An increase in the rate of Corporation Tax had been widely touted as a prediction before Budget Day, but the expectation was an increase of one or two points, with a nod towards not wanting to hinder economic recovery. The announcement of 25%, the highest rate of tax since 2007, caused a sharp intake of breath.
This is still substantially lower than the personal tax rates, so for those who are looking to shelter profits, it remains an attractive proposition, but for those who don’t leave profits in the company, the effective tax rate will be substantially higher than it is currently. There is still time for the personal tax rates to move before the higher corporation tax becomes effective, but without a reduction in the tax rates for dividends, it may no longer be beneficial for tax purposes to incorporate a medium sized business. Whilst there are many reasons for using a limited company, tax saving is by far the most attractive.
The change in rates has been softened for those businesses that are smaller, or do not recover as quickly as others, by the return to a small companies Tax Rate of 19%, with incremental increases in the rate for companies with profits between £50,000 and £250,000. The long time criticism of a system incorporating a marginal rate is that the profits falling between the lower and upper limits were taxed at a much higher rate than the full rate of tax. Based on the announcement, profits between £50,000 to £250,000 will be effectively taxed at 26.5%. It remains to be seen whether this issue will be addressed by 2023.
The increase in the headline rate is expected to raise an additional £47 Billion between 2023 and 2026.
Losses
Losses can now be carried back for up to three years, which will be a welcome cash flow advantage to companies that have been battered by the past 12 months, but any claim for relief will need to be tempered by the potentially higher tax relief that will be available in future for these losses either at the 25% tax rate, or more effectively used when profits are caught in the margin between the small company and full rates of tax from 2023.
The decision on how to use losses will be a balance between cash flow needs and future tax savings, which will vary on a case by case basis.
Super deduction
The announcement of a “super deduction” for capital expenditure caught the eye, with its 30% uplift in the costs incurred. This is obviously a carrot to encourage investments with a view to increasing expenditure in the wider economy, but it is not the giveaway that it might first appear.
Glaringly, this relief is limited to companies, according to the notes, and in the context of Corporation Tax rates shooting up to 25% from April 2023, it can be no coincidence that a company spending £100 on equipment in April 2021 will reduce tax for the year by just under £25. With that in mind this looks like an attempt to deter anyone that might be thinking about delaying expenditure to reduce the tax payable in 2023.
Obviously, if you already needed to buy equipment in the coming year, the additional 6% tax relief will be welcome, but for larger businesses, the consideration becomes a matter of cash flow planning.
The notes currently available refer to new (not second hand) “qualifying” equipment, so that there may be restrictions on when the enhanced relief will apply, and it is not entirely clear how this relief interacts with the Annual Investment Allowance that already allows full write off of plant and machinery costs in the year of purchase.
The sting in the tail of the current Annual Investment Allowance system is that unless an asset is scrapped once you are done with it, there is a claw back of the original relief, based on the disposal value of the asset. For example, a Van bought for £15,000 in 2020 gets a tax reduction of £2,850. Trading that van in before April 2023 at a value of £8,000 will give rise to a tax charge of £1,520. Overall the van has cost you £7,000 and you had tax relief of £1,330 (19% of the actual cost to you). Increasing the Corporation Tax rate will mean that the tax relief you get on that van will reduce by £230 if traded in after April 2023. Whilst a relatively small cost in the scheme of things, when extrapolated across a fleet of vans or applied to a much more valuable piece of equipment, the tax cost will need to be carefully considered. The super deduction will take the sting out of this particular tail for expenditure in the coming two years, but it might be time to consider trading in existing assets a little earlier than planned.
The winner in this scenario is the smaller company that regularly reports profits of under £50,000. For the next two years they can benefit from enhanced tax relief, in the expectation that any residual value will be taxed at a lower rate in due course.
VAT
Six hundred thousand businesses made use of the deferment option for the VAT that would have been payable between March and June 2020 and the cash tied up in that deferment is estimated to be in the region of £34 Billion. The treasury is obviously keen to get that money in the coffers as soon as possible now, but appreciates that cash flow can still be an issue for many businesses.
Prior to Budget Day a payment plan option was announced to allow the deferred VAT to be spread over up to 11 months. There was a further prompt to make arrangements to settle in the Budget with a 5% penalty applying to any deferred VAT that is not settled by 30 June, unless there is a prior agreement with HMRC for a payment plan.
If you still have deferred VAT to pay, contact HMRC without delay to make sure that you don’t get caught out with this penalty.
There is anecdotal evidence of problems with making the deferred VAT payments, as HMRC do tend to refund payments that they are not perhaps expecting. If you are intending to settle the deferred VAT it is probably worth checking with HMRC that they are expecting the payment to be made.
The reduced rate of VAT for the hospitality industry is to continue, being gradually brought back into line with standard rates over the coming year.
Research and Development
A consultation on the operation of the R&D scheme was announced. Reading between the lines, this relates more to a desire on the part of HMRC to simplify their administration than to extend the scope or availability of the scheme. We would strongly urge clients who do use the scheme to make their thoughts known by completing the consultation document.
IR35
The hoped for deferment of the extension of the off payroll working rules that place the onus to decide whether a contract is caught by IR35 on the customer did not materialise, so from 6th April, the tax treatment of providing time and labour through a Limited company may change.
