Are you ready for the changes in Corporation tax?

As an end to the pandemic became visible in 2021 (or so it was thought at the time), the significant changes that were likely to be made to Corporation Tax were announced in the March 2021 budget.

These announcements have been combined with a return to normal deadlines for filing Senior Accounting Officer returns when required and, a tightening up of the process of repayments of tax overpaid where previously the Government was keen to ensure repayments were placed in the hands of companies as soon as possible to help those companies manage their liquidity. Not quite a full return to normal but the direction of travel is obvious.

The Government was already committed to supporting economic growth through infrastructure spending and “levelling up” those parts of the UK that had suffered under-investment. Added to this is the imperative of beginning to repair HM Treasury finances ravaged by the pandemic.

Short term measures announced in 2021 included:

  • The super deduction
  • Accelerated relief for Special Rate Asset expenditure
  • Extended loss relief carry back
  • A continuation of the £1m Annual Investment Allowance beyond the end of 2021

To benefit from these changes, companies need to think carefully about when they spend money on capital assets and what they spend it on. They also need to think about whether through necessity or good planning they should use valuable tax relief such as losses to recover tax now or, store these valuable tax attributes for use in 2023 and beyond when corporation tax rates will increase.

For many businesses the answer may be obvious; claim relief and recover tax now either through claiming loss relief in 2021 or carrying back losses over the extended carry back period. However, as the date of 1 April 2023 tax increase looms, companies and their advisers may well start thinking about deferring the use of tax losses and tax relief to relieve profits from the higher rate of tax in force from that date.

Corporation tax rates

  • The main rate of corporation tax will increase from 19% to 25% from April 2023
  • Businesses with profits less than £50,000 will continue to be taxed at 19%
  • A tapered rate will be introduced for profits between £50,000 and £250,000
  • The lower and upper limits of £50,000 and £250,000 will be proportionally reduced for short accounting Period and where there are associated companies. Broadly, a company will be associated with another company at a particular time, if at that time or at any other time within the preceding 12 months:
    • one company has control of the other
    • both companies are under the control of the same person or group of persons

Companies accounting for deferred tax will need to factor in the increased corporation tax rate in their deferred tax calculations for year-end accounts purposes.

Extended loss carry back

There is no change to the current one-year unlimited carry back of trade losses. However, for accounting periods ending in the period from 1 April 2020 to 31 March 2022 there is scope for an extended relief claim where businesses can carry back trading losses to the earlier two years, up to a maximum of £2m per year.

Groups will be subject to a group cap of £2m for each relevant period but there is no pro-rating of the cap if the earlier accounting period is less than 12 months. Extended loss carry-back claims will be required to be made in a Corporation Tax Return which means many claims will only be processed once statutory accounts are signed and the corporation tax return reflecting the loss to be carried back is completed and filed.

However, claims below a de minimis limit of £200,000 may be made outside a Tax Return without having to wait to submit that Tax Return. A stand-alone de minimise claim may be made as soon as the accounting period in which the loss occurs has ended, providing it can be quantified appropriately with draft accounts and management accounts.

Enhanced relief

Our section of this guide on enhanced relief and capital allowances includes details of the myriad of incentives available to companies, particularly the new capital expenditure relief announced in the 2021 budget. Most companies would want to claim the so-called “super deduction” where possible and they may consider accelerating a capital project to before 31 March 2023 to qualify for that relief in respect of planned capital projects. The Government may well hope they do, to boost investment in the aftermath of the pandemic.

Alternatively, a company may find second-hand plant is more readily available than new plant due to well publicised manufacturing problems during the pandemic. But, would that company be prepared to pay a premium for new plant in the knowledge it could secure the super deduction for new plant that would not be available for the expenditure on second-hand plant?

If a company realises losses either by virtue of the super deduction or has been pushed into a loss position by virtue of the pandemic or Brexit transition, it may reflect whether carrying back losses to realise cash now is a good idea.

The added attraction that the loss is put to good use, outweighs the potential to relieve profits arising after 1 April 2023 that will otherwise be taxed at 25%. Each company will have its own priorities and the decision on how to use losses will be linked a variety of factors including whether there is a need for repayments of tax now and, the certainty with which profits can be predicted in 2023 and beyond.

However, would those businesses also want to claim the 50% special rate pool relief when claiming Annual Investment Allowance for that special rate expenditure get a better result?

