Corporation tax rates

As widely predicted, the Chancellor confirmed that the rate of corporation tax will increase. The rate from April 2023 will be 25% for companies with taxable profits over £250,000 – this was the top end of expectations. 

To try to prevent stifling business activity, the rate for companies with taxable profits of £50,000 or less will remain at 19%. Companies with taxable profits of between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief. The Chancellor expects this to mean that the majority of companies will not be affected by the increase but we will have to see how it applies in a group context. 

The increase in the corporation tax rate is on the back of an unprecedented period of support for business investment through a 130% upfront capital allowances super-deduction for investment in plant and machinery which is discussed further in the article on tax incentives for businesses. 

The Chancellor resisted introducing the online sales tax which had divided opinion amongst commentators. However, to preserve the deterrent to moving profits offshore, the Diverted Profits Tax rate will rise to 31% from April 2023. 

Despite the increase in the rate of corporation tax the Government notes that the UK continues to have a globally competitive tax system with the 25% corporate tax rate at the bottom end of G20 economies. 

Carry back of tax losses

In a welcome move the Chancellor announced that legislation will be introduced in Finance Bill 2021 to temporarily extend the period over which businesses may carry trading losses back for relief against profits of earlier years to get a repayment of tax paid. This measure will provide a cashflow benefit to businesses affected by COVID 19 by providing additional relief for trading losses. 

The existing trade loss carry back provisions will be extended from the current one-year entitlement to a period of three years, with losses being carried back against later years first. This extension will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022. 

The quantum of trading losses that can be carried back to the preceding year remains unlimited for companies. After losses are carried back to the preceding year, a maximum of £2,000,000 of unused losses will be available for carry back against profits of the same trade to the earlier 2 years. This £2,000,000 limit applies separately to the unused losses of each 12-month period within the duration of the extension. The £2,000,000 cap will be subject to a group-level limit. 

Companies will have to consider the benefit of realising a cash benefit from carrying back their losses against the benefit of carrying forward tax losses and reducing the quantum of profits which may be subject to higher rates of corporation tax from April 2023.

EU Interest and Royalty Directive

The Chancellor confirmed that provisions included with the UK’s domestic tax legislation which previously gave effect to the EU Interest and Royalties Directive will be repealed from 1 June 2021. 

As a result, from 1 June 2021, EU companies will no longer receive more favourable treatment than companies based elsewhere in the world, and the UK’s ability to withhold tax on cross-border payments of annual interest and royalties will be governed solely by the reciprocal obligations in double taxation agreements. If they haven’t already, international groups should review their structures in light of this change. 

Review of Banking Surcharge

The Government has acknowledged that without any other action, the increase in the corporation tax rate to 25% would make UK taxation of banks uncompetitive due to the additional bank surcharge of 8%. The government have confirmed that in the autumn, they will undertake a review and set out how it intends to ensure that the combined rate of tax on banks’ profits does not increase substantially from its current level and that rates of taxation in the UK are competitive with the UK’s major competitors in the US and the EU.

Get in touch

If you have any queries on the topics covered above, please contact Paddy Doherty, partner, KPMG in Belfast.