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Spring Budget 2021 – Business Tax

Author Image The Technical Team
3 minutes read
Last updated on 3rd Mar 2021

Overview

The Chancellor announced measures for both profits and losses for businesses.

What did the Chancellor say?

The Chancellor announced measures for both profits and losses for businesses.

Profits

Before we consider what the Chancellor said, it’s worth recalling that currently we have a single corporation tax rate of 19%, and you have to go back to 2014 when we had a main rate and a lower small profits rate.

The Budget has introduced a three-pronged approach to corporation tax in the future.

  1. Corporation tax will remain at 19% for the years starting 1 April 2021 and 1 April 2022.
  2. From 1 April 2023, the headline (i.e. main) corporation tax rate will be increased to 25% applying to profits over £250,000.
  3. A small profits rate (SPR) 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 SPR will not apply to close investment-holding companies. An example would be a company controlled by a small number of people which doesn’t exist wholly or mainly for the purpose of trading commercially or investing in land for (unconnected) letting.

Note that these measures do not impact the 20% ‘tax credit’ on UK bonds available to individuals, trustees and corporate investors. 

Losses

For the next two years, the Chancellor is making the tax treatment of losses significantly more generous. Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020/21 and 2021/22. There are also measures in place for companies that are members of a corporate group. Businesses will be allowed to carry back losses of up to £2 million for three years. This is available to both incorporated and unincorporated businesses.

What does it mean for Financial Planners?

Profits

Well, that depends on the company you are dealing with. In his speech, the Chancellor stated that around 70% of companies (1.4m businesses) will be completely unaffected, and just 10% will pay the full higher rate. For the 30% that are impacted then those looming corporation tax increases will begin to focus minds, and might influence behaviours. For example, and where appropriate, might the directors expedite the disposal of company owned assets to realise gains while subject to lower corporation tax rates? In the world of financial planning and with interest rates at historically low levels, we increasingly encounter companies seeking a better return for ‘surplus’ cash. For example, a company might invest in an insurance bond offering the prospect of low volatility (important given that the funds will be required for business purposes at some point). Think of a ‘micro entity’ using historic cost accounting for an insurance bond. The company achieves tax deferral until there is a disposal event such as full surrender, and assuming a gain arises, that profit is taxed at the prevailing corporation tax rates. If it’s a UK bond then the company enjoys a 20% tax credit which more than wipes out the corporation 19% tax due on the bond gain. Consideration may be given to crystallising the gain while the 19% rate applies and reinvesting those proceeds. For those bigger companies using fair value accounting, then tax will be paid on an annual basis and so, on an ongoing basis, investment gains will attract those 19% rates until April 2023

Despite these comments, corporate investing remains an investment story rather than a tax story. Those prevailing corporation tax rates apply just as much to deposit interest received as to investment gains!

Losses

Welcome news for those businesses impacted.

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.