Corporation Tax
Rate of tax
On 1 April 2023, the Corporation Tax rate will increase from 19% to 25% for companies with profits over £250,000. Since 1 April 2017, all corporate profits have been taxed at the same rate; the ‘small profits rate’ that was familiar before that will be reintroduced at 19% for companies with profits of up to £50,000. Between £50,000 and £250,000 there will be a tapering calculation that produces an effective marginal rate of 26.5% on profits between these limits, but an average rate on all profits of between 19% and 25%. The limits will be divided between companies that have been under common control at any time in the previous 12 months, whether UK resident or not.
Companies with an accounting period that straddles 31 March 2023 will time apportion the profits of that period to be taxed at the two different rates. For example, a company with a 30 September 2023 accounting date that makes a large profit on a transaction before 31 March 2023 will pay 25% tax on 6/12 of it. If a short accounting period is ended on 31 March 2023, that large profit will all be taxed at 19%.
Capital allowances for plant and machinery
The March 2021 Budget introduced enhanced allowances for qualifying expenditure on plant and machinery (P&M) incurred from 1 April 2021 to 31 March 2023 by companies. They can claim:
- a ‘super-deduction’, providing allowances of 130% on new P&M investment that would ordinarily qualify for 18% writing down allowances (WDAs) in the main capital allowance pool;
- a first-year ‘special rate allowance’ of 50% on new P&M investment that would ordinarily qualify for 6% WDAs in the special rate pool (e.g. integral plant in buildings).
The intention of the super-deduction was to encourage investment that might otherwise be delayed by companies wanting to claim a deduction against profits taxable at 25%. There are complex rules to prevent the benefit of the super-deduction being relieved at that higher rate.
In the most significant announcement in the Budget, as measured by the total amount of tax involved according to the government’s forecasts, the Chancellor replaced the super-deduction with a 100% first-year allowance (called ‘full expensing’ in the speech) for qualifying new P&M investment by companies for the three years from 1 April 2023 to 31 March 2026. He also said that he intended to make this relief ‘permanent’ as soon as it was prudent to do so. New ‘special rate’ P&M assets will qualify for a 50% FYA in the same period.
The 100% Annual Investment Allowance (AIA), which is available to unincorporated businesses as well as companies, is confirmed at £1 million a year ‘permanently’. This has the same effect as a 100% FYA, but it covers some special rate assets as well as general plant and machinery. It also applies to the purchase of second-hand P&M, whereas the super-deduction and new FYA are for investment in new assets.
With limited exceptions, cars do not qualify for the new FYA or the AIA.
Research & Development (R&D)
The government encourages R&D via two different schemes: the ‘enhanced expenditure’ scheme for small and medium enterprise (SME) companies and the Research and Development Expenditure Credit (RDEC) for large companies.
RDEC is a taxable expenditure credit, which increases from 13% to 20% for expenditure from 1 April 2023.
For SME expenditure from 1 April 2023, the additional deduction for qualifying revenue expenditure decreases from 130% to 86%. This means that each £100 spent is treated as £186 for tax purposes, rather than £230.
The SME scheme allows loss-making companies to surrender their loss relating to R&D in exchange for a payable tax credit. However, this credit is also reducing, from 14.5% to 10%. For example, a loss-making company with, say, £20,000 of qualifying R&D expenditure, will see its payable tax credit reduce from £6,670 to £3,720 as a result of these changes.
The Chancellor announced that a new credit rate will be available to SME loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure. Qualifying companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure, instead of the new 10% credit rate under the existing SME scheme.
The government will legislate in Spring Finance Bill 2023 to reform the R&D reliefs. The legislation will apply generally to accounting periods starting on or after 1 April 2023, except for the requirement to provide additional information, which will apply to all claims made on or after 1 August 2023.
The changes include:
- The creation of two new categories of qualifying expenditure for R&D tax relief: data licences and cloud computing services.
- Mandating companies to inform HMRC of their intention to make a claim for R&D tax relief using a new digital form within 6 months of the end of the accounting period in which the expenditure is incurred. This measure is intended to allow HMRC to perform more upfront compliance checks on new claimants, so companies that have claimed R&D tax reliefs in any of the previous three years will be exempted from this requirement.
The previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023.
Audio-visual tax reliefs
The film, TV and video games tax reliefs will be reformed, becoming expenditure credits instead of additional deductions from early 2024.
The new Audio-Visual Expenditure Credit will replace the current film, high-end TV, animation and children’s TV tax reliefs. Film and high-end TV will be eligible for a credit rate of 34% and animation and children’s TV will be eligible for a rate of 39%.
The expenditure threshold for high-end TV will remain at £1 million per hour.
The new Video Games Expenditure Credit will have a credit rate of 34%. Qualifying expenditure for the Video Games Expenditure Credit will be expenditure on goods and services that are used or consumed in the UK. Games that have not concluded development on 1 April 2025 may continue to claim EEA expenditure under the current video games tax relief until this relief ends in April 2027.
Cultural reliefs
The government intends to temporarily extend, for two years, the rate rises of three corporation tax reliefs: Theatre Tax Relief (TTR), Orchestra Tax Relief (OTR) and Museums and Galleries Exhibition Tax Relief (MGETR).
The previously increased rates will continue for 2 further years until 1 April 2025, giving relief at up to 50%. The rates will then taper down from 1 April 2025 before returning to original levels from 1 April 2026, except MGETR, which will be abolished from that date.