Company taxation

Tax rates and allowances

The rate of corporation tax will remain at 19% in 2021/22.

Although the Chancellor announced the 19% rate will remain in place for 2022/23, there will then be a planned increase in the main corporation tax rate to 25% from April 2023 applying to profits over £250,000. The rate of the diverted profits tax will rise at the same time to 31% to maintain the differential with mainstream corporation tax.

A small profits rate (SPR) of 19% will be re-introduced for companies with profits of £50,000 or less from April 2023. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective corporation tax rate. The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. The SPR will not apply to close investment-holding companies.

For a table of the main tax rates and allowances for 2021/2022, click here.

R&D tax reliefs

The government has announced a consultation on a wider review of the research and development (R&D) tax reliefs regime for the private sector in the UK to ensure that the reliefs remain fit-for-purpose in a rapidly changing R&D environment, whilst being competitive and well-targeted. This follows the outcome of the consultation in 2020 where respondents from industry groups, businesses across several sectors, accounting professionals and individuals were strongly in favour of extending the scope of R&D tax reliefs to cover expenditure on data and cloud computing whilst emphasising the importance of reviewing the overall regime.

The consultation will focus on definitions, eligibility and scope of the current reliefs to ensure they reflect how R&D activity is conducted today by traditional and digital businesses, improvements to the ways reliefs operate for businesses and HMRC through the two existing schemes (the research and development expenditure credits (RDEC) and SME scheme) and targeting the reliefs to maximise the value of the type of R&D undertaken. The consultation runs until 2 June 2021.

This is an important opportunity for the government to take stock of the current state of the R&D tax relief regime in the UK by initiating an end-to-end review aligning with the broader objective for the UK to boost productivity, promote growth and drive innovation on the global stage. This prospect will be welcomed by many businesses, advisers and researchers across industries as a chance to simplify and improve the relevance of the regime to R&D activities today.

Disapplication of the EU Interest and Royalties Directive

The EU Interest and Royalties Directive exempts from withholding taxes (WHT) any intra-group payments of interest and royalties within the EU. The UK continued to apply this, through domestic law, in the immediate aftermath of the end of the Brexit transition period. However, Budget 2021 announced that the domestic law provisions that implemented the EU Interest and Royalties Directive will cease to apply in the UK from 1 June 2021. This is part of the government's stated post-Brexit policy of aligning the UK's tax treatment of EU companies with its tax treatment of the rest of the world.

However, the practical effect of the UK's withdrawal from the EU Interest and Royalties Directive is only limited, as the Directive was rarely relied on for withholding tax exemption in practice. This is in large part because there are already other routes to WHT exemption on cross-border interest and royalty payments that are much more commonly used eg treaty exemption. Further, the EU Interest and Royalties Directive only applies in a relatively narrow range of circumstances where the interest or royalties are paid intra-group, whereas treaty and QPP exemptions apply much more widely to include payments to third parties. Accordingly, this change should have limited impact in structuring future transactions, and is forecast to raise only very modest amounts of additional revenue and for only a temporary period. So it appears to be driven more by a political desire to "signal" the UK's post-Brexit alignment of the EU with the rest of world than as a substantive revenue-raising measure.

Any existing transactions which have relied on the EU Interest and Royalties Directive and will continue beyond 1 June 2021 will be affected by the change and hence need to be reconsidered, as there is no grandfathering for already existing transactions. The UK has tax treaties with all EU Member States, and many (but not all) of these provide for full exemption from WHT on both interest and royalties. So in many cases it is likely to be possible to switch to treaty exemption instead. However, the position needs to be verified carefully, as some treaties do not provide full exemption from WHT for either or both of interest and royalties, and all treaties impose conditions for exemption which would need to be checked. In addition, in the case of interest (but not royalties) a treaty clearance from HMRC is needed before treaty exemption can be applied at source to allow interest to be paid without deduction of WHT. In view of the limited time available before 1 June 2021, and HMRC's reduced responsiveness during the COVID pandemic, any such treaty clearance processes should be commenced without delay. The QPP exemption is unlikely to be suitable to address any transactions which have relied on the EU Interest and Royalties Directive to date, as the QPP exemption does not apply to connected party transactions of the nature typically covered by the EU Interest and Royalties Directive.

