The current rate of corporation tax (19%) is set to rise to 25% in April 2023 for companies with profits in excess of £250,000. Whilst this was widely expected it is, nonetheless, a significant increase. However, companies with profits of up to £50,000 will not be affected, the 19% rate will continue to apply. For companies with profits between £50,000 and £250,000 a tapered rate will apply.
The effect of new 25% rate is tempered by:
- the deferred introduction date (which the Chancellor has argued will allow businesses to have recovered from the effects of the response to Covid 19);
- the loss carry back rules; and
- the super-deduction.
Loss Carry Back Rules
The Finance Bill 2021 will contain new legislation extending the period for which trading losses can be carried back against previous profit from one year to three years. This will apply to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022 and to trading losses made by unincorporated businesses in tax years 2020 to 2021 and 2021 to 2022.
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2m of unused losses will be available for carry back against profits of the same trade to the earlier 2 years.
The Super Deduction
The Chancellor announced a significant initiative to encourage investment in plant and machinery assets that boost productivity.
From 1 April 2021 to 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:
- a 130% super-deduction capital allowance on qualifying plant and machinery investments; and
- a 50% first-year allowance for qualifying special rate assets
This incentive will allow companies to cut their taxes by the equivalent of 25p in the pound and is aimed at the infrastructure, manufacturing, utilities and construction industries.
Clearly a lot of thought has gone into cushioning the blow of a 25% corporation tax rate, but whether this is enough to kick-start the economy remains to be seen. Whilst the Chancellor claims that the UK will still have the lowest rate of corporation tax in the G7 this is slightly underhand since the UK’s effective rate of tax has actually increased in recent years as a result of restrictions on reliefs and allowances.
With an eye on increasing the UK’s competitiveness post Brexit, the Government published a consultation on freeport policy on 10 February 2020. Pursuant to that consultation and a bidding process, the Chancellor today announced plans to introduce at least 10 Freeports around the UK, the first eight being:
- East Midlands Airport
- Felixstowe and Harwich
- Humber region
- Liverpool City Region
This measure will introduce a power to designate the location of one or more tax sites within any Freeport located in Great Britain from 9 March 2021.
The Freeports will benefit from import and export tax reliefs allowing goods to be imported, manufactured and re-exported without being subject to customs checks, paperwork, or import tariffs. In addition, the Government’s response to the consultation published in October 2020 contains various tax incentives including:
- Business Rates relief
- Enhanced Capital Allowances
- Structures and Buildings Allowance to businesses within a freeport tax site
- SDLT relief on commercial land and property transactions.
It is intended that the Freeports will create jobs, growth, and innovation in a levelling-up of towns and regions around the UK.
High Growth Businesses
The Chancellor also announced a number of actions designed to continue to keep the UK as an attractive base for high growth, innovative companies. Leaving CGT and wealth tax alone was a good start; entrepreneurs can breathe a little easier for now. In addition, further initiatives were unveiled:
- an elite points based visa system will be introduced in the next 12 months: this will enable visa applications for those that qualify to be fast tracked. It is hoped that this runs as smoothly as promised so that red tape delays can be avoided and key staff shortages can be plugged with the minimum delay;
- R&D tax reliefs: a consultation to review the availability of research and development tax relief was announced. The purpose of this is said to be to make sure that the reliefs are accurately targeted and fit for purpose in a rapidly advancing technological environment;
- Enterprise Management Incentives (EMI) share plans: EMI plans have long been the equity incentive tool of choice for high growth companies. Currently, however, there are limits to those companies that qualify, whether in relation to size, business activity or ownership structure. There are also limits on the value of shares that can be awarded under an EMI meaning some employees later to the party could miss out. The consultation will look at the extent to which the availability of EMIs can be expanded and in our view this is a step in the right direction. Hopefully the journey will continue;
- pension regulation: the Government will consult on whether changes can be made to the pensions regulatory regime to make it easier for pension funds to invest in a wider range of assets; and
- UK Listings: a nod was given to Lord Hill’s review on UK listings. Making the UK an attractive place for high growth businesses to list remains on the agenda but it appears there is still a long way to go before material changes see the light of day.
The Chancellor was clearly intending to deliver a strong message that the UK remains as keen as ever to be an attractive place for innovative businesses to thrive. At present, not much has actually happened. We will watch this space to see whether any or all of these initiatives come to fruition as promised. And whether other measures take away with the left hand what the right hand has given…
Pensions Lifetime Allowance
Last and least…
Although not a shock, it was still a disappointment. The pensions lifetime allowance (LTA) was frozen for at least 5 years at £1,073,000. The LTA has had a chequered history since it was first introduced in 2006, peaking at £1.8m in 2010 before being cut back to £1m in 2016/17 and clawing its way back up in line with inflation to the current level. This has been coupled with significant reductions in the annual allowance below which contributions to registered pensions qualify for tax relief.
The 2016 slashing of the LTA was controversial at the time and freezing it for 5 years makes it all the more so. Although it may still sound a significant amount, it is worth bearing in mind that a holder of a defined benefit pension income of just over £50,000 per annum would be up against the LTA. And they’d barely be a higher rate taxpayer. DB pensions will still be index linked and so more and more taxpayers will be dragged above the LTA.
For those who are in defined contribution schemes the position is, in some ways, even worse. Looking back at the behaviour of the equities markets over the last 5 years, it’s fair to say that without doing anything, even an averagely performing pension fund would have far outstripped inflation. Whilst a regression to the mean is the most likely outcome, there is no guarantee of this. A reinvigorated bull market could see many more people dragged into LTA concerns, and there’s not much they can do about it. Many of these concerns could be a result of contributions made before the LTA saw the light of day.
This would be bad enough in isolation, but the LTA charge on taking a lump sum in excess of the LTA is currently 55%. In the past, there have been a number of protections for taxpayers who are up against the lifetime allowance. However, those protections that remain available will not help many of the taxpayers now facing this issue.
We’re now in a position where something that was already a problem has been made considerably worse. The Government claims that only 5% of people approaching retirement are affected by the LTA. Even if true, this is still a significant number and ignores those who might alter their behaviour long in advance of retirement in anticipation of the growing problem.
Many more taxpayers will now be faced with decisions as to what to do about their pensions. Those that are currently some way below the LTA will now have 5 years for their fund to catch up. Do they stop contributing and hope the markets continue to rise, risking a shortfall in their possible pension if they plateau? Do they carry on contributing and risk the benefits being taxed at punitive rates if they misjudge? Do they retire early?
Unlike the reduction in the annual allowance, where there is a clear ability to moderate behaviour to avoid the charge, the LTA is such a long term view that it is almost impossible to get it right. We think the ramping up of this issue by the measures announced today throws a spotlight on the need to allow taxpayers who have behaved prudently in saving for retirement the possibility of protecting themselves from having the rewards of this prudence materially eroded.
If you have any questions regarding the contents of this Bulletin or Budget 2021 in general, please contact:
Head of Incentives Group
M: +44 (0)7961 118 994 or
Head of International Tax
M: +44 (0)7785 770 431 or