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ARM Innovation Hub
Barr Ellison Solicitors – commercial property
18 March, 2021 - 22:01

Budget 2021 – Reflections

I’m getting rather good at this Budget prediction lark, even if I do say so myself – of course, it does help a great deal when significant portions of the Chancellor’s speech are pre-announced or leaked to the press in advance, writes Katie Varney – Corporate & Business Tax Partner with Ensors Chartered Accountants.

Anyway, the recent Budget delivered plenty to talk about from a Corporate and Business Tax perspective, some of which I saw coming, but some of which came as quite a surprise.

Possibly the biggest announcement of this year’s speech was at the less-surprising end of the scale, being the future increase in the headline rate of Corporation Tax, from its current level of 19%, up to 25% from 1 April 2023 for companies with taxable profits in excess of £250,000. 

Although this is a significant increase, and the first for 50 years, at 25% the UK rate remains competitive and one of the lowest in the G7. Smaller companies, those with taxable profits of up to £50,000, will continue to pay at 19%, with the reintroduction of marginal relief for profits between these two limits – so much for simplification!

This advance warning of an increase in rate also creates some interesting planning points, particularly in the context of one of the other main Budget announcement. Businesses, both companies and unincorporated enterprises, that find themselves in a loss-making position as a result of the pandemic, will see a temporary extension to the rules governing the carry-back of trading losses. 

Currently, businesses are able to carry back trading losses against profits of the previous twelve months, but this look back period will increase to three years, subject to a £2 million annual cap, for losses incurred in Corporation Tax accounting periods ending between 1 April 2020 and 31 March 2022, and during the 2020/2021 and 2021/2022 tax years for sole traders and partnerships. 

This poses a question for many companies who will need to assess whether to carry back their losses for relief now at 19%, or to carry them forward for relief in future years at 25%. What is right for one business may not be right for another, and the decision will depend on individual circumstances, including the immediate need for cash and exactly when a return to profitability is forecast.

Owner-managed companies may also want to review their remuneration policies going forward, as the increase in the rate of Corporation Tax will see the benefit of taking dividends over salary being eroded and, unless we see changes to Income Tax and NICs in the interim, some business owners may find themselves worse off under their current ‘low salary, high dividend’ strategy.

The other major Budget announcement for companies, which did come as a surprise to me, was the introduction of a temporary first year allowance for capital expenditure incurred between 1 April 2021 and 31 March 2023, including a “super-deduction” of 130% on most new plant and machinery investments that would ordinarily have qualified for 18% relief, and a first year allowance of 50% on most new plant and machinery investments that would ordinarily have qualified for 6% relief. However, whilst this will be welcome news for large companies that incur substantial expenditure on capital assets, this measure does not extend to unincorporated businesses. 

Sole traders and partnerships will, therefore, have to continue to rely on the Annual Investment Allowance, which gives upfront relief on 100% of the cost of qualifying plant & machinery, up to a maximum of £1 million. This limit is, however, set to reduce to just £200,000 from 1 January 2022 and with no further extension to the AIA yet announced, we seem set to see a significant disparity between the reliefs available for companies and those not operating through a corporate veil.

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