The change includes an anti-forestalling rule ie in the event any step is taken with a main purpose of ensuring WHT exemption under the EU Interest and Royalties Directive still applies (such as acceleration to before 1 June 2021 of payments that would otherwise been due on or after that date), then the EU Interest and Royalties Directive instead stops applying to the relevant payments from Budget Day (3 March 2021) instead of 1 June 2021.

Temporary extension of carry back of trading losses

In a bid to further assist those who may have suffered losses as a result of the pandemic, legislation will be introduced in Finance Bill 2021 to temporarily extend the period over which companies may carry back trading losses.

Under the proposed rules, trading losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022 can be carried back as follows:

• one year without a cap (same as under current rules); and
• a further two years, but against more recent years first and subject to a cap of £2m of losses arising in accounting periods ending in the 1 April 2020 to 31 March 2021 period (financial year 2020) and a separate cap of £2m losses arising in accounting periods ending in the 1 April 2021 to 31 March 2022 period (financial year 2021). This is the "extended relief".

Claims for extended relief, unless below a de minimis of £200,000, will be required to be made in a tax return.

Other loss reliefs and (Part 4 CTA 2010) restrictions apply. For example, any unrelieved losses can be carried forward in the usual way. The proposal does not involve any changes to group relief rules, so any losses carried back cannot displace existing group relief claims (the time limit for group relief claims remains two years from the end of the relevant accounting period).

A group for the purposes of the extended relief means a group for allocation of the group deductions allowance for loss restriction (in section 269ZZB CTA 2010). The members of the group will be those in the group as at 31 March 2021 and 31 March 2022. Where the group cap applies and any company in the group's allocation will exceed the de minimis, a nominated company will be required to submit an allocation statement to HMRC showing which companies have been allocated the £2m cap.  Where every company in the group is only able to make de minimis claims, neither the group cap nor the allocation statement requirement will apply.

A similar extension is being introduced for trade losses of unincorporated businesses. For trade losses of tax years 2020/021 and 2021/22, it is intended to allow unrelieved losses to be carried back and set against profits of the same trade for the three prior tax years, with a £2m cap on losses (for each of the 2020/2021 and 2021/2022 tax years) that can be carried back to the earliest two years. There will be no partnership level cap.

Amendments to the reform of loss relief

Following an evaluation of the corporation tax loss reforms introduced in 2017, HMRC has identified a number of areas where they consider changes to be desirable. A key change will be to correct an “unintended consequence of the legislation… not in line with the policy objective” where groups are prevented from accessing an allowance to which they are entitled following an acquisition or demerger. Other “improvements” have been identified in the following areas: transfer of a trade where there has been a change of ownership, group relief, loss restriction computation and the deductions allowance, including the group allocation statement. Legislation detailing the amendments will be introduced in Finance Bill 2021.

Temporary tax reliefs on qualifying capital asset investments

Increased reliefs for expenditure on plant and machinery will apply to qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023.

The increased reliefs include a 'super-deduction' providing first-year allowances of 130% for new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances and a first-year allowance of 50% for new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.

In addition to the general exclusions to first-year allowances, there will be exclusions from the increased reliefs for used and second-hand assets and expenditure on contracts entered into prior to 3 March 2021. Assets used wholly within a ring-fence trade (oil and gas) will be excluded from the super-deduction and assets used partly in a ring-fence trade will temporarily qualify for a 100% first-year allowance. Plant and machinery expenditure incurred under a hire purchase or similar contract must meet additional conditions to qualify for the increased reliefs.

The rate of the super-deduction will need to be apportioned if an accounting period straddles 1 April 2023.

New disposal rules will apply to assets that have been claimed to these allowances. Disposal receipts should be treated as balancing charges (taxable profits), instead of being taken to pools. For assets claimed under the super-deduction, the disposal value for capital allowance purposes should take the disposal receipt and apply a factor of 1.3, subject to adjustment where disposals occur in accounting periods straddling 1 April 2023.

In addition to existing anti-avoidance rules, an anti-avoidance provision will apply to counteract arrangements which are contrived, abnormal or lacking genuine commercial purpose.

