Corporation Tax changes, Diverted profits and bank levy review
Main corporation tax rate to rise to 25% from 1 April 2023.
As the government’s seeks to rebuild its finances after the COVID-19 pandemic, it has increased the main Corporation tax rate to 25% from 1 April 2023 on profits over £250,000. The rate for small profits under £50,000 will remain at 19%.
Where a company’s profits fall between £50,000 and £250,000, the lower and upper limits, it will be able to claim an amount of marginal relief providing a gradual increase in the corporation tax rate. The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. It should be noted that close investment holding companies, will not be eligible for the lower rate of taxation.
The return to lower and upper rates and a high marginal rate in between will add another layer of complexity to the process of forecasting tax payments. Whilst a relatively competitive rate compared to other G7 members, a main rate of 25% will be double the current 12.5% rate in Ireland.
All corporate businesses will need to consider how the increase in the main rate of corporation tax will impact upon their future business returns and projected cashflows.
Diverted Profits Tax
There will also be concurrent changes to increase the Diverted Profits Tax rate to 31% from 1 April 2023 that are intended to maintain the impact of this tax designed to deter anti-avoidance.
Banking levy review
The government has announced a review of the UK banking surcharge, a corporation tax surcharge of 8% on the taxable profits of banks that have annual profits relating to banking activities greater than £25m. The changes to corporation tax rates will disproportionally affect banks and the review will should help ensure that the UK banking sector remains competitive with its peers in the US and the EU.
Capital Allowances
A “super-deduction” will be introduced from 1 April 2021 until 31 March 2023 allowing companies to benefit from a 130% first-year allowance for capital expenditure on qualifying new plant and machinery assets. This deduction will allow companies to potentially reduce tax payable by 25p for every £1 invested in eligible plant and machinery.
The super-deduction will apply to expenditure on new main pool plant and machinery that ordinarily qualifies for the 18% main pool rate of writing down allowances. A temporary first year allowances of 50% known as a “SR allowance” will also apply to companies investing in new plant and machinery qualifying for special rate pool plant and machinery. This will include qualifying expenditure on integral features in a building and long life assets that normally qualify for 6% writing down allowances.
The measures announced will not apply to qualifying expenditure on “second hand” or “used” plant and machinery and will not apply to expenditure incurred in respect of a contract entered into prior to 3 March 2021. Any companies that have already contracted for the provision of plant and machinery will only be able to claim capital allowances at the normal standard rates.
Certain general exclusions to first year allowances will also apply including, for example, expenditure on cars, plant or machinery for leasing etc. for which the super-deduction will not apply. Where an accounting period straddles 1 April 2023 the rate of the super-deduction will be apportioned accordingly.
A further consequence of the super-deduction is that there will be amendments to the disposal rules for plant and machinery that has qualified for the allowance. Disposal receipts will be treated as balancing charges rather than an adjustment to the plant and machinery pools. Adjustments will be required if only part of the expenditure has been claimed as part of the temporary allowance and to apply a factor to the disposal receipts depending on the chargeable period in which the disposal takes place. Similar provisions apply where an SR allowances has been claimed. As would be expected, anti-avoidance provisions apply.
The Finance Bill will also include provisions for the extension of the temporary increase in the rate of the Annual Investment Allowance (AIA) of £1 million for the period to 31 December 2021 that was announced on 12 November 2020. The AIA will still be available to all businesses and therefore companies will need to consider the allocation of AIA where any expenditure may not qualify for the super-deduction or SR allowance in its relevant chargeable period.
This measure will be welcomed by all companies looking to invest in plant and machinery during the periods outlined. However, it will be necessary to consider the detailed legislation to ensure the deductions will be available and that all the capital allowances now available are fully optimised in the relevant periods.
The Chancellor also announced amendments to ensure that certain Lessor and Lessees of plant and equipment under long funding operating leases do not fall into anti-avoidance provisions due to the COVID-19 pandemic. The changes means where on or after 1 January 2020, there is (or was) a change in the payments under the long funding operating lease that would have been payable on or before 30 June 2021 due to the COVID-19 pandemic, and this causes an extension of the terms of the lease, the anti-avoidance provisions will not apply.
