2021 Budget: Corporation Tax and International
Corporation Tax Rates
The rate of corporation tax will increase from April 2023 to 25% on profits over £250,000.
Although the rate for small profits under £50,000 will remain at 19% and there will be relief for businesses with profits under £250,000 so that they pay less than the main rate.
In line with the increase in the main rate, the Diverted Profits Tax rate will rise to 31% from April 2023 so that it remains an effective deterrent against diverting profits out of the UK.
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.
The Government is seeking to stimulate business investment by introducing a “super-deduction” for qualifying expenditure on plant and machinery from 1 April 2021 to 31 March 2023. The temporary tax reliefs will be available to companies in the form of enhanced capital allowances:
- A super-deduction in the form of an enhanced first-year allowance of 130% on assets that ordinarily qualify for 18% main rate writing down allowances
- A first-year allowance of 50% on assets that ordinarily qualify for 6% special rate writing down allowances
Multiple conditions and exclusions apply, including:
- The expenditure is incurred from 1 April 2021 to 31 March 2023
- Expenditure is excluded if incurred under a contract made before 3 March 2021
- A reduced super deduction applies in a period straddling but ending on or after 1 April 2023
- A clawback of all or some of the relief (in the form of a balancing charge) can arise, depending on the date of the disposal
- Any tax advantage obtained as the result of “relevant arrangements” can be counteracted by the making of adjustments
An additional tax saving of up to £25 per £100 invested will be welcomed by businesses in the current environment, but like all first-year allowances, these enhanced allowances are only available in the period of investment. For many this may simply create additional tax losses to carry forward and, as the use of losses is restricted against profits in excess of £5 million on a group basis, some modelling may be required to see whether the overall result will be beneficial.
Other factors to consider will be the interaction with the annual investment allowance, which remains at £1 million until 1 January 2022, and any additional compliance requirements arising in consequence of the balancing charge on a future disposal.
The government has used the existing FYA regime (which is now otherwise limited in its scope) as the framework to deliver the super deduction for expenditure on plant and machinery. The FYA regime includes a number of general exclusions which don’t apply to AIAs, for example. In particular, there is an exclusion for plant and machinery provided for leasing, which means that expenditure incurred by property investors on assets in properties that are let out is excluded from benefitting from the new allowance. It is unclear at this stage whether the Government may be minded to reconsider, given that an exception from the leasing exclusion applied to certain plant and machinery in buildings under the ECA scheme until it was withdrawn last year.
Loss carry back relief
The trading loss carry back rule will be temporarily extended from the existing one year to three years. Companies will be able to obtain relief for up to £2 million of losses in each relevant accounting period ending between 1 April 2020 and 31 March 2021 and between 1 April 2021 and 31 March 2022 subject to a group level limit of £2 million.
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2 million of unused losses will be available for carry back against total profits in the earlier 2 years. This £2 million limit applies separately to the unused losses of each 12-month period within the duration of the extension.
The £2 million cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of a de minimis of £200,000 to apportion the cap between its companies.
This measure is likely to benefit companies making taxable profits in periods prior to the pandemic. It is disappointing the 50% corporate loss restriction will not be relaxed temporarily and so denies companies the ability to fully offset losses made during the pandemic period against profits in the following period.
COVID-19 support measures
The Government is extending the Coronavirus Job Retention Scheme (CJRS) until the end of September 2021. Employees will continue to receive 80% of their current salary for hours not worked. There will be no employer contributions beyond National Insurance Contributions (NICs) and pensions required in April, May and June. From July, the Government will introduce an employer contribution towards the cost of unworked hours of 10% in July and 20% in August and September.
The Government will continue to provide eligible retail, hospitality and leisure properties in England 100% business rates relief from 1 April 2021 to 30 June 2021. This will be followed by 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2 million per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties. Repayments of business rates relief by businesses will be made deductible for corporation tax purposes.
The Government will provide ‘Restart Grants’ in England of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses. From 6 April 2021 the Recovery Loan Scheme will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million. The scheme will be open to all businesses, including those who have already received support under the existing COVID-19 guaranteed loan schemes.
The package of COVID-19 measures will provide a degree of flexibility to businesses in how and when they restart their business operations as the economy reopens over the coming months. These measures are welcomed.