Temporary increase in annual investment allowance

The limit of the annual investment allowance (AIA) will be temporarily increased from £200,000 to £1,000,000 for expenditure on plant and machinery incurred during the period from 1 January to 31 December 2021.

The AIA was introduced from April 2008 and a permanent limit of the annual amount was set at £200,000 from 1 January 2016. The AIA was temporarily increased to £1,000,000 for two years from 1 January 2019 and legislation will be introduced in Finance Bill 2021 to maintain the current temporary £1,000,000 limit for one additional year from 1 January 2021.

Restoring plant and machinery leases to pre-COVID treatment

Capital allowances anti-avoidance legislation that would normally be triggered when the term of certain plant or machinery leases is extended will be automatically disapplied when the extension to the term of the lease is related to COVID-19, unless a party to the lease elects to disregard this measure.

This measure will apply to long funding operating leases and short leases where the 'new' period would be of sufficient length to create a long funding lease, where the date of the change in consideration for a lease which results in an extension to the lease lies between 1 January 2020 and 30 June 2021.

The change to the lease must have been made for a reason related to COVID-19 and after the change the consideration under the lease must be substantially the same as, or less than, the consideration under the lease before the change. Additionally, there must be no other substantive changes to the terms of the lease and the lessor and lessee must not have made any arrangement in connection with any changes to capital allowances relating to the lease arising as a result of the extension of the lease due to COVID-19.

The government will be able to amend the end date of this legislation via secondary legislation to adapt to future circumstances as they become clearer.

Freeports

Following a government consultation and Freeport bidding process during 2020 and the beginning of 2021, the government has today announced the creation of eight Freeport areas within England. The Freeport concept is a significant part of the UK's post-Brexit landscape which the government hopes will: (i) provide hubs for enhanced trade; (ii) promote investment; (iii) encourage the creation of high-skilled jobs; and (iv) drive the regeneration of economically deprived areas. The Freeport areas announced today include Solent, Liverpool City Region and East Midlands Airport.

Freeports are used worldwide and are generally customs zones located at or near ports where business can be carried out inside a country's land border. They can reduce administrative burdens and tariff controls, provide relief from duties and import taxes, and ease tax and planning regulations. The new UK Freeport model involves the creation of a geographically distinct areas, which will be contained within a "Freeport outer boundary" and include one type of port - sea, rail or air. This geographical area may encompass a number of different zones within the overall Freeport, including one or more designated tax sites. These tax sites will normally be a single contiguous site within the Freeport, no larger than 600 hectares, and will be created through the introduction of new legislation in Finance Bill 2021. This will allow one or more tax sites to be designated within any Freeport from 9 March 2021. Businesses operating within such a Freeport tax site may benefit from the Freeport specific tax reliefs detailed below: 

Enhanced Capital Allowances (ECA): The government will introduce the new ECA for companies which incur qualifying expenditure on plant and machinery (P&M) primarily for use within a Freeport tax site. Such P&M must be new or unused and be for the purpose of a qualifying activity. This accelerated relief will allow companies to reduce their taxable profits by the full cost of the qualifying investment in the same tax period the cost was incurred. Companies investing in the Freeport tax site will be eligible to benefit from the relief where the qualifying expenditure is incurred on or after the date that the tax site is designated until 30 September 2026. The legislation implementing the new ECA will include a five year clawback, whereby ECA claimed may be clawed back in the event that the primary use of any P&M changes from a use inside the relevant tax site to one outside of such tax site within 5 years of such P&M 's acquisition or the date it is brought into use.

Enhanced Structures and Buildings Allowance (SBA): The government will offer an enhanced SBA rate, providing enhanced tax relief for companies incurring qualifying expenditure on the construction of new, or renovation of existing, structures and buildings for non-residential use within Freeport tax sites. This accelerated relief is intended to allow firms to reduce their taxable profits by 10% of the qualifying expenditure every year for ten years, compared with the standard 3% per annum over 33 and a third years. This relief will be claimable where qualifying expenditure is incurred, the first contract for construction is entered into and the qualifying asset is brought into qualifying use between the date of the designation of the Freeport tax site and 30 September 2026. The legislation introducing this enhanced SBA rate will also allow for a just and reasonable apportionment of qualifying expenditure for structures and buildings which are partly within and partly outside of the relevant tax site.

