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Chancellor Rishi Sunak laid out changes to corporation tax and other business taxes as part of his 2021 Budget, delivered on October 27. Here is everything you need to know...
Income tax on trading income
Basis period reform
Further to the Government’s recent consultation, Finance Bill 2021–22 will amend ITTOIA 2005, Pt. 2 to remove references to basis periods and provide for the profits of a tax year to be the profits arising in that year. The current rules requiring apportionment of profits to basis periods will instead require apportionment of profits to tax years. The changes will take effect for tax year 2024–25 with a transition year in 2023–24 where the basis period will be the 12 months from the end of the 2022–23 basis period, plus a transition component running from the end of this 12-month period to 5 April 2024. Overlap profits will be relieved in full in 2023–24 and not carried forward into the new tax year basis. For businesses with higher taxable profits in 2023–24 because of the change in basis, the transitional adjustment will be spread over five years. Businesses will be able to elect out of spreading and accelerate the charge by treating additional amounts as arising in the tax year.
The draft legislation published on 20 July 2021 will be revised to reduce the impact of transition profits on allowances and benefits, alongside other changes.
Rate of tax
There are no changes to the rates of corporation tax announced at the Budget in March 2021. The main rate of corporation tax will remain as follows:
• financial year commencing 1 April 2021 – 19%
• financial year commencing 1 April 2022 – 19%
• financial year commencing 1 April 2023 – 25%
From 1 April 2023:
• the main rate will only apply to companies and groups with profits over £250,000 p.a.;
• the small profits rate of corporation tax for companies with profits below £50,000 p.a. will be 19%;
• marginal relief will be reintroduced for companies with profits between £50,000 p.a. and £250,000 p.a. to smooth the transition between the small profits rate and the main rate;
• the small profits rate will not apply to close investment-holding companies.
These measures have already been enacted in FA 2021.
Annual investment allowance
Finance Bill 2021–22 will extend the temporary £1m level of the annual investment allowance until 31 March 2023.
Vehicle taxation: vehicle emission certification
Finance Bill 2021–22 will amend capital allowances, company car tax and vehicle excise duty legislation so that the tax system continues to function as intended where vehicles have been certified through the new comprehensive vehicle type approval scheme due to be introduced in 2022. For capital allowances, the legislation will also confirm the applicable carbon dioxide emissions figure to be used as that arising from the Worldwide Harmonised Light Vehicle Test Procedure.
For capital allowances and company car tax, the measures will apply retrospectively from Royal Assent of Finance Bill 2021–22.
Research and development tax credits
The Chancellor announced in his speech that the R&D tax credit regime would be reformed. The scope of the regime will be extended to include expenditure on data and cloud computing costs. However, the regime will be refocused towards innovation carried on in the UK – relief for expenditure on activity taking place overseas is to be restricted. Little detail on this was given on Budget Day, and it appears plans for these changes, and plans to restrict abuse of the system and improve compliance will be announced later in the autumn.
Cross-border group relief
Finance Bill 2021–22 is to repeal the cross-border group relief rules contained in CTA 2010, Pt. 5, Ch. 3 and make related changes to rules applying to losses of EEA-resident companies trading in the UK through permanent establishments. The changes apply from 27 October 2021.
Finance Bill 2021–22 will change the rate of the banking surcharge to 3% and increase the surcharge allowance from £25m to £100m to provide greater support for challenger banks. This measure will apply from 1 April 2023.
Creative industry reliefs
Museum and galleries tax relief: extension of sunset clause
Finance Bill 2021–22 will extend the sunset clause for museums and galleries exhibition tax relief for a further two years until 31 March 2024.
Theatre, orchestra, and museums and galleries exhibition tax reliefs
Finance Bill 2021–22 will temporarily increase the headline rates of relief for the following creative reliefs as set out below:
Theatre tax relief and museums and galleries exhibition tax relief
• Non-touring (27 October 2021 to 31 March 2023) – 45% (formerly 20%)
• Non-touring (1 April 2023 to 31 March 2024) – 30%
• Non-touring (From 1 April 2024) – 20%
• Touring (27 October 2021 to 31 March 2023) – 50% (formerly 25%)
• Touring (1 April 2023 to 31 March 2024) – 35%
• Touring (From 1 April 2024) – 25% for Theatre Tax Relief; 0% for Museums & Galleries
Orchestra tax relief
• Expenditure from 27 October to 31 March 2023 – 50% (formerly 25%)
• Expenditure from 1 April 2023 to 31 March 2024 – 35%
• Expenditure from 1 April 2024 – 25%
Finance Bill 2021–22 will also implement anti-avoidance changes to better target these reliefs and ensure they are safeguarded from abuse. These changes will apply to companies entering into productions from 1 April 2022.
