Corporation tax rates
Corporation tax will remain at 19% for the years beginning 1 April 2021 and 1 April 2022.
As announced in the Spring Budget, from 1 April 2023, the main rate of corporation tax will increase to 25%, and will apply to profits over £250,000. A small profits rate will also be introduced for companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. Companies with profits between £50,000 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.
The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies.
Normally, trading losses can be carried back to the previous year.
The Chancellor announced in the Spring Budget, a temporary extension to the loss carry back rules for company accounting periods ending in the period 1 April 2020 to 31 March 2022 and for tax years 2020 to 2021 and 2021 to 2022 for unincorporated businesses. Losses in these periods will be available to carry back for up to 3 years, with losses being carried back against later years first.
Carry back will be subject to a cap of £2,000,000.
The nil rate dividend allowance will remain at £2,000 for 2021-22.
National Insurance (NI) for the self employed
Class 2 NI will increase to £3.15 per week for 2022-23.
The rate of Class 4 national insurance will increase to 10.25% (from 9%) from 6 April 2022 due to the first stage of introduction of the new Social Care levy announced in September.
From April 2023, once HMRC’s systems are updated, the 1.25% Levy will be formally separated out and will also apply to income from employment or self-employment of individuals working above State Pension age, and National Insurance contribution rates will return to their 2021 to 2022 levels.
Basis period reform
Basis periods are the accounting periods used for a tax year. Currently, sole traders and partners are taxed based on their accounting year ending in the tax year. So, for example, for the 2020-21 tax year, that would include the year ended 31 March 2021, but also year ends from earlier in the tax year, such as 30 April 2020.
If you have a year end other than 31 March or 5 April, you will usually have been taxed on some profits twice in the first years and these ‘overlap’ profits are carried forward to be offset at a later date – normally when you cease trading.
Hidden in the accompanying documents to the Budget was confirmation that the Government will reform basis periods with effect from the 2024-25 tax year, such that profits will be taxed in the tax year in which they arise. There will be a transitional year in 2023-24.
So, if you have a 5 April or 31 March (which is deemed to be the same as 5 April to save adjusting for a few days), there will be no change for you.
If you have a different year end, some profits will again be taxed twice, but you will be able to offset you overlap profits.
To give an example. Say you have a 30 April year end, the profits taxed in year tax year will be:
2022-23 – based on the year ended 30 April 2022
2023-24 – based on the year ended 30 April 2023 plus 11 months of the year ended 30 April 2024 less your overlap profits
2024-25 – based on 1 month of the year ended 31 April 2024 plus 11 months of the year ended 30 April 2025
This may result in a higher than usual taxable income in 2023-24 since profits usually grow over time, so the overlap profits are likely to be less than the addition amount brought into the year.
For businesses with higher profits in 2023 to 2024 due to the change in basis, the transitional period additional profits will be automatically spread over a period of five years. Businesses will be able to elect out of spreading and accelerate the charge, to treat additional amounts as arising in the tax year.
What that really means is that if you do not have a 31 March/5 April year end, unless there are strong business reasons for an alterative year end, you may want to switch to a 31 March/5 April year end as soon as it makes sense to – which will probably be the 2024-25 tax year if you want to spread the transitional profits.
Making Tax Digital
Making Tax Digital (MTD) has been going through consultations over the past few years. The current status of MTD is as follows:
From April 2019, all VAT registered businesses with a turnover in excess of the VAT threshold (£85,000) have been required to file their VAT returns through compliant software under making tax digital. From April 2021, the soft-landing rules cease, which means that all transfers of data must be by digital links (for example, you cannot take the information from a spreadsheet and type it into a website to file your VAT – you must be able to upload the information from the spreadsheet to the website digitally).
It was confirmed in the Budget that MTD for VAT will be extended to all VAT registered businesses from April 2022.
MTD ISTA (Income tax self assessment) will be compulsory for the self employed, partnerships and landlords with gross income (ie before deducting any costs) of £10,000 or more. Tax payers will be required to make quarterly reports of their income and expenses digitally, together with a fifth filing to finalise the figures and report any other income.
Every transaction will have to be recorded individually (ie you can’t add the sales/rent receipts for the quarter together and report a total figure, you have to enter every receipt individually), and that the information has to be transferred electronically to HMRC quarterly, with no retyping at any stage.
MTD ITSA was due to start from 6 April 2023, but that has now been delayed to 6 April 2024 for the self employed and landlords and 6 April 2025 for general partnerships.
MTD for corporation tax is currently in consultation and will not be made compulsory until 2026 at the earliest.
Businesses can claim an “annual investment allowance” (AIA) when they buy plant and machinery for use in the business. The standard limit is £200,000, which means that businesses can claim an immediate tax write down of the first £200,000 of expenditure every year. The AIA was temporarily increased to £1,000,000 for two years from 1 January 2019. This was extended in the Spring Budget to 31 December 2021, and again in the Autumn Budget to 31 March 2023.
For asset purchases in excess of the AIA, as well as some non-qualifying expenditure such as cars, expenditure goes into one of two pools – the main rate or the special rate pool, with current writing down allowances of 18% and 6% respectively, on a reducing balance basis.
The Chancellor announced in the Spring Budget a new ‘Super-deduction’ to encourage companies (NB Companies only, it does not include personal tax payers) to invest. From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:
- a 130% super-deduction capital allowance on qualifying plant and machinery investments
- a 50% first-year allowance for qualifying special rate assets
Cars with zero emissions are entitled to a 100% tax write down in the first year, those between up to 50g/km go into the main (18%) rate pool and those with emissions over 50g/km into the special (6%) rate pool.
The Structures and Buildings Allowance remains at 3%.
Research and development tax credits
Companies can claim an enhanced tax deduction for research and development costs.
Changes were announced to the scope of costs eligible for relief by expanding qualifying expenditure to include data and cloud costs from April 2023.
There will also be changes to encourage R&D carried out within the UK.
The Chancellor announced in the Budget that there would be key reforms to business rates from 2023, including more frequent revaluations, investment relief for green technologies and business rates improvement relief.
He also announced that next year’s increase in the multiplier would be cancelled, and a 50% discount for businesses in the retail leisure and hospitality sectors for 2022-23 (subject to a £110,000 per business cap).
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’.