SDLT: The government will offer SDLT relief on purchases of land and buildings situated within Freeport tax sites in England where that property is acquired for use, and used, in a "qualifying manner" (as yet undefined). This will be subject to a "control period" of up to 3 years. The government will introduce measures to allow HMRC to require claimants to provide information to ensure that such relief continued to be available to the claimant during this 3 year control period, where such availability is dependent upon the future actions of the claimant. This SDLT relief will be available for qualifying transactions with an effective date from the date the Freeport tax site is designated until 30 September 2026. A provision will also be included in the legislation implementing this relief to allow the government to clawback such relief where the purchaser fails to use such property in a "qualifying manner".

Tax deductibility of business rates repayment

The government will introduce legislation in Finance Bill 2021 so that businesses which repay coronavirus support or relief, which has previously been provided to them by the government and which they no longer require, can claim an income tax or corporation tax deduction equivalent to the quantum of that repayment.

This measure aims to provide neutrality and fairness in respect of a business’s tax outcome. This is on the basis that the sums that a business repays to the government will count as an allowable expense (if the expenses covered by the relief would have originally been an allowable deduction). It also allows a deduction in the same accounting period as the original liability would have been due and paid. The quantum will be limited to the original liability.

In order to benefit from this measure a business must have had a liability which would have been deductible in calculating the profits of the business for income tax or corporation tax purposes had the liability not been removed through coronavirus support or relief. The original liability must have been removed by a public authority purely for the purpose of supporting business in connection with coronavirus.

This measure will have retrospective effect once enacted.

Taxation of banks

Banks are currently subject to an 8% bank surcharge in addition to the existing 19% corporation tax on their profits, for a 27% effective corporate tax rate on their profits. Budget 2021 recognised that the increase in corporation tax rate to 25%, coupled with the existing 8% bank surcharge, would produce an effective corporate tax rate of 33% for UK banks - which would make them uncompetitive and damage a key export. Accordingly, Budget 2021 announced a review of the surcharge during 2021, with proposals to be announced in the Autumn. Budget 2021 indicated generic objectives of ensuring that the combined rate of tax on banks' profits does not "increase substantially from its current level", that UK bank tax rates remain "competitive with our major competitors in the US and the EU", and that the UK tax system is "supportive of competition in the UK banking sector". But no details are provided behind these relatively vague statements.

It seems likely that the bank surcharge will be significantly reduced from 1 April 2023 when the increased rate of corporation tax begins -- but the announcement appears to have been crafted carefully to avoid promising a full and immediate 6% reduction down to 2% to compensate for the 6% increase in the corporation tax rate. This perhaps leaves room for the government to seek to increase banks' effective corporate tax rate a little above the current 27% while still claiming the increase is not "substantially" above its current level. Alternatively, it is possible the government might seek to phase in the reduction in the bank surcharge over time to create a temporary increase in banks' effective corporate tax rates during the transition (as it did previously when reducing the rate of bank levy at the time the corporation tax surcharge was introduced). Or it might seek to increase the bank levy rate to recoup some or all of the revenue lost from the reduction in bank surcharge -- as the published language that there will not be a substantial increase in the tax rate "on banks' profits" appears to have been crafted to avoid implying any commitment on the bank levy.

Budget 2021 also announced that the government would be given powers, by statutory instrument, to change the definition of "bank" for various bank-specific tax rules. These include the bank levy, the bank surcharge to corporation tax, the bank loss relief restriction rules, the restriction on tax relief for compensation payments paid by banks, and the bank tax Code of Practice. The government proposes to consult on the regulations later this year. However, this is not currently anticipated to result in substantive change to the scope of these bank-specific tax rules. Instead it has been announced to be a purely technical change. The current scope of "bank" to which these bank-specific tax rules apply is based on the Financial Conduct Authority's current Handbook, which is being replaced from 1 January 2022 by the introduction of the new Investment Firm Prudential Regime. So the intention appears to be for the regulations to maintain the tax status quo through these regulatory changes. Unusually, the government is to be given power to introduce these technical changes retrospectively -- regulations made up to 30 June 2022 can have effect from 01 January 2022.

