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Budget 2021 – key changes to Corporation Tax and Capital Allowances

Posted on 01/04/2021

Corporation Tax
The main rate of Corporation Tax will increase on 1 April 2023 to 25%, from the current rate of 19%. The full 25% rate will apply to profits in excess of £250,000. Profits less than £50,000 will continue to be taxed at 19% (the ‘small profits rate’) and a marginal ‘catch up’ rate of 26.5% applies to the next £200K of profits so that by the time profits reach £250,000 an average rate of 25% has been reached. The higher rates of tax are likely to change the remuneration strategy for individuals that have the option to choose to take dividends from their companies in addition to a salary.

In recognition that many companies will incur losses as a result of the pandemic, the carry back rules have been changed to allow losses to be carried back for up to three years (previously just one), with the extension capped at losses of £2m. This will give additional scope for loss making companies to recover tax paid in earlier years. These enhanced loss carry back rules will apply to accounting periods ending between 1 April 2020 and 31 March 2022. Unincorporated businesses can also benefit from a similar three year loss carry back window.

Capital Allowances
A new ‘Super-Deduction’ First Year Allowance (FYA) has been introduced for qualifying capital expenditure incurred on new plant and machinery (P&M). A brief summary:

• The expenditure must be incurred between 1st April 2021 and 31st March 2023 under a contract entered into after 3rd March 2021.
• Expenditure on General Pool P&M will attract the FYA of 130% and expenditure on Special Rate Pool P&M will receive a 50% allowance.
• The subsequent disposal of an asset qualifying for the enhanced allowances will trigger a balancing charge.
• The general exclusions for FYAs (such as cars) will apply to the expenditure as well as specific anti-avoidance to target contrived arrangements, to obtain a tax advantage in connection with allowances.

These changes may provide companies with planning opportunities involving the timing of expenditure and possible changes to accounting periods.

If you would like to discuss the impact of any of the above in light of your personal circumstances, please call Charles Green on 020 8652 2450 or email crg@clarksonhyde.com

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