Switching between film tax relief and high-end TV relief during production
Finance Bill 2021–22 will allow film production companies to claim film tax relief for films that were initially intended to be released in cinemas, but which are instead put on streaming services, as long as they meet the criteria for high-end TV tax relief. This will ensure that relief is not lost should a company decide to change its distribution method during production. It will apply to any new film commencing production on or after 1 April 2022, and to ongoing productions that have not completed principal photography by that date.
Asset holding companies
Finance Bill 2021–22 will introduce a regime for the taxation of qualifying asset holding companies (QAHCs). The regime will cover the taxation of QAHCs as well as payments made by QAHCs including changes to the remittance basis. The measure, originally announced in December 2020, will apply from 1 April 2022. The draft legislation published on 20 July 2021 has been amended following input from stakeholders.
Accounting changes for insurance contracts
A new accounting standard, IFRS 17, is being introduced. This measure gives the Government power to issue regulations such that the impact of an insurance company transitioning to IFRS 17 can be spread over several years for tax purposes.
Hybrids and other mismatches
The Government confirmed that a measure announced in July 2021 will be included in the next Finance Bill. The measure clarifies that transparent entities, constituted outside the UK, where all the entity’s profits are taxable in the hands of the members of the entity, will be treated as partnerships for the purposes of the rules covering deduction/non-inclusion mismatches where the payee is a hybrid entity.
The tonnage tax regime allows shipping companies to be taxed on the basis of the tonnage of their fleets, rather than on a conventional taxable profits basis. The regime is elective and the Government intends to increase the flexibility of the election regime. Various restrictions and requirements included in the current regime to meet EU State Aid rules will be eliminated, and the regime refocused on UK flagged ships. Other administrative changes will also be made.
Uncertain tax positions
It has been confirmed that the requirement to notify an uncertain tax position (UTP) will be included in the forthcoming Finance Bill and will come into effect for returns due to be filed on or after 1 April 2022. A key change is that a UTP will now only be determined according to two criteria:
• whether provision has been made in a company’s accounts for a tax position taken in a return; and
• whether a tax position taken in a return is not in accordance with HMRC’s known position.
The controversial ‘substantial possibility test’ is not now included, but the Government remain committed to exploring whether it can be introduced at a later stage.
CT loss relief: adoption of IFRS 16
Finance Bill 2021–22 will amend loss relief rules to ensure they continue to work as intended for companies adopting IFRS 16 Leases. The changes apply retrospectively from 1 January 2019.
Corporate redomiciliation consultation
The Government has also announced a consultation on the introduction of a UK redomiciliation regime which would allow companies to redomicile, and therefore relocate to the UK. The intention is that redomiciliation would enable a foreign-incorporated company to change its place of incorporation to the UK while maintaining its legal identity as a corporate body. It is hoped that this would give companies maximum continuity over business operations and substantially reduce administrative complexity compared to other routes of relocating to and incorporating in the UK.
The consultation will seek views on:
• the advantages of enabling companies to redomicile;
• the level of demand that exists, among which types of companies and sectors;
• the appropriate checks and entry criteria;
• the merits of establishing an outward redomiciliation regime; and
• the tax implications associated with the introduction of a redomiciliation regime.
Diverted profits tax
Two, largely administrative, announcements were made in respect of DPT dealing with:
• the implementation of Mutual Agreement Procedure decisions; and
• the interaction with corporation tax enquiries.
Mutual agreement procedure (MAP) decisions relating to the diverted profits tax
A small number of international groups subject to DPT have sought relief under a tax treaty using the MAP of that treaty. It is the Government’s (and HMRC’s) position that DPT is not covered by tax treaties. However, situations appear to have arisen where under a MAP, the UK and another treaty state have agreed the appropriate course of action is to adjust DPT, presumably to avoid double taxation of income, and this new measure will allow that to take place.
Diverted profits tax – interaction with corporation tax (CT) closure notices
In a recent First-tier Tribunal case, HMRC were instructed to issue closure notices in regard to a corporation tax enquiry prior to the expiry of a DPT review period (such period runs for 30 days plus 15 months after the issue of a DPT charging notice). This measure will prevent closure notices being issued until the DPT review period expires. In the case in question the taxpayer wanted closure notices to be issued, but this measure will also stop HMRC closing CT enquiries before companies have determined whether they wish to adjust their CT returns to avoid or reduce a DPT charge.
On-line sales tax
Within its final report on the Business Rates Review, the Treasury has confirmed that an on-line sales tax (OST) remains under consideration. The Treasury notes that such a tax, levied at 1% or 2% could not be a full replacement for business rates, but it could potentially be part of the overall landscape for taxing retail businesses, and any revenue raised from OST would be used to reduce business rates for retailers. A consultation on an OST will be launched shortly.
Budget 2021 - Overview of Changes
• Administration and Compliance Changes
• Capital Gains Tax (CGT) Changes
• Corporation Tax and Other Business Tax Changes
• Customs and Excise Duties Changes
• Employment Tax Changes
• Personal Tax Changes
• Property Tax Changes