UK Corporation Tax rate
As provided for in Finance Act 2021, the main rate of UK Corporation Tax will increase from 19% to 25% from 1 April 2023 for close investment holding companies and companies which are not small.
Small companies with profits below £50,000 (as defined) will continue to be taxed at 19%, with the re-introduction of a taper system for companies with profits between £50,000 and £250,000. The Chancellor reinforced the point in today’s budget that such a rate increase will continue to see the UK hold the title of the lowest tax rate in the G7, and fifth lowest in the G20.
Prior to this increase, businesses can continue to benefit from the increased Annual Investment Allowance (AIA), following today’s announcement that this will continue at £1,000,000 per year until April 2023, after which the relief will revert to £200,000. This relief runs alongside the super-deduction introduced in March and represents the government’s bid to encourage investment in the UK post-Brexit. The increase in the AIA is likely to be welcome news to those businesses (for example, leasing businesses) which are unable to benefit from the super-deduction.
Notwithstanding this positive move, businesses will need to carefully consider the benefits of maximising claims for relief alongside the Corporation Tax rate increase from April 2023. Care will be needed to ensure that large claims do not crystallise significant in-year tax losses which in turn may be subject to carry forward loss restrictions that negate the benefits of such a claim.
Research and Development
Following the consultation document issued in March 2021, the Chancellor has announced that the UK’s R&D regime will be subject to reform to reflect modern research methods. As a result, the definition of qualifying expenditure will be extended to include data and cloud computing costs. In addition, in a bid to focus tax incentives on R&D activity taking place in the UK, the legislation will be adapted to ensure that relief is focussed on UK-based R&D. Whilst we expect this will be helped by the introduction of the scale-up visa, which is aimed at simplifying the process for bringing overseas talent to the UK, the move should encourage the development of local skills and expertise.
The changes will bring upside to R&D claims by expanding the scope of relevant expenditure, however, businesses should be mindful of the introduction of restrictions. As expected, the devil will be in the detail, with changes and next steps for review to be set out publications to be made available later in the autumn.
Diverted Profits Tax
Large multinationals with business activity in the UK will welcome the announcement that the government will legislate in Finance Bill 2021-22 enabling HMRC to implement tax treaty Mutual Agreement Procedure (MAP) decisions relating to the Diverted Profits Tax (DPT). A MAP is a mechanism for tax authorities to discuss cross-border taxation of specific transactions or situations with a view to coordinating their approach for the benefits of the taxpayers involved.
The aim of the DPT is to defer multinational groups of companies from implementing aggressive tax planning techniques which divert profits away from the UK in an attempt to reduce the group’s overall corporation tax liability. Where applicable, the prevailing DPT rate is 25% (31% from 1 April 2023) of the amount of diverted profits (plus a surcharge for banking companies).
This change will take effect in relation to MAP decisions reached after 27 October 2021. The measure will allow relief against DTP to be given where necessary, subject to the terms of the relevant treaty, in order to effect a decision reached through MAP.
A recent First-tier Tribunal decision (Vitol Aviation UK Limited) that held HMRC was not permitted to delay issuing a closure notice in respect of an enquiry merely because there was an ongoing DPT investigation. The Budget has altered this dynamic such that for close notice applications made on or after 27 September 2021, HMRC will be able to delay issuing a closure notice if there is an ongoing DPT review.
Cross-border group relief
The government will legislate in Finance Bill 2021-22 to abolish Cross-Border Group Relief (CBGR) and other related loss reliefs, to take effect from 27 October 2021. The move may appear to contradict many of the other reforms badged as post-Brexit “wins” such as the welcomed reduction in alcohol duty and changes to tonnage tax, stating that the current position “conflicts with UK policy interests”.
The change is undoubtedly a result of Brexit and will impact UK groups with subsidiaries established in the EEA which incur foreign losses and EEA-resident companies that have incurred losses when trading in the UK through a UK Permanent Establishment. The measure will have an effect on company accounting periods ending on or after 27 October 2021 (transitional rules will apply for accounting periods that straddle this date). Following the change, it will no longer be possible to surrender an EEA loss to a UK company. In addition, a non-UK company with a loss-making UK PE will only be able to group relieve its UK PE loss if there is no possibility of using the loss against non-UK profits of any person for any period.
Affected companies (those which are UK or EEA companies) should consider the impact such a move will have upon projected UK Corporation Tax forecasts, along with the associated impact of the Corporation Tax rate increase from 1 April 2023.
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Autumn Budget 2021
With much having been announced or shared in advance of the Chancellor rising to his feet, there were few elements left to surprise in what Rishi Sunak has labelled a Budget delivering a ‘Stronger Economy for the British People’.