Finally, Budget 2021 announced that the government will legislate in Finance Bill 2021 to deal with the withdrawal of LIBOR and reform of bank interest rate benchmarks following its 12 November 2020 policy paper on "The tax impact of the withdrawal of LIBOR and other benchmark rates".

Enterprise management incentives: call for evidence

The government has launched a call for evidence on the operation and potential extension of the tax-advantaged Enterprise Management Incentive (EMI) scheme that follows an announcement at Budget 2020 that the EMI scheme would be reviewed.  Responses must be submitted by 26 May 2021. The stated intention is ensure that the EMI scheme provides support for "high-growth" companies to recruit and retain the best talent so they can scale up effectively, and to examine whether a wider population of companies should be eligible to access the scheme.

The EMI scheme is intended to increase the ability of SMEs to attract and retain talent by using tax-advantaged share-based remuneration in the form of qualifying share options. The rationale is that SMEs can struggle to reach their growth potential where they may not have the resources to offer competitive cash remuneration packages to employees and potential employees.  The call for evidence is intended to elicit views on the following broad topics:

• whether the EMI scheme is currently fulfilling its policy objectives and actually helps eligible businesses to grow and to attract and retain talent
• if companies which have outgrown the current eligibility criteria of the EMI scheme are experiencing structural recruitment and retention issues that EMI could help to address
• if those eligibility criteria should be extended so that more companies are able to access the EMI scheme.

The post-Brexit framing of the call for evidence (the government "wants to make the UK the best country in the world to start and grow a business") is perhaps inevitable, but the potential expansion of the EMI scheme should be a popular move with many smaller businesses.

Enterprise management incentives: extension of COVID-19 relaxation

Employees participating in an EMI scheme must in most cases meet a “committed working time” requirement of 25 hours working time per week or 75% of working time to be eligible for tax benefits. In 2020, the small list of exceptions was extended on a temporary basis to ensure that furloughed employees, those on unpaid leave and those working reduced hours in each case because of the pandemic, would not lose EMI benefits by virtue of a failure to meet the committed working time requirement. The extension was initially scheduled to expire on 5 April 2021, but will now not expire until 5 April 2022.

Social investment tax relief

Social investment tax relief (SITR) was introduced in 2014 to incentivise investment in qualifying social enterprises, and provides income tax relief and capital gains tax hold-over relief for investors. Following a call for evidence in 2019, the original “sunset” clauses which would have withdrawn SITR with effect from April 2021 will be extended to April 2023. The government explains that this decision was taken in light of the responses received to the 2019 call for evidence, and a response document will also be published.

Changes to the hybrid and other mismatches regime

The government has confirmed changes it will be making to the UK's hybrid and other mismatches regime, which has applied for corporation tax purposes since 1 January 2017.

The legislation governing this regime sought to implement in full the recommendations of Action 2 of the OECD Base Erosion and Profit Shifting (BEPS) project.  It did so in a manner which was (for taxpayers and advisers alike) bewilderingly lengthy and complex, and which, as it turns out, produced outcomes which were disproportionate or unintended in view of the regime's aims.

The changes announced result from the government's consultation with stakeholders on potential areas of improvement following the Spring Budget 2020.  These changes are, in essence, tinkering with technical details to address some of the disproportionate or unintended effects of the regime.  They in no sense represent a simplification of the regime - indeed, quite the opposite, based on the draft legislation published to date.

Given the highly technical nature of the changes, taxpayers potentially affected by the hybrids regime will need to closely scrutinise these changes to understand any impact on their particular position under the rules.  Some will be relieved to find they may now drop outside the scope of the regime entirely or that, whilst still in the scope of the rules, certain adverse consequences are mitigated.  For example, following these changes it should be less likely that small investors in tax transparent funds will suffer adverse effects under this regime and some of the more substantial changes should allow the regime to apply more fairly in circumstances where US parents own UK subsidiaries which have been checked "open" for US federal income tax purposes.  

In reviewing these changes, taxpayers will need to consider whether any improvement to their position is only prospective; whilst certain of the changes will have retrospective effect from 1 January 2017, others will only have effect from Royal Assent to Finance Bill 2021.