For many years now previous governments have lowered corporate tax rates in the UK to encourage business and investment in the UK economy. Back in 2010 the corporation tax rate stood at 28%, since then it has been cut to 19%. Plans were in place to cut this even further to 17% however those were cancelled in 2019.
Around the world corporate tax rates have fallen too, previously the global average stood at 40%, by 2020 this came down to 24%. Like in the UK governments all over wanted to encourage business and attract investment into their economies.
How has COVID impacted corporation tax?
Governments around the world have had to assess their tax strategy since the start of the COVID-19 pandemic. Here in the UK the government has been limited to which taxes it can raise following the Conservative party manifesto promise to not raise income tax, national insurance and VAT. For this reason, when the Chancellor of the Exchequer, Rishi Sunak announced in his 2021 Spring Budget plans to increase the UK corporation tax rate many were not surprised. The main rate will increase to 25%, effective from April 2023 and the introduction of a small-profits rate of 19% also outlined.
Rishi Sunak outlined the increase was required to recover some of the financial support given to businesses. Having paid out more than £100 billion Rishi described the increased tax rates for businesses as fair and necessary, seeing the increase as a way to ask businesses to contribute to the UK recovery.
The good news for those smaller businesses and limited company contractors who have annual trading profits below £50,000 is that they will see no difference in their corporation tax bills as the small profits rate will apply to them. Those who make profits between £50,000 and £250,000 will pay a tapered rate which will increase in line with the profits made, with only those businesses who have profits above £250,000 paying the new rate of 25%.
As outlined, although the change will not affect all contractors with some affected partially, contractors will still feel disappointed after what has been a tough year.
Super-deduction
Another new introduction by the chancellor to encourage investment has been the announcement of a ‘super-deduction’ capital allowance. Unlike the delayed increase to the rate of corporation tax rate, this super-deduction is available from 1 April 2021 for two years, ending on 31 March 2023.
During this period, companies that invest in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This will allow them to effectively cut their tax bill by up to 25p for every £1 they invest.
Plant and machinery covers various business items, including computer equipment, telephone equipment and office furniture such as desks and chairs.
For example, a company that purchases equipment of £1,000 could deduct £1,300 from its taxable profits in year one, achieving a tax saving of £247.
Making Tax Digital for corporation tax
In the Spring Budget the government also committed to developing and modernising the UK tax system using its Making Tax Digital (MTD) programme.
In the initial stages MTD since April 2019 has been focused around VAT. The government have confirmed its intention to continue this rollout with Self Assessment tax payers from 2023 and then corporation tax from 2026.
A requirement of the scheme will be that all companies and businesses required to maintain digital records, use MTD-compatible software and provide HMRC with quarterly updates.