Reform of Research and Development Tax Credits
Innovation is at the heart of the Government’s post-Covid-19 recovery plan. It has launched a wide ranging consultation on the Research and Development Tax Credit Schemes to achieve four key objectives:
- Maintain and enhance the UK’s international competitiveness
- Boost spend on research and development
- Ensure existing R&D schemes remain relevant in today’s economy
- Prevent abuse of those schemes
Possible changes to the regime include:
- Creating an ‘RDEC for all’ combining the existing SME and large company R&D regimes
- Changing the process for making R&D claims e.g. outside a company’s self-assessment Corporation Tax Return
- Using the R&D schemes to promote social value, for example developing green technology and discourage R&D in certain fields
- Expanding both the tax definition and the qualifying cost categories of R&D to allow cloud hosting, data costs and maybe even capital expenditure to be included
- Revisiting the treatment of overseas costs in R&D claims
The Government intends to consider the responses to the 2020 consultation on the scope of Qualifying R&D expenditure as part of this larger consultation on changes to the R&D regime.
BDO will be responding in detail to this consultation, which closes on 2 June 2021.
Other Innovation incentives
In addition to the main R&D consultation, the Government will:
- Launch a new digital grant of up to £5,000 to help SMEs purchasing and implementing productivity-enhancing software to transform the way they do business
- Commit £375 million to the ‘Future Fund: Breakthrough’, a new direct co-investment product to support the scale up of the most innovative, R&D-intensive businesses.
A temporary return of three-year loss carry back
Unincorporated businesses and companies will welcome the increased flexibility to carry back losses arising during the period of the pandemic an additional two years. The extended relief will allow for a three year carry back of losses arising in 2020-21 and 2021-22. Currently losses in an ongoing business can only be carried back twelve months.
Details are as follows:
- Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for up to £2m of losses in each of 2020-21 and 2021-22
- Companies that are members of a corporate group will be able to obtain relief for up to £200,000 of losses in each of 2020-21 and 2021-22 without any group limitations
- Companies that are members of a corporate group will be able to obtain relief for up to £2m of losses in each of 2020-21 and 2021-22, but subject to a £2m cap across the group as a whole.
This should mean that a company making losses in the year to 31 March 2021 would be able to set those losses against profits arising in the year ended 31 March 2018. This will provide some additional cash flow by accessing a repayment of previous tax payments
The cap will be disappointing for larger businesses and we will have to wait for details on how it will operate in practice.
Businesses should review their projected losses and seek advice on the steps they can take to access early tax repayments.
Post-COVID-19 recovery support
Restart Grants
Local Authorities in England will provide new ‘Restart Grants’ to businesses required to close because of the latest national lockdown. The grants of up to £6,000 per premises will be based on the rateable value of their business premises and be available to ‘non-essential retail businesses’. Hospitality, accommodation, leisure, personal care and gym businesses will be able to get more generous grants of up to £18,000 as they will reopen later with more restrictions.
Businesses that continued to trade, those that chose to close and those that are in administration or insolvent will not qualify.
As with previous grants schemes, the government is also providing all local authorities in England with additional discretionary business grant funding of £425m.
Recovery loans
A new scheme, available from 6 April 2021, will help businesses of all sizes fund the resumption of business after lockdown ends.
Businesses can borrow between £25,000 and £10m. Any business (apart from banks and insurers) can apply before 31 December 2021, including those already borrowing under existing COVID-19 loan schemes. The Government will underwrite the new loans with an 80% guarantee.
The scheme will offer both overdrafts and invoice finance over a maximum of three years and term loans and asset finance over a maximum of six years. Personal guarantees will be required for loans over £250,000 and the business must be able to show it has been affected by the pandemic but remains viable and not insolvent.
