The Chancellor has confirmed an increase in the main CT rate from 19 to 25 percent with effect from 1 April 2023.
The Chancellor has confirmed an increase in the corporation tax (CT) rate from 19 to 25 percent with effect from 1 April 2023. The Government notes that this will remain the lowest rate in the G7. An increase is not unexpected given the unprecedented levels of government spending on various support measures in response to the ongoing COVID-19 pandemic, but the delayed implementation means that the Government will not see a significant increase in its revenue from this measure until the 2023-24 fiscal year. There has understandably been concern from businesses that increasing the CT rate while the pandemic continues to cause economic disruption will hamper recovery and the news that a rise will not take effect until April 2023 is welcome. In addition, the 19 percent rate will continue to apply to companies with profits of not more than £50,000, with marginal relief for profits of up to £250,000.
The increase is projected to bring in additional revenues of £11.9 billion in 2023-24, rising to £17.2 billion in 2025-26. In line with the 6 percent CT rate increase, the rate of Diverted Profits Tax will also increase by 6 percent to 31 percent from April 2023.
The Government estimates that the 19 percent CT rate will continue to apply to around 70 percent of active companies. This is being implemented by reintroducing the small profits rate of tax as it applied before April 2015, but with lower thresholds. The thresholds are reduced for periods of less than a year and where there are associated companies.
As the combination of the 25 percent CT rate and the 8 percent bank surcharge would make UK taxation of banks uncompetitive, the Government will undertake a review of the surcharge and set out proposals in the autumn to ensure that the combined rate of tax on banks’ profits does not increase substantially from its current level. This will be followed by legislation in the 2022 Finance Bill. As there are different calculation rules for the two taxes and the word ‘substantially’ is open to interpretation, this may not be as straightforward as a 6 percent cut in the rate of surcharge. Arguably the banking sector has done relatively well from this Budget in being spared a share of the pain suffered by other large companies, which is a change from the general policy of previous Budgets since the financial crisis.
Deferred tax impact
For tax accounting purposes, a UK tax rate can be regarded as ‘substantively enacted’ under IFRS and UK GAAP if it is included in either:
The newly announced 25 percent rate is expected to be included in Finance Bill 2021 which is due to be published on 11 March 2021. We expect the rate to be substantively enacted over the coming months via the Bill being passed by the House of Commons.
Deferred tax assets and liabilities on balance sheets prepared after the substantive enactment of the new tax rate must therefore be re-measured accordingly. However, any cut in the banking tax surcharge would not be substantively enacted until the 2022 Finance Bill has been passed in final form by the House of Commons, so in the interim banks could find themselves having to reflect the CT rate increase but not the surcharge cut.
For balance sheets prepared to a date before the substantive enactment of the new CT rate there is no deferred tax re-measurement, but any material effect of the increase to 25 percent must be disclosed.
US-parented companies and groups should be aware that under US GAAP the position is slightly different. Changes in tax rates are accounted for only once enacted (i.e. once Royal Assent has been given). Under US GAAP there are no requirements to disclose tax rate changes that have been proposed or announced, but not enacted.
If you would like to discuss the impact of the new CT rate for your business, please speak to your usual KPMG contact.
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