Budget 2021: Corporate tax

Today’s announcement of an increase in the rate of corporation tax from 19 per cent to 25 per cent was certainly the most eye-catching corporate tax measure and was arguably the most important point in the 2021 Budget in terms of its impact on public finances.

Certainly, the additional tax expected to arise from this change dwarfed any other revenue-raising measure in the Budget Red Book and it seems that the Chancellor very much had large corporates in mind when he said that he expected more from those that were able to afford it. 

The increase in rate has been postponed for a couple of years giving near-term relief for businesses as the effects of the pandemic are worked through but, thereafter, corporate tax is set to rocket.

Over the next five years, the rate increase is expected to generate additional corporation tax of almost £50bn, and in 2026 alone this will result in additional tax of £17bn. Given that total corporate tax receipts for 2021/22 are expected to come in at around £40bn, the scale of this increase is obvious.

The announcement effectively winds the clock back ten years and will return the UK corporate tax rate to around where it was in 2011, though the Chancellor was quick  to point out that the UK would remain the most competitive corporate tax regime in the G7. 

However, there were some relieving provisions that will lessen the impact in the short term and encourage businesses to invest.

The re-introduction of a small companies rate of tax for businesses making profits of less than £50,000, and marginal relief for those making profits of less than £250,000, returns the UK to a regime that was abolished back in 2015, but has been resurrected in order to target the tax increase at the most profitable companies with the deepest pockets. Now, as then, the relevant thresholds will be reduced where there are associated companies under common control.

The temporary extension of the period over which trading losses are able to be carried back, to 3 years, was predicted and again marks a return to a policy that was previously adopted in the aftermath of the 2008/09 financial crisis.

Mark Twain said that history does not repeat but it does often rhyme. This certainly seems to have been true in today’s Budget.

Away from rate changes there are a couple of other very interesting developments. 

The announcement of a 130 per cent ‘super deduction’ for qualifying capital spending is clearly aimed at encouraging investment and will be welcomed by capital intensive businesses.

There was also an announcement of a consultation on research and development (R&D) tax relief, which is no doubt targeted at keeping the UK at the centre of global innovation. This also perhaps shows the first signs of ‘fiscal freedom’ following the UK’s departure from the EU, as the effect of the EU’s State Aid regime becomes less relevant. A consultation on the enterprise management incentive (EMI) tax advantaged employee share scheme was also announced, seemingly for similar reasons.

Finally, a quick word about the dog that didn’t bark. There was nothing in the Chancellor’s speech about the extension or any reworking of the digital services tax. This perhaps reflects the fact that tax changes in this area are fraught with technical difficulty and international  complications. It seems that the Chancellor has judged that these are best left for another day, though watch out for announcements in the coming weeks. 

For now, it seems that he has been content to let the corporation tax rate take the strain. 

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Dan Robertson Dan Robertson

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