When I did my tax exams more than 20 years ago, there were several complications that caused me headaches, such as first-year capital allowances, different rates of corporation tax and marginal relief for ‘medium-sized’ companies. These complications were removed over time and I thought I had seen the last of them. This year’s spring Budget has proved how wrong I can be!

Multiple corporation tax rates

The introduction of a new corporation tax rate of 25% from 1 April 2023 stole most of the Budget headlines. To ensure that the rate change does not have an impact on smaller companies, the Chancellor announced that the 19% rate will continue to apply to UK resident companies that are not close investment holding companies (CIHCs) with profits (including tax-exempt distributions) of up to £50,000.

A tapered rate will apply to companies (other than CIHCs) with annual profits (including tax-exempt distributions) of between £50,000 and £250,000. This means that the first £50,000 of profits will be taxed at 19% and every £1 of profit above that would be taxed at 26.5% until profits reach £250,000 (technically via the deduction of marginal relief from tax calculated at the main rate). Hence, the closer a company is to the £250,000 ‘upper threshold’, the closer its effective tax rate is to 25% (see Box 1).

Box 1: Effective tax rates at different profit levels from 1 April 2023

As you would expect, the £50,000 and £250,000 limits are reduced where the company concerned has associated companies or an accounting period of less than 12 months.

Although these calculations will be built into tax computation software, complications remain for the approximately one-fifth of companies caught in the tapered rate. For example, they may find budget forecasting more difficult, as the expected tax rate will be dependent on the size of tax-adjusted profits. The varying rates will also need to be factored into already complicated decisions on whether to incorporate a business.

Temporary capital allowance reliefs

Alongside the introduction of freeports, which will be covered in a future article, one of the most eye-catching measures supporting business investment was a new, unlimited, 130% super-deduction for eligible capital allowance expenditure on plant and machinery incurred between 1 April 2021 and 31 March 2023. This was coupled with an equivalent 50% first year allowance (FYA) for eligible expenditure taken to the special rate pool (such as integral features and long-life assets) over the same period.

At a 19% corporation tax rate, the super-deduction provides a 24.7p reduction in tax payable for every £1 spent. The ‘30p top-up’ is pro-rated where the expenditure is incurred in an accounting period (AP) that ends after 31 March 2023.

Example

Babyface Ltd acquires an eligible asset on 20 February 2023 for £1m. Its AP is the 12 months to 31 December 2023. As the super-deduction rules apply for 90 days of the AP, the percentage deduction available is: (100% + (90/365 x 30%) = 107%, resulting in a tax deduction of £1.07m.

FYAs for special rate expenditure are given through an upfront relief of 50% of the cost of eligible expenditure. The remaining 50% is taken to the special rate pool, which attracts an annual writing down allowance (WDA) of 6%.

Expenditure eligible for these reliefs is essentially what would otherwise be taken to the main rate or special rate plant and machinery pools, but certain items are excluded, such as:

• second-hand or used assets;
• cars;
• expenditure in the period in which the qualifying business of the company is permanently discontinued; and
• any assets that are acquired for the purposes of leasing to another party.

The usual rules apply for determining the date on which expenditure is incurred. The general rule is that it is treated as incurred as soon as there is an unconditional obligation to pay it. However, expenditure incurred on a contract entered into before 3 March 2021 will be treated as incurred on the date of the contract and not eligible for either of the two reliefs.

Which allowance should I choose?

The temporarily increased annual investment allowance (AIA) limit of £1m will continue to apply until at least 31 December 2021 (after which it is scheduled to reduce to £200,000). Expenditure on plant and machinery eligible for the various forms of relief are set out in Box 2.

Box 2: Capital allowance rates for different assets from 1 April 2021

As a company or group may allocate the AIA in whatever way it likes to eligible capital expenditure, a standalone company is likely to allocate it in the following order of priority:

1  Special rate expenditure not qualifying for the special rate FYA (eg, used, second-hand or assets to be leased that are long-life assets or integral features).

2  Main rate expenditure not qualifying for the super-deduction (eg, used, second-hand or assets to be leased which are general plant and machinery).

3  Special rate expenditure eligible for the special rate FYA.

To complicate things further, the super-deduction has a nasty sting in its tail. When an asset on which the deduction has been claimed is disposed of, a balancing charge is brought into account, calculated as set out in Box 3.

Box 3: Adjustment to disposal values when disposing of ‘super-deduction’ assets

Record keeping will be key for calculating the balancing charge on disposal. The 25% corporation tax rate may apply to part of the period in which the balancing charge arises. So, the net value of the super-deduction may be less than first anticipated.

Example

Fox Ltd, a large company, purchased an asset on 1 June 2021 for £1m, which it disposed of on 1 February 2023 for £500,000. It has a 31 December year end. The respective allowances and balancing charges comparing the super-deduction and the AIA are as follows:

While an anti-avoidance provision will be introduced to counteract any artificial arrangements designed to obtain these reliefs, companies should start considering what commercial arrangements they should be putting in place to derive the greatest benefit from them. It may be appropriate, for example, to bring forward planned investment, especially if the assets concerned are expected to be retained for at least a few years.

Company trading losses

A temporary extension to the loss carry-back rules has been introduced for both income and corporation tax purposes, which allows a limited amount of loss to be carried back for up to three years for APs ending between 1 April 2020 and 31 March 2022.

A standalone company can carry back an unlimited amount of trading losses incurred in these APs to the preceding 12 months. A company can carry back up to £2m of losses to the three years ending at the start of the AP of the loss. The loss is carried back on a last-in, first-out basis.

For groups with any companies with more than £200,000 of loss to carry back from a particular AP, there is a £2m three-year carry-back limit for the whole group.

Where a company claims to carry back losses for an annual accounting period in excess of £200,000, the claim must be made in the company’s tax return and cannot be made until the following dates:

When applying the £200,000 limit, a company must take account of all claims that are available to it, such as capital allowances, make no surrenders of losses for group relief and make the maximum permissible loss carry-back claim. Companies with loss carry-back claims exceeding £200,000 that are group members must also have their claims specified on a loss carry-back allocation statement.

Example

The companies of the group Armadillo suffered the following losses in the AP ended 31 December 2020.

Company Xylophone – £500,000

Company Yellow – £150,000

Company Zebra – £1.7m

Company Yellow can carry back its full loss of £150,000 to the APs ended 31 December 2017 and 2018. Companies Xylophone and/or Zebra will need to restrict their claims so that the total three-year carry back for the whole group is no more than £2m. Claims cannot be made until 31 March 2021, the allocation of the £2m limit must be set out in a loss carry-back allocation statement and Company Xylophone’s and Company Zebra’s claims would need to be made in a company tax return.

Conclusion

While the changes in this year’s Finance Bill create complexity, they also provide opportunities for strategic tax planning. Companies with funds to invest (perhaps from tax refunds through loss carry-back claims) may find the current capital allowances incentives attractive. The timing of expenditure should be planned carefully to ensure that companies do not miss out.

About the author

Richard Jones, Business Tax Manager, Tax Faculty