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Budget 2021 Commentary: Corporate Tax

Corporation Tax rate increases

Genevieve Morris, Head of Corporate Tax

“It’s big companies that have been the victim of this Budget – not a windfall tax on those that have done well through the pandemic as may have been expected, but a blanket increase in the Corporation Tax rate from 19% to 25% in April 2023. This represents an increase in the tax bill of these companies of over 30%.

“The UK’s low Corporation Tax rate has been an incentive to overseas companies to set up in the UK and a question will remain on whether this tax hike will make the UK less attractive to these businesses in the future. Ireland’s tax rate is 12.5% – and just across the Irish sea, the UK is out of the EU and will have a tax rate double that of Ireland.

“We do have to be thankful that the increase announced today will not apply until April 2023, at which point we hope that businesses will be a long way along the road of recovery and the impact of the tax increase won’t be a decrease in employment.”

Small profits tax rate

Genevieve Morris, Head of Corporate Tax

“The small profits tax rate staying at 19% is welcome. However, as is the tapering system from 19% to 25% on businesses with profits between £50k and £250k – this system was previously used in the UK before all Corporation Tax rates were aligned.”

Carry back losses

Genevieve Morris, Head of Corporate Tax

“Delighted to hear that the Chancellor has confirmed that companies will be able to carry back losses of up to £2m for three years. This has been widely campaigned for across the tax industry and has been used in the past after the financial crises. This will provide a welcome cash injection to businesses that have sustained losses in 2020/21 and have historically been profitable. However, larger business owners will need to make the decision to carry back losses for relief at 19% or carry these losses forwards and potentially obtain tax relief at 25% in the future.

“However, the Chancellor hasn’t gone far enough with losses – I would have liked to see him introduce a mechanism whereby loss-making companies could have sold their losses in exchange for a cash refund. This would have enabled start-up businesses that traditionally make losses in their first few years of trading to also receive a cash boost.”

Investment allowance

Genevieve Morris, Head of Corporate Tax

“The new investment allowance, providing a 130% tax deduction for capital expenditure will encourage businesses that have the cash to do so to accelerate spending. However, it is a measure that will only benefit the businesses that have done well during this period and have the cash to spend. This is effectively a huge cash tax cut for these businesses, almost the exact opposite of what we were expecting, and an indication that the Chancellor knows that these companies are the ones that will start repairing the economy and that he needs to encourage that.

I would have liked to see him introduce a mechanism whereby loss-making companies could have sold their losses in exchange for a cash refund.

Having an interim VAT rate of 12.5% for a further six months is perhaps surprising

Alan Pearce, VAT Partner

“Extending the 5% VAT rate for the hospitality and catering sector until 30 September is very welcome. Having an interim VAT rate of 12.5% for a further six months is perhaps surprising, especially as most of the sector should be able to reopen by this stage.

“However, these VAT rate cuts will help businesses in two ways. It will provide financial support if they decide to keep prices the same and retain the VAT reduction. However, if businesses pass on the VAT reductions to their customers this will also stimulate consumer spending and increase business turnover. It should be remembered that whether the VAT rate cut is passed on the consumer or not is a commercial decision for the business.”

The Chancellor’s long-term financial planning helped by UK being able to keep customs duty

Simon Sutcliffe, Customs Duty Partner

“The Chancellor’s long-term financial planning will no doubt be helped by the UK being able to keep any Customs Duty it collects from businesses importing goods into the UK.

“The UK collected approximately £3.3 billion in 2019/20 on behalf of the EU. This money will now go into the Exchequer together with any additional duty that the UK will collect on certain goods imported into the UK which are not covered by the Free Trade Agreement with the EU.

“Announcing the Freeports initiative located in eight new locations helps solve the Distribution Hub issues created by the recent Trade Co-operation Agreement (TCA) and the huge adverse consequences that the application of tighter Rules of Origin within that agreement caused British business. Freeports should help the UK to maintain its role as a distribution and manufacturing hub for companies wanting access to EU markets.”

The Chancellor misses an opportunity

Milan Pandya, Head of Audit, Assurance & advisory

“The Chancellor announced that he is launching a review of Research & Development tax reliefs to make sure the UK remains a competitive location for cutting-edge research. He has missed an opportunity to further support entrepreneurs and innovators. The UK is already recognised as leading in innovation in many sectors, including healthcare and certain technology sectors.

“The Chancellor has missed the opportunity to support growth in the industries of the future by providing enhanced targeted support for research and development costs. Being leading edge in these industries is vital to support long-term employment and investment by the private sector, all of which will result in greater tax receipts for the Chancellor.”

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