Page 10 - Budget 2021

Business Owners

The rate of corporation tax has been 19% since 1 April 2017. It had been due to fall to 17% last April, but the planned
change – which had been legislated for – was reversed. Unlike income tax, National Insurance contributions (NICs) and
VAT, corporation tax rates were not given a rate freeze promise in the Conservatives’ 2019 manifesto.

19% is a historically low rate of corporation tax, but it will not survive for large companies beyond April 2023. At that
point the rate will jump to 25% for companies with profits of £250,000 and over. For companies with profits of up to
£50,000 a revived smaller companies’ rate of 19% will continue. Between £50,000 and £250,000 of profits there will
be a new relief which, to judge by past practice, implies 19% on the first £50,000 of profits and 26.5% on the excess.

Operating via a company creates the opportunity to draw income as dividends, free of NICs, and shelter profits at a
corporation tax rate that is below the basic rate of income tax – rather than personal tax rates on earnings of up 45%
(46% in Scotland). From April 2023, the higher rate of corporation tax will change that calculation for businesses with
profits over £50,000. In the meantime, the government has continued to attack the use of one-person companies,
with the latest measure being the introduction of off-payroll working rules to private and third sector employers from
6 April 2021, after a one year deferment in response to the pandemic.

Capital Allowances

Capital allowances have been subject to a variety of changes in recent years, ostensibly to encourage an increase in
business investment.

The Annual Investment Allowance (AIA), which gives 100% initial relief for investment in plant and machinery, was
‘temporarily’ raised to £1,000,000 for two years from 1 January 2019. The AIA has been a favourite measure for
Chancellors to tweak, so it is not surprising that last November there was a 12 month extension to the temporary
increase. In theory the AIA will now automatically revert to its previous £200,000 level at the start of 2022. In practice
another late Autumn announcement of an extension is possible.

In the two years from 1 April 2021 the AIA will be eclipsed by a new ‘super-deduction’ of 130% of the amount invested
in qualifying plant and machinery by companies. This will effectively mean a £25 tax reduction for each £100 of
investment. For certain long-life assets, the existing 6% writing down allowance will be supplemented by a 50% first
year allowance until April 2023.

Losses

The pandemic has led to many businesses trading at a loss. The Chancellor has recognised this and temporarily
extended the period over which both incorporated and unincorporated businesses can carry back trading losses from
one year to three years.

The extension applies to up to £2 million of an unincorporated business’s unused trading losses made in each of
2020/21 and 2021/22. The same limit is relevant separately to companies’ unused trading losses, after carry back to
the preceding year, in relevant accounting periods ending between 1 April 2020 and 31 March 2021 and for the
following accounting period. The £2 million ceiling will be a group-level limit. As a result, groups with companies that
have the capacity to carry back losses above £200,000 will be required to apportion the cap between their constituent
companies.

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