As predicted, the Chancellor announced a rise in the main rate of corporation tax from 19% to 25% from 1 April 2023 in today's Budget, reversing the downward trend since 2010.
The corporation tax rate for profits under £50,000 will remain at 19% and there will be marginal relief for businesses with profits between £50,000 and £250,000 so that they pay less than the main rate.
In addition to the corporation tax rate increase, the two key announcements of significance for companies are:
i) an extended three year trading loss carry back for accounting periods ending between 1 April 2020 and 31 March 2022 (subject to a group cap of £2m for each period), and
ii) an enhanced temporary first year capital allowance of 130% (a 'super deduction') for expenditure on new plant and machinery from 1 April 2021 to 31 March 2023.
As a result of these three changes, there is no single ideal strategy for all companies to follow. Whilst typically when a higher CT rate is imminent it might be beneficial for companies to defer capital investment and delay loss utilisation, any advantage gained may be outweighed by the new super deduction and extended loss carry back rules.
Consequently, all companies should carefully plan their capital investment and corporate loss utilisation over the next few years, taking into account their current profile and strategic priorities. For instance, is the group's main objective to reduce its taxable profits when the higher CT rates apply in 2023 or take advantage of the enhanced capital allowances and loss carry backs now in order to generate an immediate CT repayment?
Future tax savings may be achieved by planning the timing of transactions and maximising tax reliefs but cash flow considerations and projections of future profits/ losses are also part of the equation. We would also expect anti-avoidance and anti-forestalling measures to be introduced which will impact the decision making.