HMRC’s known position, the Government is considering a third criteria for possible future inclusion where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect.
Taxpayers need to notify HMRC only where the tax advantage is expected to be over £5 million for a 12-month period.
This was expected following the responses to the consultation that were published on 20 July 2021. However, as noted in those responses, businesses do have valid concerns regarding identifying HMRC’s known position from the significant volume of guidance and materials that HMRC produces. The Government recognises that it will need to be very clear on what is meant by HMRC’s known interpretation and ensuring that guidance is kept up to date.
Investment in Tax Technology
The Government will invest a further £180 million in 2021-22 in additional resources and new technology for HMRC. This is forecast to bring in over £1.6 billion of additional tax revenues between now and 2025-26.
HMRC continue to invest in administrative capabilities with the expectation of an increased yield. HMRC IT system investments include enabling taxpayers to access services more easily and facilitating improved tax collection. This sounds a lot like the goals of Making Tax Digital (“MTD”) and indeed the increased tax receipts seem to align with the go-live date for MTD for Corporation Tax. Taxpayers should ensure that their own systems are fit for purpose by reviewing their tax processes together with the sources and quality of their tax data. Improving automation and integration will help reduce financial and reputational risks that arise from the earlier filing dates. This investment will also enable additional data submission and increased HMRC analysis and scrutiny.
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