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Given the continuing economic implications of the COVID-19 pandemic, it was no real surprise that the Chancellor used the Spring Budget on 3rd March 2021 to announce further support for businesses. However, it would be safe to say that one or two Budget announcements would not have been received as welcome news by a large majority of businesses.
The biggest such announcement was the 6% increase in the rate of corporation tax from 19% to 25% with effect from 1 April 2023. According to the Chancellor, this measure is required to balance the need to raise revenue with the objective of having an internationally competitive tax system, with the Chancellor making it clear that this increased rate will still leave the UK with the lowest corporation tax rate in the G7. The increase in corporation tax rate is projected to bring in additional revenues of £11.9 billion in 2023-24, rising to £17.2 billion in 2025-26.
The measure is not unexpected given the significant levels of government spending on various support measures in response to the COVID-19 pandemic. This measure seemed inevitable in the run up to the Budget, with the government’s continued commitment to maintain the ‘triple tax lock’ (not to increase income tax, National Insurance or VAT), leaving the Chancellor with few other options. It can be argued that support for the increase may also have been boosted by proposals from President Biden to raise the headline rate in the US to 28%.
There had been concerns amongst a large majority of business owners that increasing the corporation tax rate while the pandemic continues to cause economic disruption will hinder economic recovery. As such, the news that a corporation tax rise will not take effect until April 2023 is welcome.
As part of the measure, the Chancellor announced a new small profits rate of 19% from 1 April 2023 for companies with profits of less than £50,000. Companies with profits above this threshold will be subject to the increased rate of 25% with the introduction of marginal relief for profits between £50,000 and £250,000. These thresholds are to be reduced proportionately for the number of associated companies and for short accounting periods.
The introduction of marginal relief, whilst introducing some complexity into the system, means that businesses with profits between £50,000 and £250,000 will be taxed at an effective rate of tax between 19% and 25%.
It is important to note that the small profits rate will not apply to close investment-holding companies (CIC). In broad terms, a company will be a CIC if it is owned by five or fewer shareholders and does not exist wholly or mainly for the purpose of trading commercially or investing in land for letting to an unconnected party.
While the increase in CT rate will not be implemented until 1 April 2023, there is now even more incentive for companies to plan ahead in terms of putting in place appropriate structures and ensuring that the various corporation tax reliefs can be taken advantage of, with a view to reducing taxable profits.
If you have any queries about corporation tax, or tax matters in general, then please do not hesitate to get in touch.
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