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As was hinted at prior to the budget, it was announced that corporation taxes would rise. Thankfully, these rises will not happen immediately but there will be a big jolt in the tax rate in April 2023.
From April 2023 the corporation tax system will return to having two rates of tax and a tapering calculation to attempt to not create a cliff edge of tax for companies. Business earning over £250,000 in taxable profit will pay 25% corporation tax. Companies earning up to £50,000 in taxable profit will remain to pay tax at 19%. For those in between these two values the rate will increase on a sliding scale from 19% to 25% depending on how close to £250,000 your taxable profits are.
This lower rate only applies to trading businesses and there are some exceptions from this rate for companies in a group, or that have associated companies. More complicated business structures will have an added layer of complexity to what tax rates might apply.
This new corporation tax system shows a return to an older system that ran up to March 2014. However, this new system is less generous as the bandings are much lower than the older version. For example, the lower band is very small, covering taxable profits up to £50,000 whereas this had been a £300,000 tax band in the old system.
For many of our clients this will mean that from 2023 there is an increase in their real tax rate for year ends after 31 March 2023. It also means that predicting your corporation tax charge will get slightly more complicated.
The implications of this are that many small businesses will be wondering if the tax advantage of a limited company still stands compared to operating as a partnership or sole trader. This can be a complicated assessment to make. For now, there are two factors that you might want to consider:
This subject deserves a deep dive, and we will publish an assessment of this in the coming weeks both for the current tax rates and those expected to be in place for 2023/24.
The Chancellor attempted to soften the blow with some tax incentives that will cover the two years before this tax rise but will also benefit business that are not limited companies.
In a move similar to the reaction to the financial crash of 2007/8 there has been a temporary extension to how losses can be utilised.
Normally when a business makes a loss it has an option to carry this loss back one year to get back some tax paid for that period of accounting. Losses made in the financial years ending in each of 2020/21 and 2021/22 can be carried back three years. The total amount of losses that can be carried back is £2m.
Sole traders, partnership and limited companies can all utilise this temporary tax relief.
Companies that are in a formal group are limited to a cap of £2m of losses utilised across the whole group.
Currently when you buy a physical asset (that isn’t a car or other restricted asset) HMRC allow the full value of that expense to be offset against the businesses tax liability. This is true for limited companies and unincorporated businesses. This allowance was an extension to the capital allowances system to encourage businesses to spend money in the wake of the financial crash thirteen years ago. This tax break has remained in place since then (subject to some tweaks along the way) so in an effort to encourage spending by businesses on big ticket items Rishi Sunak announced an additional “Super-Deduction” to encourage UK businesses to spend.
From 1 April 2021 until 31 March 2023 when a UK business buys plant or machinery for the business, you will now be able to claim an additional 30% of this cost against your tax bill.
For example, if you buy an asset worth £1,000 before 1 April 2021 then this will reduce your taxable profit by £1,000. A limited company at the moment would therefore save £190 in tax. If you delayed buying the asset until 1 April 2021 then the reduction to taxable profit would be £1,300, saving a limited company £247 in tax.
Details are yet to be announced for how the this will work practically for businesses that have a year-end other than 31 March 2021, but accurate recording of the date of purchase of items will be important.
If you have business year-end of 31 March 2021 then you will need to decide what is more valuable to your business: saving the tax now, which will most likely be payable in nine months’ time, or saving more tax for a tax payment that is a year and nine months’ away.
A big announcement made prior to the budget was that the furlough scheme would be extended to the end of September.
Employees will see no difference in the scheme to the 30 September as it will still pay 80% of average earnings and allows for flexible working arrangements to operate.
For employers there will be an increased cost of the scheme in July, August and September. From July the grant will only cover 70% of the employees 80% of average earnings. In August and September employers will have to fund 20% of the furlough payments, with the grant dropping to 60% of the 80% of average wages.
In money terms this means:
Unless the roadmap for returning life to normal for this summer goes awry this will be the end to the Coronavirus Job Support Scheme.
It is too early to plan ahead for those employees you’ve placed on furlough especially as demand this far in advance may be hard to predict for those businesses most hard hit. Also due to the changes brought in on 1 December 2020, employees cannot be on furlough during their notice period, meaning that this is fully at the cost of the employer.
Fourth and fifth grants will be made available to the self-employed.
The Fourth SEISS grant will be paid at 80% of three months’ average earnings, as before, and will cover the period 1 February to 30 April 2021.
Applications will be made via the HMRC gateway as before and will be based on the claimant confirming that their business has suffered as a result of the restrictions put in place in this period.
Those who are able to continue to generate income at a similar rate to normal are specifically told in the HMRC guidance to not claim this grant. Guidance for the fourth grant is expected to be published by HMRC shortly but the published budget document does state that “eligibility criteria will remain the same as the third grant”, therefore much of the HMRC guidance published for the third grant will remain.
The Fifth SEISS Grant has some different requirements.
This broadens those that can apply for the grant as it will now account for those who started a self-employed business in the 2019-20 tax year based on tax returns filed before midnight on the 2 March 2021.
The Fifth grant will include a turnover test where the claimant will have to confirm how much their income has dropped compared to pre-pandemic levels.
For those whose turnover has to have dropped by 30% or more they will be entitled to a full 80% of 3 months’ average earnings.
Turnover fallen by less than this will get a grant worth 30% of 3 months’ average earnings.
Be aware that all these grants are taxable. Any grant money received since the first of the SEISS grants has to be detailed separately on your tax return. And as always HMRC know who took the grants they are testing that tax payers are honest in declaring them. Our advice is to make sure you have a record of what you received and when so that we can make sure it is disclosed correctly when completing your tax return.
Grants are being made available for those in the retail, hospitality and leisure sector.
