The main rate of U.K. corporation tax will increase to 25 percent from April 2023, under plans announced in the Chancellor of the Exchequer’s Budget speech today. The rate is currently 19 percent.
The Chancellor also announced the introduction of a “super-deduction” for qualifying expenditure by businesses on new plant and machinery assets over the next two years. This expenditure would otherwise give rise to 18 percent annual deductions as capital allowances, but between April 2021 and March 2023 an up-front deduction will be available equal to 130 percent of the expenditure.
The stated expectation is that an April 2023 corporation tax rise will come in once the economy has returned to pre-pandemic levels, projected in the Budget report to raise approximately £12 billion in the first year.
While a possible corporation tax rise has been trailed in the press in recent days, it will constitute the first increase in the headline rate of U.K. corporation tax since the mid-1970s, and after a policy for many years of gradual falls to a rate amongst the lowest in the G20. The Budget report states that, at 25 percent, the U.K. corporate tax rate will remain the lowest in the G7, although accounting for this assertion would seem to require a degree of lateral thinking and a working crystal ball. The Office of Budget Responsibility in contrast observed that the rise would be a return to the middle of the pack of advanced economies.
A small profits rate of 19 percent will preserve the present rate for the smallest businesses. Today’s proposal is for the 25 percent main rate to apply in full once the annual profits of a company or its group reach £250,000. While this was stated to capture only 10 percent of firms, it is notable that, under a similar dual-rate system of corporation tax which applied before 2015, the equivalent threshold was orders of magnitude higher at £1.5 million.
In contrast, the two-year “super-deduction”, projected to cost over £12 billion in each of the next two years, is intended to stimulate investment by businesses with cash reserves. There is no cap on the amount of relevant expenditure on new plant and machinery which can qualify for the 130 percent deduction, potentially providing current-year tax relief of approximately one-quarter of the pre-tax costs incurred—so long as the business also makes sufficient taxable profits in the year to absorb the deduction in full.
For further information, please get in touch with any member of the London Tax team, or your usual Shearman & Sterling contacts.