Thankfully, plans for matching capital gains tax rates to income tax rates were thwarted by pressure from business groups and Conservative Party donors. Unfortunately, the fear of the destructive power of such a change accelerated massive numbers of transactions and this part of the Rebel Alliance, based in Birmingham and Manchester, rather than the ice planet of Hoth, advised on eight deals which completed in the last week.
In addition to the potential changes to CGT, we were concerned that changes could have been made to pension tax relief and that a wealth tax could have been introduced. Fortunately, these aren’t the tax rises you’re looking for!
When the Empire captured the starship carrying the blueprints for the Death Star, Princess Leia downloaded them to R2D2, who then escaped and landed on Tatooine. However, with plans for the CGT increase abandoned, what plans would Rishi Skywalker have to announce?
As always, we focus in this summary on the key changes for you, our clients and contacts, and the impact they will have on you and your businesses. In the same way that nobody wants to watch a repeat of The Phantom Menace with Jar-Jar Binks, nobody wants to spend five minutes reading what you’ll learn on News at Ten. Therefore, we are focusing in this letter on corporation tax rate changes, incentives for investment, cashflow opportunities from the use of losses, stamp duty benefits and freeports.
From 1 April 2023 the corporation tax rate will be increased to 25% from its current level of 19%.
To limit the impact, companies with profits of less than £50,000 will continue to pay tax at the 19% rate, with a tapering increase so that the full rate of 25% is payable where profits are above £250,000.
The thresholds will be proportionately reduced for accounting periods of less than a year or where there are other companies under common control.
The rate rise does not take effect until 2023, so there is time to update budgets and cash flow forecasts to take account of the increase.
The announcement suggests that the rate rise will be included in the 2021 Finance Bill. If this is the case, deferred tax provisions will need to be recalculated once the Bill has been substantively enacted (spring/summer 2021) rather than waiting until 2023.
Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery will benefit from new first-year capital allowances.
A super deduction of 130% will be available for costs incurred on plant and machinery qualifying for capital allowances under the main rate pool and a 50% first-year allowance (FYA) will be available for assets qualifying for allowances under the special rate pool, such as internal fixtures in buildings.
The temporary annual investment allowance (AIA) of £1m will be extended for another year, covering qualifying capital expenditure made this calendar year. Of course, the super deduction may make this irrelevant except for special rate pool assets.
The Chancellor wants to encourage companies that have built up their cash reserves to invest in capital assets. The introduction of these enhanced reliefs should lead to lower corporation tax bills.
The interaction between AIA, the super-deduction and the 50% FYA is not currently clear. For example, if you spend £1m on qualifying capital expenditure, which one do you use first?
Ideally, you’d want to use the super deduction on the assets qualifying for relief under the main pool, followed by the AIA on assets qualifying for the special rate pool, then the 50% FYA. Whether this will be allowed will be become clear when the Finance Bill is published.
As an example, if you were to buy a new droid, or a machine for use in your factory, for £1m, you would now deduct £1.3m from your taxable profits in the year of purchase. The tax saving would then be £247,000.
You should also be mindful of the timing of expenditure as it must be incurred in the periods set out above. If it straddles these periods, time apportionment of the reliefs will be required.
The government will introduce legislation to temporarily extend the period over which companies can carry back trading losses from one year to three years.
Under the existing rules, a company incurring a trading loss in an accounting period may make a claim for that loss to be set off against total profits of the same accounting period. Additionally, it can claim for the unused balance of such losses to be set off against all profits of the preceding twelve month period or the losses can be carried forward for use against future profits.
For accounting periods ending between 1 April 2020 and 31 March 2022, the carry back period will be extended from one year to three years for unused losses. These losses may be offset against profits of the same trade, starting with profits of most recent years first before being carried back to earlier years. The current rules allow trading losses to be carried back one year to offset against total profits without restriction.
No change is proposed to the current one-year unlimited carry back of trade losses. However, for the extended relief, the amount of loss that can be carried back to the earlier two years of the extended period will be capped at £2m for each of those two years. There are separate caps of £2m of losses for accounting periods ending between 1 April 2020 and 31 March 2021 and between 1 April 2021 and 31 March 2022. Groups will be subject to a group cap of £2,000,000 for each period which means that the £2,000,000 cap will need to be allocated amongst the UK group companies that wish to carry back losses.
This measure has the potential to generate a corporation tax refund if companies have made losses in periods ending since 1 April 2020 which they have not been able to fully relieve against profits for the year before that.
Companies should review the use of losses in accounting periods ending after 1 April 2020 to determine whether an additional loss carry back claim could generate a corporation tax repayment. Groups will also need to consider how the carry backs are allocated between group companies.
The first lockdown last year had a big impact on the housing market, leaving it resembling a Princess Leia hologram with a dodgy battery. In an attempt to revive the market, in July last year, the Chancellor increased the residential SDLT nil rate band from £125,000 to £500,000.
This measure was due to end on 31 March 2021 but has now been extended. The £500,000 nil rate band will remain in place until 30 June 2021. To avoid a ‘cliff edge’ effect, the nil rate band will reduce to £250,000 from 1 July to 30 September before returning to £125,000 with effect from 1 October 2021.
Where a purchaser buys a residential property (and the transaction is not a higher rate transaction such as a second home) no SDLT will continue to be due on the first £500,000 of consideration where the transaction takes place on or before 30 June 2021. Where the transaction is a higher rate transaction, a rate of 3% will apply to the first £500,000 of consideration. In both cases, this will be an SDLT saving of £15,000 compared to the standard bandings of SDLT. The reduction in the nil rate band to £250,000 between 1 July and 30 September 2021 will result in savings of up to £2,500.
Being idealistic (as good Jedis should be) you might expect the extension of the nil rate band to reduce the costs of buying properties, with this helping first time buyers get onto the housing ladder. It seems, however, that the saving has led to price increases, so that the vendors have retained at least some of the benefit of the saving.
Landlords, who are very much seen as Darth Vader type figures by certain sections of Twitter, have also been said to benefit from the increase by expanding buy-to-let portfolios. This position is likely to continue into the 2021/22 tax year, however, the advent of Government guaranteed mortgages may yet help first time buyers.
The government has been keen to encourage the development of freeports which can have favoured VAT and Customs Duty regimes. Eight freeports have been announced for England, with the two nearest Claritas’ offices being in Liverpool and at East Midlands Airport. Two key incentives will be an enhanced 10% rate of structures and buildings allowances (compared with the 3% normal rate) and 100% capital allowances until 2026.
Unfortunately for our theme, this measure affects freeports rather than spaceports. As someone who grew up in Derby, near to the East Midlands Airport freeport, I can attest that a spaceport would have been quite in keeping.
After all, few Derbeians of my generation can have missed the similarity between the cantina in the Mos Eisley spaceport, a “wretched hive of scum and villainy” according to Obi-Wan Kenobi, and the Pink Coconut nightclub!
This measure should be of interest to companies looking to locate and export from a location which could offer enhanced transport links and a more attractive tax regime.
All images copywriter of Shutterstock
The world of tax is constantly changing, so keep up to date on all our news, views and opinions
22 November 2023
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