corporation tax

While personal taxes were broadly left alone in the Budget, apart from the freezing of some thresholds, corporation tax was the big victim of a significant hike.

The Chancellor gave businesses advance notice of a big rise in the main rate of corporation tax, which will go up from 19% to 25% in April 2023.

However, the corporation tax hike was not as straightforward as it first seemed, with layers of complexity added alongside the higher rate.

Small companies, defined as those with taxable profits of less than £50,000, will continue to benefit from a lower tax rate, remaining at 19%.

The rate of corporation tax is then tapered from 19% to 25% on profits up to £250,000.

So far, so good. But the Association of Taxation Technicians (ATT) is warning that this tapering approach could result in high effective tax rates for profits that fall into the marginal relief band.

Jeremy Coker, President of the ATT, said:

“The small profits rate will protect the smallest companies from the planned increase in corporation tax. But it will also add further complexity.

“Many of those dealing with corporation tax breathed a sigh of relief when the previous small profits rate was abandoned in favour of a single rate of corporation tax in April 2015. It seems odd that we are now moving away from that simplicity and back into the realm of multiple rates and marginal relief.”

Companies with profits between £50,000 and £250,000 will be charged corporation tax at the main rate of 25%, and this will then be reduced by a marginal relief, resulting in a gradual increase in the overall corporate tax rate.

Jeremy Coker continued:

“Introducing marginal relief removes an otherwise unwelcome cliff edge effect which would otherwise mean that a small increase in profits would make corporation tax rates shoot up. However, we know from past experience that marginal relief calculations can be complicated, and make estimating future tax bills tricky.

“Due to how marginal relief works, those profits which fall into the marginal relief band of between £50,000 and £250,000 could also be subject to an effective tax rate of around 26.5 per cent – higher than the headline rate of 25 per cent.

The reintroduction of the small profits rate may therefore be welcome by the smallest companies, but might cause headaches for those whose profits lie in the middle ground.”

With the higher corporation tax a couple of years away, the Chancellor also introduced an incentive for businesses to spend and invest over the next two years.

The new ‘super deduction’ creates a temporary corporation tax relief on capital investment when money is spent on certain qualifying capital assets from 1st April 2021.

According to Treasury figures, the move is expected to stimulate £25 billion in UK business investment, with capital intensive businesses including manufacturing and utility sector businesses likely to particularly benefit.

The super deduction is a temporary first-year allowance, with 130% applied to most new plant and machinery investments, which previously would have only received relief at 18%.

There’s also a first year allowance of 50% on most new plant and machinery investments, which would have ordinarily received a 6% relief.

Commenting on the introduction of super deductions on businesses’ capital investment, Portia Pierrel, Director, PwC said:

“These measures will be welcomed by businesses and will encourage an immediate acceleration of investment, instead of holding off. However, care will need to be taken in relation to certain assets, such as vehicles and leased plant and machinery, which may be subject to restrictions.”