Help to Grow scheme
This scheme is aimed at helping small businesses grow by providing management and digital skills training as well as cash discounts on qualifying software. 12-week management training and mentoring programmes will be provided through a network of business schools with 90% of the cost funded by the Government.
Companies can also apply for vouchers for 50% discounts, saving them up to £5,000, on approved software that enhances their productivity. Companies can register their interest in the scheme here.
Freeport locations and additional tax incentives announced
The Chancellor announced that there will be eight Freeports in England. These will be East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth & South Devon, Solent, Thames and Teesside. The Government continues to discuss the creation of further Freeports with the devolved administrations in Scotland, Wales and Northern Ireland.
The Freeports should begin operations from late 2021 and are expected to contribute to the Government’s levelling up agenda and boost local employment. Freeport locations will enable businesses to benefit from tax reliefs and incentives. The main incentives and reliefs will be:
- An enhanced 10% Structures and Buildings Allowance rate for expenditure on the construction or renovation of non-residential structures and buildings brought into use on or before 30 September 2026.
- A 100% Enhanced Capital Allowance (ECA) for investment in new or unused plant and machinery for a qualifying activity. This will be available until 30 September 2026 and be subject to clawback if the plant or machinery moves out of Freeport within 5 years
- SDLT relief on purchases of land and buildings until 30 September 2026 subject to clawback if the property is not used in a qualifying manner for three years
- Full Business Rates relief available for five years to all new businesses, and certain existing businesses where they expand. This relief can start on any date up to 30 September 2026.
- A proposed employer National Insurance Contributions relief for eligible employees in Freeport sites from April 2022 and available until at least April 2026, with a possible extension to April 2031, all subject to parliamentary approval.
The reliefs will be a valuable incentive, and existing or new businesses that are intending to commence or expand operations should consider locating in or relocating to a Freeport tax site.
Changes to the UK Hybrid and Other Mismatch Rules
As expected, the government has announced they will make a number of changes to the UK Hybrid and Other Mismatch Rules in the Finance Bill. This follows the consultation into potential changes during the Summer of 2020 and the government’s response published in November 2020.
The changes are expected to benefit taxpayers by removing some of the penal outcomes that could arise under the current drafting of the Hybrid rules. Legislation will be published as part of the Finance Bill and while some changes will have retrospective effect from 1 January 2017, others will only have effect from Royal Assent of the Finance Bill.
The government’s November 2020 response mentioned a change in relation to the definition of dual inclusion income and the implementation of an inclusion/no deduction rule. This was expected to be a retrospective change, but will now only apply from Royal Assent of the Finance Bill. Companies will be able to make a claim to apply to the changes to dual inclusion income retrospectively.
Based on wording in the policy paper the breadth of the inclusion/no deduction rule may also be expanded, but we will need to wait for the legislation in the Finance Bill.
Repeal of rules related to Interest and royalties directive
The EU Interest and Royalties Directive (IRD) provided an exemption from withholding tax in respect of certain payments of interest and royalty payments. The IRD ceased to apply to the UK when the Brexit transition period expired on 31 December 2020 but the legislation giving effect to the IRD in UK law continued to apply.
The legislation will now be repealed and will cease to apply to payments on or after 1 June 2021. There is an anti-forestalling provision which applies to payments made on or after 3 March 2021. Existing exemption notices issued by HMRC that the IRD applied to payments of interest will be revoked on 1 June 2021 even where the date of expiry on existing notices extends beyond 1 June 2021.
Residents of an EU Member State can still apply for relief under the provisions of a relevant bilateral double taxation agreement either by way of relief at source or repayment. Prior HMRC clearance is required in relation to interest payments that a reduced double taxation agreement rate is available. Where an EU company has previously applied for exemption under the IRD and an exemption notice has been issued, the company can write to HMRC confirming that the relevant treaty conditions apply.
A company may continue to pay royalties overseas and deduct only the reduced the treaty rate without seeking prior clearance from HMRC if the company reasonably believes that the beneficial owner of the payment is entitled to claim relief under a double taxation agreement.