Payment dates

There are three separate payment regimes for how and when companies pay corporation tax. Which regime a company falls within is determined by whether they meet certain profit thresholds. The “associated companies” rules for tax rates will also replace the 51% group company test for the purposes of determining whether a company is large or very large for quarterly instalment payment purposes. Companies should consider if this new test will propel them into the quarterly payment regime or even into the very large quarterly payment regime for corporation tax.

Research and Development

Companies carrying out qualifying research and development (R&D) activities can save corporation tax, depending on the costs incurred. Only companies can claim this relief. Sole traders and partnerships cannot. Generally speaking, the relief is under claimed and it is important to identify any potential R&D projects. The section on enhanced tax reliefs sets out more details.

Income and expenditure

The general tax planning strategy should normally be to defer income and make full use of all available allowances and deductions. If liquidity is not a concern some thought should be given to when relief is claimed if it becomes apparent there is a need to mitigate the effect of higher tax rates in the future.

Income

Income is reflected for tax purposes in accordance with what is termed generally accepted accounting principles (GAAP). The general principle is that income arises when the work is done, or the goods are supplied and not when you are paid. It may be possible for income to be deferred into a later accounting period. However, the accounting policies must be applied on a consistent basis from one year to the next and must be consistent with GAAP.

Maximising other deductions

There are several ways in which a company can maximise deductions for expenses in an accounting period. Planned expenditure, for example on repairs, could be brought forward, or in some instances, a provision could be made in the accounts for future costs. In general, tax relief is often allowed for provisions made in full accordance with GAAP provided there isn’t a specific prohibition for the expense.

The following items merit review:

Bad debts

The debtors’ ledger should be reviewed in detail so that provisions and/or impairments can be made for bad debtors. It is important that evidence is available where a provision is to be made, that the circumstances under which the debt have proven to be bad were in existence as at the balance sheet date.

Stock

The company can make a specific provision against slow-moving, damaged or obsolete stock, but a general provision is not allowed against tax. The company might be able to change the way it values stock, but great care needs to be taken.

Bonuses

It might be possible to make a provision for bonuses and/or other remuneration to be paid in the following year, thus advancing tax relief. For such a provision to be allowable, it must be possible to establish that the liability to make the payment existed at the balance sheet date and that the payments must then be paid within nine months of the end of the period, otherwise they will be deductible only in the accounting period in which they are paid.

Pension contributions

If the company has a registered occupational pension scheme (including schemes such as a SIPP or a SASS for the directors and their families), tax relief is given for contributions actually paid in the year, rather than the amounts provided for in the accounts.

Filing deadlines

Year end marks a deadline for various tax filing obligations in addition to the normal CT600 corporation tax return. These include where relevant:

  • The corporate interest restriction return (interest > £2m)
  • Reviewing and publishing tax strategy (large groups)
  • Country by Country Reporting (companies that are members of large international groups

The anniversary of the preceding year’s filing deadline also may mark the final date for certain claims such as R&D claims, group and consortium relief claims, use of the Group Deductions Allowance and loss carry back claims. Companies should review prior years and consider if further filings are needed before the window to make further changes to the return for the prior year closes.

Where a company or group has over £200m of UK turnover it will also need to consider if it has a Senior Accounting Officer filing obligation for both corporation tax and all other in-scope taxes. The filing deadline for this is aligned to accounts filing deadlines of 6 and 9 months after the end of the accounting period.

International

International governmental agreement to further measures to combat international tax avoidance have been widely reported. These are reflected in the ongoing work of the Organisation for Economic Co-operation and Development in the Pillar 1 and Pillar 2 initiatives.

These deal with:

  • Attributing taxable income to countries where large companies actually do business (Pillar 1)
  • Establishing a global minimum rate of tax (Pillar 2) There is substantial work still to be done on these proposals at both an international and domestic level.

However, in the meantime, the UK together with other jurisdictions are looking more closely than ever at the pricing and trading arrangements between international affiliates to determine if taxable income is being reflected in the correct country for tax purposes. Groups of companies should continue to examine arrangements with affiliates.

While the UK does have an SME exemption for Transfer Pricing, other countries may well not offer relief from their own Transfer Pricing rules for smaller companies. Together with recently introduced profit fragmentation rules that apply to all companies trading with lower tax countries, even small groups of companies may find themselves subject to UK or overseas scrutiny if it could be argued they are not reporting “arm’s length” profit.

This insight was originally featured in our Year-end tax guide for 2021/22.