Highlights of Measures in 2021 UK Budget Affecting Companies

March 2021

The 2021 UK budget, presented to the Parliament on March 3, 2021, contains a number of measures that will affect companies, including changes to the corporation tax rate. In his speech to Parliament, the Chancellor focused on measures to address the economic impacts of the COVID-19 pandemic, including the need for public revenue, while at the same time continuing support for businesses through restart loans and grants, and incentives for investment in growth. The finance bill that will legislate the proposed changes was released on March 11.
 
The most significant measures affecting companies are as follows:
 
  • Corporation Tax Rate: The main corporation tax rate will be increased and the UK will return to having lower and upper rates, as well as a high marginal rate in between, which will add another layer of complexity to the process of forecasting tax payments. The current 19% rate will continue to apply until April 1, 2023 when it will increase to 25% for companies with profits exceeding £250,000. Companies with profits of £50,000 or less will continue to pay at the 19% rate (small profits rate). Where a company’s profits fall between £50,000 and £250,000, it will be able to claim an amount of marginal relief providing a gradual increase in the corporation tax rate. 
The changes to the corporation tax rates will disproportionally affect banks, so the government will review the banking surcharge, a corporation tax surcharge of 8% on the taxable profits of banks that have annual profits relating to banking activities greater than £25 million. This review should help ensure that the UK banking sector remains competitive with its peers in the U.S. and the EU.

All corporate businesses should consider how the rate increase in the UK will impact their future business returns and projected cash flows.
 
  • Diverted Profits Tax (DPT): To maintain the 6% differential between the DPT and the main rate of corporation tax, the DPT rate will increase from the current 25% to 31% as from April 1, 2023. The DPT applies to multinational enterprises with business activities in the UK and certain structures that purportedly divert profits from the UK. The DPT regime is separate from, and in addition to, the regular UK corporation tax, and DPT payable cannot be credited against the regular corporation tax.
  • Loss Carryback Rules: The trading loss carryback period will be extended temporarily from one to three years for losses arising in 2020-21 and 2021-22. There is no limit on the amount of losses that will be able to be carried back to the preceding tax year, but a maximum of £2 million of unutilized losses will be able to be carried back to the other two years (and the £2 million cap applies at a group level for companies within a group).
  • Super Deduction: A new temporary super deduction will be available for companies investing in qualifying new plant and machinery between April 1, 2021 and March 31, 2023. This deduction will allow companies to potentially reduce tax payable by 25 pence for every £1 invested in eligible plant and machinery. The super deduction will apply to expenditure on new main pool plant and machinery that ordinarily qualifies for the 18% main pool rate of writing down allowances. A temporary first-year allowances of 50% will also apply to companies investing in new plant and machinery qualifying for special rate pool plant and machinery.
  • Hybrid and Mismatch Rules: A number of changes will be made to the hybrid and other mismatch rules in the Finance Bill, following the government’s November 2020’s response to a consultation.
  • Withholding Tax Exemption on Interest and Royalties: The EU Interest and Royalties Directive (IRD), which eliminates withholding tax on certain interest and royalty payments, ceased to apply in the UK when the Brexit transition period expired on December 31, 2020. However, even though the exemption under the IRD no longer applies in the UK, the UK legislation giving effect to the IRD continues to apply; this legislation will be repealed via the Finance Bill and will cease to apply to payments on or after June 1, 2021. After that date, the withholding tax rates on interest and royalties will depend on the provisions in an applicable tax treaty.
  • Consultation on Research and Development (R&D) Incentives: The government has launched a consultation on the nature of investment in R&D by private enterprises and the manner in which such investment is supported by R&D relief schemes. The consultation will close on June 2, 2021.
 
For more details on the UK budget, see BDO in the UK’s analysis.
 

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