The Chancellor, Rishi Sunak, has delivered his second Budget of 2021. Setting the tone for his “new age of optimism”, the Budget had a number of giveaways but contained very little in the way of changes to UK taxation.
This article will take a closer look on how Business Taxes will be affected.
Corporation tax rates
The main rate of corporation tax is currently 19%. In the Spring Budget 2021, the Chancellor announced the rate would remain at 19% until 1 April 2023 but the rate will then increase to 25% for companies with profits over £250,000. The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less.
Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.
Capital allowances
Plant and machinery
Most corporate and unincorporated businesses are able to utilise a £200,000 annual investment allowance (AIA) to claim 100% tax relief on their qualifying expenditure on plant and machinery. The allowance was temporarily increased to £1 million for expenditure incurred on or after 1 January 2019 and was due to revert back to £200,000 from 1 January 2022. The £1 million allowance will now be retained until 31 March 2023.
Transitional rules will apply to accounting periods that span 1 April 2023.
For companies, this aligns the end of the temporary AIA with the end of the ‘super-deductions’ as announced by the government in Spring Budget 2021.
Reminder - Super DeductionBetween 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery are able to benefit from new capital allowances, termed ‘super-deductions’ or ‘first year allowances’, as follows:
Businesses incurring expenditure on plant and machinery should carefully consider the timing of their acquisitions to optimise their cashflow. |
Structures and Buildings
A Structures and Buildings Allowance (SBA) was introduced with effect from 29 October 2018 to relieve costs for new structures and buildings used for qualifying purposes. A business must hold an allowance statement containing certain information to be eligible to claim SBA. Minor changes will be made to the allowance statement requirements to clarify the information required to be kept.
Research and Development relief reform
Research and Development (R&D) tax reliefs for companies will be reformed to:
- support modern research methods by expanding qualifying expenditure to include data and cloud costs
- more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK
- target abuse and improve compliance.
These changes will take effect from April 2023. You can learn more about them in our blog on the subject.
Making Tax Digital for Income Tax
The Making Tax Digital (MTD) regime is based on businesses being required to maintain their accounting records in a specified digital format and submit extracts from those records regularly to HMRC.
It had been expected that sole trader businesses and landlords with business income of more than £10,000 per annum would be required to enter the MTD regime for income tax purposes from 6 April 2023. However, HMRC recently announced that this will be deferred until 6 April 2024. Early adoption of digital record keeping and voluntary submission of MTD for income tax data remains possible.
Following the deferral for sole trader businesses and landlords, general partnerships will not be required to comply with MTD for income tax until 6 April 2025 and the date other types of partnerships (for example limited liability partnerships) will be required to comply will be confirmed in the future.
HMRC has also confirmed that the new system of penalties for the late filing and late payment of tax for income tax self assessment will be aligned with when a taxpayer becomes mandated into MTD for income tax. For individuals without trade or property income or otherwise exempt from MTD for income tax, the new penalty regime will apply to their income tax affairs from 6 April 2025.
MTD for corporation tax
HMRC has previously announced that MTD for corporation tax will not be mandated before 2026.
Accounting periods that are not aligned to tax years
Aligned to the revised start date for MTD for income tax, changes will be made to simplify the rules under which trading profits made by self-employed individuals and partnerships are allocated to tax years.
The changes mainly affect unincorporated businesses that do not draw up annual accounts to 31 March or 5 April. The transition to the new rules will take place in the 2023/24 tax year and the new rules will come into force from 6 April 2024.
Affected self-employed individuals and partnerships may retain their existing accounting period but the trade profit or loss that they report to HMRC for a tax year will become the profit or loss arising in the tax year itself, regardless of the chosen accounting date. Broadly this will require apportionment of accounting profits into the tax years in which they arise.
ExampleA business draws up accounts to 30 June every year. Currently, income tax calculations for 2024/25 would be based on the profits in the business’s accounts for the year ended 30 June 2024. The change will mean that the income tax calculations for 2024/25 will be based on 3/12 of the profits for the year ended 30 June 2024 and 9/12 of the profits for the year ended 30 June 2025. |
This change will potentially accelerate when business profits are taxed but transitional adjustments in 2023/24 are designed to ease any cashflow impact of the change.
Annual Tax on Enveloped Dwellings
The Annual Tax on Enveloped Dwellings (ATED) charges increase automatically each year in line with inflation. The ATED annual charges will rise by 3.1% from 1 April 2022 in line with the September 2021 Consumer Price Index.
Residential Property Developer Tax
A new tax will be applied from 1 April 2022 on company profits derived from UK residential property development. The tax will be charged at 4% on profits exceeding an annual allowance of £25 million. For companies that are part of a group, the £25 million allowance will be allocated by the group between its companies.
Cultural relief
The government has announced that it will temporarily increase cultural tax reliefs for theatres, orchestras, museums and galleries across the UK from 27 October 2021 to 31 March 2024, increasing the relief organisations can claim as they invest in new productions and exhibitions.
Changes will also be introduced to better target the cultural reliefs and ensure that they continue to be safeguarded from abuse. These will apply from 1 April 2022.
Cross-border group relief
Following the UK’s exit from the European Union (EU), the government is bringing the corporation tax group relief rules relating to European Economic Area (EEA) resident companies into line with those for non-UK companies resident elsewhere in the world. This applies to accounting periods ending on or after 27 October 2021 and will affect UK groups with subsidiary companies established in the EEA along with EEA-resident companies that are trading in the UK through a permanent establishment.
Online Sales Tax
The government has announced its plans to consult and explore the arguments for and against the introduction of an ‘Online Sales Tax’.
Should such a tax be introduced in future, it would raise revenue to fund business rates reductions.
Read more about the 2021 Autumn Budget
David Robinson
As a Tax Partner, I advise clients on all aspects of UK tax, ranging from business taxes, transactions and private client matters, helping to achieve the objectives and aspirations of businesses and their owners.
View my articlesTags: Business Taxes
