Corporation Tax Changes: UK Budget in Spring 2021

published on 1 April 2021 | reading time approx. 5 minutes

After a couple of years of tweaks to the UK Corporation Tax regime, the recent UK Budget included a whole raft of changes to the Corporation Tax regime in the UK. Some people may recognise elements of which look like a blast from the past.

Please find below some further details of the major changes announced:

Corporation Tax Rate – Changes

The future corporation tax rates changes are as illustrated below (we see the return of a main rate and a small profits rate concept):

	up to 31 March 2023	from 1 April 2023
Main rate	19%	25%
Small profits rate	n/a	19%
Lower threshold	n/a	£ 50,000
Upper treshold	n/a	£ 250,000
Tapering (marginal relief)	n/a	between £ 50,000 & £ 250,000

From 1 April 2023, the main rate of corporation tax will increase to 25% for companies with profits over £250,000.
Companies with profits of £50,000 or less will continue to be taxed at 19%.
Where profits fall between £50,000 and £250,000, the tax rate will be 25%, but companies will be able to claim marginal relief.
The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies, while the related 51% group company test will also be repealed and replaced by associated company rules.
These rules will also be used in determining whether a company is large or very large for quarterly instalment payment purposes, or for assessing whether a company can use the small claims treatment for the patent box, and so on.

Capital Allowances – Super Deductions

For companies within the charge to corporation tax, increased allowances for expenditure on plant and machinery will apply temporarily.
For qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023, companies will be able to make the claims illustrated below (we see the re-emergence of First Year Allowances (FYAs)):

	Usual rate of allowance	Qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023
Qualifying plant and machinery	18% per annum, reducing balance	130% FYA
Qualifying special rate pool items	6% per annum, reducing balance	50% FYA

The rate of the super deduction will require apportioning if an accounting period straddles 1 April 2023.
New disposal rules will apply to assets that have claimed these allowances.
Disposal receipts should be treated as balancing charges, instead of being taken to pools and, for assets claimed under the super deduction, the disposal value for capital allowance purposes should take the disposal receipt and apply a factor of 1.3,
except where disposals occur in accounting periods straddling 1 April 2023 resulting in a lower factor.

Key conditions

Assets must be new
Contracts must not have been entered into prior to 3 March 2021

Corporation Tax Loss Relief – Carry Back Extension

The period over which trading losses can be carried back is to be temporarily extended from 12 months to three years. This temporary extension applies for trading losses incurred by companies in accounting periods ending between 1 April 2020 and 31 March 2022.

Key restrictions

For companies there is no limit on the amount of trading losses that can be carried back to the preceding year, but, after that, a maximum of £2m of unused losses are available for carry back against profits of the same trade for the earlier two years. This £2m limit applies to each accounting period falling within 1 April 2020 to 31 March 2022.

Groups will be subject to a group cap of £2,000,000 for each relevant period.

Research & Development Tax Credit Changes

The 2021 Budget has announced a cap to the R&D tax credit payable to a Small and Medium Sized Enterprise (SME) in any one year. This measure will apply to accounting periods beginning on or after 1 April 2021.

The New Cap

The new measure limits the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.

A company is exempt from this cap if:

its employees are creating, preparing to create or managing Intellectual Property (IP) and
it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D, or the provision of externally provided workers (EPWs) by, connected persons

Why is there a Cap?

The SME payable R&D tax credit allows loss making companies to claim a tax credit worth up to 14.5% of the R&D element of their surrendered losses and receive an immediate cash-flow benefit.
However, the tax credit has become a target for fraud and abuse. The objective of the cap is to ensure the relief goes to those who should receive it and to deter abuse.
This measure has been in consultation since its announcement in Budget 2018. It was announced that implementation of the cap would be delayed until April 2021 to allow for further consultation on the changes. The further consultation was published on 19 March 2020 and closed on 28 August 2020.

Interest & Royalties

From 1 June 2021, payments of interest and royalties made by UK companies to companies resident in EU member states will cease to benefit from UK withholding tax exemptions. It will instead be governed by the respective double taxation treaty between the two countries.
Not all tax treaties take withholding tax down to nil.
Some example countries are illustrated below (applicable in most cases):