The Super-Deduction and the Increase in the Main Rate of Corporation Tax
Rishi Sunak’s plan for replenishing the public purse consists of encouraging businesses to invest heavily now to strengthen the economy, so that by 2023 they will be resilient enough to start paying tax at much higher rates.
The government anticipates a £10bn loss to the Exchequer between 2021 and 2023 due to the introduction of the super-deduction, but once the rate of corporation tax rises in 2023 it will see a net gain of about £24bn.
This scheme provides tax relief at a rate of 130% for companies that invest in qualifying plant and machinery and a rate of 50% for companies that invest in qualifying special rate assets. The super-deduction will be available until 31 March 2023.
For an asset to qualify for either of the deductions listed above, it must be a new asset, rather than a second hand asset.
One key issue with the super-deduction is that the relevant asset cannot be ‘pooled’ with your other assets. This means that if you dispose of an asset that qualified for relief at some point after 31 March 2023, you may end up paying a large balancing charge, at a rate of 25%. In fact, if the asset did not depreciate at all you could actually end up in a net tax payment situation. AIA may still be the better option in certain circumstances and you should compare the benefits of both reliefs on a case-by-case basis.
Keep in mind that the annual limit of AIA investment decreases on 1 January 2022 to £200,000 from the current limit of £1m.
Increase in the Corporation Tax Rate
With effect from 1 April 2023 the main rate of corporation tax will increase from 19% to 25%.
A small profits rate of 19% will be retained for businesses with profits of under £50,000, and a marginal rate of 26.5% will apply to profits between £50,000 and £250,000.
The £50,000 profit threshold will be shared between all associated companies. This means that where more than one company is under the same control, or where one company controls others, the profits of each will count towards the £50,000 threshold.
Points for review:
• What are your plans for investment – would any of that investment qualify for the super-deduction? If so, what is the lifespan of the asset and do you expect to stay on the 19% corporation tax rate?
• Are you best to wait until the higher Corporation Tax rate is introduced to make an investment – getting 100% relief at 25% tax, rather than 130% relief at 19% tax? The former represents a higher rate of relief of 1.21%.
• Should you review your overall corporate structure and streamline your associated companies?
• Once higher rates are introduced, does a corporate structure still work for you from a tax planning perspective?