Changes and upheavals in government are undoubtedly causing disruption in tax policy. Businesses and individuals are working in times of unprecedented budget U-turns and a huge divide in opinion on how fiscal policy should be used to manage the economy. In such challenging times, it’s important for them to go back to basics and ensure that tax incentives and reliefs are being appropriately utilised.

Remuneration for owner-managers

Given the uncertainty businesses have faced over income tax, national insurance contributions (NIC) and corporation tax rates, it is worth revisiting the efficiency of remuneration policies.

Contrary to the announcement in the mini-Budget on 23 September 2022, the corporation tax rate will increase to 25% as planned for any company with profits of £250,000 or more from 1 April 2023.

Similarly, the cut to dividend tax rates of 1.25 percentage points announced at the mini-Budget will not go ahead. The basic rate of income tax will remain at 20% indefinitely, the planned 1 percentage point cut having been abandoned. The additional rate of income tax remains and the threshold that it applies from is lower from 6 April 2023.

However, the reversal of the 1.25 percentage point NIC increase with effect from 6 November and the repeal of the Health and Social Care levy announced at the mini-Budget survived, giving rise to some savings for employees and employers.

Taking all these factors into account, it may be beneficial for owner-managed companies to consider undertaking a comparison of the costs of bonuses and dividends to ensure that any remuneration is at an optimal split. Additionally, changes in tax rates may affect business decisions around the relative benefits of incorporation.

Plans for close investment-holding companies

The reintroduction of a small companies rate and marginal relief has also led to the reintroduction of the close investment-holding company (CIHC) regime. A CIHC is a company that is ‘closely held’ and does not exist for a ‘permitted purpose’ such as trading or the commercial letting of property. Such companies are subject to the main corporate taxation rate, irrespective of the quantum of their profits. This increase in corporation tax may affect the way in which investments are held.

An investment company may still be the more attractive vehicle. Holding investments personally would result in all income being taxed on an arising basis at the individual’s marginal rate.

Super deduction

This incentive will come to an end on 31 March 2023 and there are several issues to consider. Disposal of super-deduction assets will generally give rise to a balancing charge. The computations are complex, with disposal proceeds being uplifted by up to 30% (or a hybrid rate, depending on the date of disposal). TAXguide 13/21 provides more detail on this point.

But this isn’t the only issue looming with the end of the super deduction. Blockages in supply chains are causing delays in the delivery of plant and machinery. Many businesses are nervous about missing the deadline for additions to qualify for the super deduction. If delivery delays are expected, it may be worth seeking advice to explore whether the expenditure is deemed to have been incurred before 1 April 2023, irrespective of the delivery date. For example, if there is an unconditional obligation to pay for the plant and machinery, the date the expenditure is incurred can be deemed to arise at the same time as the obligation, unless anti-avoidance rules in s5, Capital Allowances Act 2001 apply.

Annual investment allowance

The annual investment allowance (AIA) threshold had been expected to fall to £200,000 on 31 March 2023. However, September’s mini-Budget announced that the £1m increased threshold would be permanent. While the availability of capital allowances does not generally dictate capital expenditure, it is worth considering whether this might alter the timing of any plant and machinery purchases. Essentially businesses don’t need to worry about the diminishing AIA and can make decisions around capital expenditure without reference to the 31 March 2023 deadline.

The AIA extension could be another lifeline for companies concerned about missing the super-deduction deadline. If a company with a 31 March year end incurred £100,000 of expenditure qualifying for the super deduction on 31 March 2023, the overall amount of relief would be £24,700 (£100,000 x 130% x 19%). Companies that will pay tax at the 25% rate incurring expenditure qualifying for the AIA on or after 1 April 2023 would obtain relief of £25,000 (£100,000 x 100% x 25%), but without the clawback provisions on a disposal that apply if the expenditure had qualified for the super deduction. However, for companies with annual expenditure on plant and machinery already exceeding £1m, relief would instead be available over time through writing down allowances.

About the author

Angela Clegg, Business Tax Manager, ICAEW