Should companies suffer tax now to save in the future?
17 October 2023
With the Autumn Statement only five weeks away, thoughts turn to how the chancellor’s speech may impact companies. Only last week, the chancellor warned that he is preparing ‘for the worst’ as the Office for Budget Responsibility’s (OBR) official economic forecasts are anticipated to show a gloomier picture for the UK economy than they did in spring. With the current government increasing the headline corporation tax rate to 25%, its highest rate in a decade, are further tax rises for corporates out of the picture or could further increases be a potential policy for the government to raise tax revenues?
Companies have benefitted in recent budgets from generous changes to the capital allowances regime, including the introduction of the enhanced 130% super deduction and full expensing regimes. However, these companies may now also be starting to feel the impact of the increased 25% corporation tax rate from 1 April 2023. Given the expected OBR forecasts, we expect it is unlikely that the chancellor will increase corporation tax deductions to soften the impact of the increased tax rate for companies.
Whilst companies wait for any upcoming announcements, they may want to look at ways to manage their increased corporation tax costs. One of the ways in which this may be possible is through considering how they use any brought forward tax attributes, such as corporation tax losses within the group or their capital allowances pools.
Generally, companies look to use their corporation tax losses as soon as possible, to minimise the cash tax payable. However, with the significant increase in the headline tax rate and the additional flexibility on the use of carried forward losses, companies may now consider whether this is the best approach. It may be more beneficial to crystalise corporation tax now and carry forward the existing losses to a future period, where they may be utilised against profits subject to tax at the new, higher tax rate. This may be particularly pertinent to those with taxable profits between £50,000 and £250,000, where the combination of the new rate and marginal relief result in a marginal tax rate of 26.5%. The ability to disclaim capital allowances in earlier years, resulting in higher capital allowances and increased tax relief in later years should also be considered.
Companies should model their specific scenarios to weigh up the impact of accelerating their cash tax payable with the benefit received from utilising losses and claiming capital allowances at the higher tax rate. This will need to take into account the time value of money and the impact of potential restrictions where groups are trying to utilise more than £5m of losses per annum.
In anticipation of the approaching Autumn Statement, companies may therefore want to prepare for any upcoming announcements by considering their carried forward tax attributes and modelling any potential tax savings available. Where modelling demonstrates that an alternative approach would be more beneficial and usual time limits allow, companies could look to amend previous claims for capital allowances and the use of losses to maximise reliefs. However, given the current economic and political uncertainty, the crux of the issue is whether companies will want to suffer tax now to save tax in the future.
Companies have benefitted in recent budgets from generous changes to the capital allowances regime, including the introduction of the enhanced 130% super deduction and full expensing regimes. However, these companies may now also be starting to feel the impact of the increased 25% corporation tax rate from 1 April 2023. Given the expected OBR forecasts, we expect it is unlikely that the chancellor will increase corporation tax deductions to soften the impact of the increased tax rate for companies.
Whilst companies wait for any upcoming announcements, they may want to look at ways to manage their increased corporation tax costs. One of the ways in which this may be possible is through considering how they use any brought forward tax attributes, such as corporation tax losses within the group or their capital allowances pools.
Generally, companies look to use their corporation tax losses as soon as possible, to minimise the cash tax payable. However, with the significant increase in the headline tax rate and the additional flexibility on the use of carried forward losses, companies may now consider whether this is the best approach. It may be more beneficial to crystalise corporation tax now and carry forward the existing losses to a future period, where they may be utilised against profits subject to tax at the new, higher tax rate. This may be particularly pertinent to those with taxable profits between £50,000 and £250,000, where the combination of the new rate and marginal relief result in a marginal tax rate of 26.5%. The ability to disclaim capital allowances in earlier years, resulting in higher capital allowances and increased tax relief in later years should also be considered.
Companies should model their specific scenarios to weigh up the impact of accelerating their cash tax payable with the benefit received from utilising losses and claiming capital allowances at the higher tax rate. This will need to take into account the time value of money and the impact of potential restrictions where groups are trying to utilise more than £5m of losses per annum.
In anticipation of the approaching Autumn Statement, companies may therefore want to prepare for any upcoming announcements by considering their carried forward tax attributes and modelling any potential tax savings available. Where modelling demonstrates that an alternative approach would be more beneficial and usual time limits allow, companies could look to amend previous claims for capital allowances and the use of losses to maximise reliefs. However, given the current economic and political uncertainty, the crux of the issue is whether companies will want to suffer tax now to save tax in the future.
Beth Barker
Associate director
AUTHOR
Beth Barker
Associate director
