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Companies and unincorporated associations that pay Corporation Tax.
The measure sets the charge to Corporation Tax and sets the main rate at 19% for the Financial Year beginning 1 April 2022 and also sets the charge to CT for the Financial Year beginning 1 April 2023.
This measure also announces that from 1 April 2023, the Corporation Tax main rate for non-ring fenced profits will be increased to 25% applying to profits over £250,000. A small profits rate (SPR) will also be introduced for companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. 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.
This measure supports the government’s objective to raise revenue whilst keeping the UK’s rate of Corporation Tax competitive relative to other major comparable economies and excluding the least profitable businesses from a rate increase.
At Budget 2020, the government announced that the Corporation Tax main rate (for all profits except ring fence profits) for the years starting 1 April 2020 and 2021 would be 19%.
The Corporation Tax charge and main rate for Financial Year 2022 will have effect from 1 April 2022 to 31 March 2023.
The Corporation Tax charge, main rate and small profits rate for Financial Year 2023 will have effect from 1 April 2023 to 31 March 2024.
The Corporation Tax charge and main rate for Financial Year 2021 was set by section 6 of Finance Act 2020.
Legislation will be introduced in Finance Bill 2021 to set the charge to Corporation Tax and set the main rate of Corporation Tax for all non-ring fence profits to 19% for Financial Year 2022 and to set the charge to Corporation Tax and set the main rate at 25% for Financial Year 2023.
Legislation will also introduce a small profits rate and will set this at 19%.
The small profits rate will apply to profits below the lower limit of £50,000 and profits exceeding the upper limit of £250,000 will be charged at the main rate. The thresholds that apply for determining whether a company is chargeable at the small ring fence profits rate at s279E Corporation Tax Act 2010 will be aligned with these limits.
In line with the approach taken with the former rules, the small profits rate will not apply to close investment-holding companies. The definition of a close investment-holding company will follow the definition previously found at section 34 CTA 2010.
Marginal relief provisions will also be introduced so that, where a company’s profits fall between the lower and upper limits, it will be able to claim an amount of marginal relief that bridges the gap between the lower and upper limits providing a gradual increase in the Corporation Tax rate.
The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies.
The related 51% group company test at S279F to S269H CTA 2010 will be repealed and replaced by associated company rules. This will be the case for its application for determining whether a company is large or very large for quarterly instalment payment purposes or for determining whether a company may elect to use the small claims treatment for the Patent Box, and so on.
Broadly, a company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:
-5
+20
+2390
+11900
+16250
+17200
These figures are set out in Table 2.1 of Budget 2021 and have been certified by the Office for Budget Responsibility (OBR). More details can be found in the policy costings document published alongside Budget 2021.
This measure is expected to have a significant economic impact and the OBR has made an adjustment to their economy forecast to account for this measure. More details can be found in their March 2021 Economic and fiscal outlook.
A behavioural adjustment has been made to account for changes in the incentives for multinational companies to shift profits in and out of the UK. An adjustment has also been made to account for the reduced incentive to incorporate as a result of this measure.
There is expected to be no direct impact on individuals as Corporation Tax is levied on companies.
However, if businesses struggle or are unable to pay increased Corporation Tax, this could impact on their family formation, stability or breakdown. To support, HMRC can provide a Time To Pay arrangement.
It is not anticipated that this measure will impact on groups sharing protected characteristics.
This measure is expected to have a significant administrative impact on approximately 2 million businesses who will need to be aware of the changes even if they do not currently have a Corporation Tax liability.
The introduction of a small profits rate will mean that around 1.4 million businesses continue to pay either no Corporation Tax or Corporation Tax at 19%.
There will be a one-off cost as businesses familiarise themselves with the rate changes and determine which rate of Corporation Tax they should be paying. Some businesses will have to update internal software systems. The one-off implementation cost to all businesses is estimated to be around £50 million.
There will also be a negligible continuing administrative burden for companies which will make claims to marginal relief particularly where there are changes in the number of associated companies. It is expected that these changes will also affect agents acting for businesses and software providers. HMRC does not have data that would suggest agents or software providers will increase fees as a result of this change which would increase the continuing costs, but we will keep this under review.
This measure will have no impact on civil society organisations.
Customer experience is expected to stay broadly the same as this measure does not alter how businesses interact with HMRC.
Estimates of compliance costs are shown in the following table:
One-off impact
(£million)
Costs
Savings
Net impact on annual administrative burden
50
–
negligible
The additional costs for HMRC in implementing this change are anticipated to be approximately £5.1 million.
Other impacts have been considered and none has been identified.
This measure will be monitored through information collected from Corporation Tax receipts.
If you have any questions about this change, contact Eva Upali on Telephone: 03000 542465 or email: eva.upali@hmrc.gov.uk.