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Corporation tax rates and losses in the 2021 Budget

9th March 2021

On 3 March Rishi Sunak delivered his 2021 Budget against a backdrop of high underlying national debt and a nationwide lockdown. 

In the past year, the Government has announced over £280 billion worth of support to protect jobs and the economy. 

The Chancellor was clear that this support will have to be paid back, and one of his headline-grabbing announcements was the increase to the Corporation tax main rate, which will rise to 25% from April 2023.

For many manufacturing businesses, which have not only had to deal with adapting to COVID-19 in the last year but also with the disruptions of Brexit, this additional cash expense was unwelcome. 

The potential good news is the rate does not increase until 1 April 2023, and the hope is that by then the economic recovery will be well under way. 

In addition, small companies with annual profits of £50,000 or less will continue to be taxed at 19%, referred to in the Budget as the Small Profits Rate. 

Companies will only have to pay corporation tax at 25% when their annual profits exceed £250,000.

If a company has profits between £50,000 and £250,000 then a marginal relief will apply to provide a gradual increase in the effective Corporation Tax rate.

Salaries v dividends

Owner managers of manufacturing companies should also look to reconsider their remuneration strategies. 

Changes to dividend tax rates over the last five years has narrowed the tax gap between salary and dividends, but with a low corporation tax rate the use of dividends tended to remain effective tax planning. 

Now that the corporation tax rate is set to increase to 25% in a couple of years, it may be worth revisiting to ensure the extraction of dividends remains tax efficient.

Complexity

The reintroduction of marginal relief, previously abolished in April 2015 for non-ring-fenced taxable profits, has also led to the return of the associated companies’ rules

The last time a corporation tax return included marginal relief, the thresholds were reduced by being divided by the number of associated companies.

From April 2015, when marginal relief no longer applied, the rules changed to apply only to 51% owned group companies. This is especially important when determining whether a company is large or very large for quarterly instalment payments.

Having to include associated companies, rather than just 51% owned group companies, in determining whether quarterly instalment thresholds are surpassed can have wider, and potentially more immediate, implications for corporation tax. 

It is likely to mean a higher number of companies are to be included in the calculation, and companies previously outside the requirement to pay under the large or very large quarterly instalments regime could now have to pay their corporation tax earlier than anticipated.

The main corporation tax rate increase, or having to pay tax earlier through the quarterly instalment regime, will however only impact companies that generate taxable profits. 

Losses

The recent Budget also announced that where a business, both incorporated or unincorporated, generates a trading loss between 1 April 2020 and 31 March 2022 it will be able to carry this back three years rather than the typical 12 months.

The Government has previously allowed a temporary extension of the period a business can carry back a trading loss. This was also in times of economic crisis in 1991 and 2008, and it gives the opportunity to companies to receive a refund of taxes which were paid on pre-COVID profits. 

The loss relief beyond the normal 12 months is restricted though, limited to £2m per group and must be offset against profits of the same trade.

We will be more than happy to have a conversation with you about maximising tax reliefs available to your business.

For more information on the Manufacturing sector, please visit our Manufacturing Knowledge Hub.

Also check out our Business after COVID-19: Transition Knowledge Hub for more guidance and advice on managing the pandemic.

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