2021 Budget/Finance bill
The 2021 Budget (described as a ‘Budget for recovery’) was delivered on 3 March 2021, closely followed by the Finance Bill 2021, containing some of the proposed measures. Our analysis of all the 2021 Budget proposals can be viewed here. In this article we highlight some of the business tax measures of international interest.
Main corporation tax rate to rise to 25% from 1 April 2023
As the government seeks to rebuild its finances after the COVID-19 pandemic, it will increase 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. 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. While corporation tax rates are to go up, there are reliefs such as patent box and Research & Development tax credits that still make the UK attractive for qualifying businesses.
Diverted Profits Tax increase
There will also be concurrent changes to increase the Diverted Profits Tax rate from 25% to 31% from 1 April 2023 in order to maintain the impact of this tax designed to deter avoidance.
Temporary return of three-year loss carry back
Unincorporated businesses and companies will have 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 the 2020/21 and 2021/22 tax years
- Companies that are members of a corporate group will be able to obtain relief for up to £200,000 of losses arising in each accounting period ending between 1 April 2020 and 31 March 2022, without any group limitations
- Companies that are members of a corporate group will be able to obtain relief for up to £2m of losses arising in each accounting period ending between 1 April 2020 and 31 March 2022, but subject to a £2m cap across the group as a whole.
This will provide some additional cash flow by accessing a repayment of previous tax payments, although the cap will be disappointing for larger businesses.
Businesses should review their projected losses and seek advice on the steps they can take to access early tax repayments.
Capital Allowances enhancements
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 subject to corporation tax 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 “Special rate (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.
These first year allowances are uncapped and are in addition to the Annual Investment Allowance, which is still also available to businesses and groups until 31 December 2021.
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.
Freeport locations and additional tax incentives announced
There will be eight Freeports in England, at 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:
- A 100% Enhanced Capital Allowance (ECA) for corporation tax payers investing 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
- A more widely available 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
- Stamp Duty Land Tax 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.
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.
We recommend that EU companies receiving interest or royalties from related UK companies review the position to determine whether they will need to take any action in advance of 1 June.