Repeal of Interest and Royalties Directive
Following the UK’s withdrawal from the European Union and the end of the transition period on 31 December 2020, the Government have resolved to repeal the UK’s implementation of the Interest and Royalties Directive with effect for payments made from 1 June 2021 (although there are provisions to prevent the payments due after 1 June 2021 being brought forward to benefit from the rules). From 1 June 2021, payments of interest and royalties to EU associated enterprises which would have previously been exempt will now be subject to UK income tax at a rate of 20% (unless a double taxation agreement applies).
Interest and royalty payments from UK companies to major EU territories (including Germany, France, the Netherlands and Spain) are likely to qualify for relief under the relevant double taxation agreement such that the repeal of the Interest and Royalties Directive is unlikely to have a significant economic impact. However, there are a number of instances where either interest or royalties are not reduced to 0% under the relevant double taxation treaty (e.g., interest / royalties paid to Italy, royalties paid to Luxembourg, interest / royalties paid to Portugal). Companies making interest payments under the directive may need to make new treaty claims to obtain reduced withholding rates.
Reporting rules for digital platforms
The Government will introduce legislation that enables regulations to be made implementing the OECD’s rules on reporting by digital platform operators. The provisions will require UK digital platform operators that facilitate the provision of services by UK and/or other taxpayers to report information regarding the income of sellers to both HMRC and the sellers. These provisions are not intended to apply to digital platforms which facilitate the sale of goods.
The provisions will be subject to consultation in Summer 2021 and are not expected to come into force before 1 January 2023 with the first reports not due until 1 January 2024.
The introduction of these provisions is not unexpected given the report published by the OECD and the recent trends in the international tax landscape. However, we welcome the impending consultation along with the 2-year time frame prior to implementation.
Hybrid mismatch provisions
Following on from the published response to the Consultation in November 2020, the Government have confirmed that they will be amending the UK’s hybrid mismatch provisions. Key changes are to the treatment of exempt investors under the hybrid entities provisions, extension of dual inclusion income for groups and the exclusion of investors with less than 10% in transparent funds. The vast majority of these changes will apply from Royal Assent of Finance Act although taxpayers may elect to the dual inclusion income changes earlier. In addition, a number of changes are retrospective from 1 January 2017 and seek to ensure the provisions operate as intended (e.g., excluding the release of debt from the rules).
We welcome the Government’s confirmation that the changes to the hybrid mismatch provisions will still be implemented especially as these changes should put the UK provisions on a level playing field with comparable provisions in other European territories (such as Luxembourg and the Netherlands). Given the complexity of the rules, it will not be possible to understand the extent of these changes until draft legislation is released later in March.
R&D tax reliefs Consultation
The Government is to carry out a review of R&D tax reliefs, with a consultation published alongside the Budget. This review will consider all elements of the two R&D tax relief schemes, with the stated objective of ensuring the UK remains a competitive location for innovative research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.
It has been well-known for some time that HMRC are keeping the R&D tax credit schemes under review and so this broad consultation does not come as a surprise, particularly given the recent consultation on qualifying expenditure. The consultation will provide a comprehensive review of the schemes. Given the breadth of the consultation it is certain that changes will be implemented in future years.
Notable points under consideration include:
- Review of the SME scheme
- Widening the definition of R&D and differential rates for different areas of research
- The case for continued inclusion of sub-contract R&D for SMEs where this is undertaken overseas
- Limiting the eligibility of Qualifying Indirect Activities
- The inclusion of capital expenditure. This was another area, in addition to data costs, that FTI Consulting initiated the lobbying for in 2016.
The Government has announced plans to create “Freeports” in the UK in early 2020. A total of eight Freeport areas have now been announced and legislation will be included in Finance Bill 2021 to designate tax sites within these locations.
The tax incentives available will include:
- An enhanced capital allowances in the form of a first-year allowance of 100% for qualifying expenditure on new and unused plant and machinery for use within the tax site until 30 September 2026
- An enhanced rate of structures and buildings allowance of 10% on a straight-line basis for expenditure on qualifying assets brought into use by 30 September 2026
- An SDLT relief for purchases of land and buildings within a Freeport tax site, subject to a ‘control period’ of up to 3 years and the land being acquired and used in a ‘qualifying manner’, until 30 September 2026. The relief will be subject to a clawback if the property is not used for a qualifying commercial purpose within the control period
Freeport policy is one of the Government’s widely trailed post Brexit policies. The capital allowances available for plant and machinery and SDLT relief mimic those given for expenditure and acquisitions in designated assisted areas in enterprise zones / disadvantaged areas.
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