Businesses classed as non-essential retail can get a grant of up to £6,000 while businesses that operate in the hospitality, accommodation, leisure, personal care and gym sectors will be given a grant of up to £18,000.
The budget carefully uses the words “up to” for these grants – it doesn’t detail how they will be calculated. It would however be assumed that these will be administered by the business rates systems much like the previous grants of this nature.
This will be available in April 2021.
The Bounce Back and Coronavirus Business Interruption Loan Scheme (CBILS) will end on the 31 March 2021. As had been suggested before Christmas a replacement loan scheme will be put in place from the 1 April 2021.
The new loan, the Recovery Loan Scheme will mean the government will provide 80% backing for loans between £25,000 to £10m for businesses to ensure that banking continues to support business in the UK.
The loans will be available to those who already have a Bounce Back Loan or a CBILS loan in place.
This will likely be available in much the same way as the CBILS loans were available, so not as readily available as the bounce back loans with a little more due diligence required by the bank.
As with any lending it should be approached with caution because it can increase the risks to your business as ultimately these will need to be paid back. Having a business plan or rough cashflow forecast will be helpful in making sure your businesses is taking on the correct commitment to borrowing.
There will be a business rates holiday until the end of June for business in the hospitality and leisure sector. However, there will be an additional business rates relief of 66% for the period 1 July 2021 to 31 March, meaning businesses in these sectors will not face full business rates until April 2022.
The budget document gives further clarification:
“[The] 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2 million per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties. Nurseries will also qualify for relief in the same way as other eligible properties.” Budget 2021
Time to pay arrangements previously announcement remain unchanged.
For more details on how you can pay deferred VAT or owed personal tax over a number of months see our article here.
The tax-free Personal Allowance has been increased by £70 to £12,570 and then it will be frozen at this level until 2026, although there will be an election before then.
The Basic Rate band will increase by very small amount too to £37,700, meaning if your income is less than £100,000 then the basic rate of tax applies up to £50,270. Again, this is frozen until 2026.
National Insurance bandings have also increased slightly. The full details of this can be found on our Tax Rates Table here.
The basic, higher and additional rates of Income Tax will remain at 20%, 40% and 45% respectively, with the exception of dividends (remaining at 7.5%, 32.5% and 38.1% respectively).
For the majority of director/shareholders, the following table shows the optimal structure for drawings from 6 April 2021. This is dependent on your limited company reporting after tax profits high enough to pay dividends at this level and is also dependant on your other personal income.
This is given as a general guide. For specific advice talk to your Client Manager.
This gives a practical monthly drawing amount and a £18 buffer to allow for incidental income from other sources. If you have other income such as rental income or income from other investments outside of your business, then these levels may not be the most appropriate.
There is scope for some businesses, where they already have employees who have PAYE and National Insurance paid to HMRC monthly, to increase the director’s salary to £793. However if you have no other employees this is not recommended as this will cause you to start having to pay National Insurance monthly where you currently have nothing to pay. Increasing the monthly salary would mean monthly dividends would be reduced to £3,396 per month in order to remain a basic rate tax payer.
These drawings levels are also stated on the basis that your business has sustainable profits, after accounting for tax, in order to pay these dividends. If you are unsure about the current year profitability of your business we recommend you talk to your client manager to conduct a quick review of your management figures to calculate your tailored drawings plan. Getting this wrong could cost an additional 32.5% tax charge!
The drawings stated above would generate an annual tax bill of £2,677 payable through Self-Assessment. Drawings above this level will result in tax liabilities of at least 32.5% of the additional amount drawn. Owner-managers who have significant levels of income from other sources, should contact their Principal Adviser for further advice on their optimal drawings’ strategies from April 2020.
There have been no changes! After many rumours and concerns no changes were made to the Annual Exemption, the rates of CGT or Business Assets Disposal Relief (what used to be Entrepreneurs Relief)
This doesn’t rule out future changes as this is known target for various groups in government and HMRC.
Inheritance Tax was also left unchanged – again despite being an area highlighted for reform for a number of years now.
No changes were made to the R&D tax relief currently available for limited companies. They did however announce that a review will be started to ensure that the relief is effective at encouraging and targeting UK Businesses to lead “cutting edge” research.
An area that has been threatened for attack for a few years has been the VAT registration threshold as this creates an artificial “lump” in small businesses earning abilities – as any business that operates just below the £85,000 will know it can make a significant impact on your business decision.
It was announced that this will remain unchanged until April 2024, at the earliest.
Rules come into place from the 1 April 2021 that mean medium and large employers are now legally instructed to assess if a subcontractor is operating via a personal service company, and therefore caught by the IR35 legislation.
Nothing was mentioned in the budget (which last year delayed this legislation coming into force until 2021). This will mean opportunities for contractors who could be viewed as a personal service company could be fewer. IT also has implications for professional locums who operate via personal service companies rather than as temporary employees.
For smaller businesses employing contractors the law doesn’t stipulate that these organisations have to make a judgement on the IR35 status of subcontractors but that doesn’t mean there is no risk in these contracts.
The budget didn’t include the term “Making Tax Digital” once in the document nor in the speech by the Chancellor. However, it remains official HMRC guidance that from the 6 April 2023 all businesses and landlords with income over £10,000 will need to submit quarterly figures to HMRC using a digital system.
There is also an updated requirement that VAT registered businesses with a turnover under £85,000 will have to use the system from 1 April 2022.
Limited Companies are not set to be mandated to complete this for Corporation Tax purposes until 2026, which comes as some relief now that the corporation tax calculations will be more complex for most small businesses.
We keep our blog updated on these matters here.
BA (Hons) FCA
Partner & Principal Adviser
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