Budget 2021: Small companies rate and marginal relief

In order to support the public finances through the economic fallout caused by the coronavirus pandemic, the Government has decided to increase the headline rate of corporation tax from 1 April 2023, estimated to result in an increase in annual government revenue of £17.2bn by 2025-26.

From 1 April 2023, the corporation tax rate applicable to companies with taxable profits above £250,000 will be 25 per cent. Companies with profits below £50,000 will, however, continue to pay tax at the current rate of 19 per cent. Those with taxable profits between £50,000 and £250,000 will benefit from marginal relief, similar to that which applied before the previous incarnation of the small companies’ rate of corporation tax was abolished with effect from 1 April 2015.

The relevant profit thresholds will be reduced where there are associated companies under common control, and the concept of associated companies will replace the current concept of related 51 per cent group companies when assessing whether corporation tax is due by instalment payments, amongst other issues. So called ‘close investment holding companies’, a term which is likely to encompass many personal or family investment companies, will be unable to benefit from the lower rate of corporation tax or marginal relief, so will pay corporation tax at a flat rate of 25 per cent.
Whilst there has been a reintroduction of a main rate and small companies’ rate of corporation tax, the thresholds this time around are lower than they were previously. The relevant draft legislation concerning the operation of the small companies rate and marginal relief has not yet been published, so there may be further ‘devil in the detail’.

In line with the 6 per cent increase in the main rate of corporation tax, the more penal tax rate applicable to profits falling within the scope of the diverted profits tax (which can apply where there are contrived arrangements to divert profits away from the UK) will also rise by 6 per cent, to 31 per cent, from 1 April 2023.

Finally, the Government has identified that, given the increase in the main rate of corporation tax, the additional surcharge payable by banking companies of 8 per cent of profits may make the UK unattractive to affected businesses when compared to other major competitor jurisdictions such as the US and the EU. It is therefore proposing to review this surcharge and set out proposed modifications in the Autumn of 2021.

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Dan Robertson Dan Robertson