In this article Aisléan Nicholson takes us through some of the key corporate tax changes enacted and mooted over the past year.

Introduction

The past year has seen a variety of UK tax changes enacted and mooted. This summary is a reminder of some of the key corporate tax areas for UK companies and groups with a UK presence to consider, starting with some of the practical considerations arising from the Finance Act 2021 (“FA 2021”) measures announced in the Spring Budget and looking at some potential upcoming changes which HMRC are seeking to introduce.

Finance Act 2021 changes:

Increase in corporation tax rates

Whilst an increase in the UK rate of corporation tax was anticipated prior to the Spring Budget, the new headline rate of 25 percent from 1 April 2023 was higher than many expected, though still cited by HM Treasury as competitive on a global basis. The 25 percent rate applies to companies with taxable profits exceeding £250,000 in the tax year, plus all close investment holding companies and any non-resident company operating in the UK through a permanent establishment.

A small profits rate of 19 percent will continue to apply for the majority of UK resident companies with taxable profits of £50,000 or less. For UK companies with taxable profits between £50,000 and £250,000, there is a return to the marginal rate calculation meaning the company can claim an amount of marginal relief, such that there is a gradual increase in the effective corporation tax rate between 19 percent and 25 percent. Thresholds are adjusted for accounting periods of less than 12 months and/or for the number of associated companies. The deferred tax implications of this now enacted rate change will also need to be considered.

The potential for increased tax payments from 2023 onwards is leading some companies to reassess their wider approach to reliefs and incentives, perhaps looking again at the potential to make R&D claims, perform detailed reviews of capital expenditure to identify assets qualifying for capital allowances, and assessing whether the use of patents in their business could see them availing of patent box relief, all of which offer increased value as the effective tax rate increases.

Further, companies have been assessing the interaction between the change in tax rate and the temporary change in the tax loss carry-back rules, in addition to the capital allowance super-deduction discussed below, and the wider interaction with the UK’s rules on the use of corporate losses, group relief etc.

Temporary extension of loss carry-back for companies

Ordinarily outside the cessation of a trade of a business, companies are limited to carrying back their trading losses into the preceding year only.

As covered in detail in the August 2021 edition, FA 2021 introduced a temporary increase to the carry back period for trading losses from one year to three years for accounting periods for “relevant accounting periods” – i.e., those ending in the period 1 April 2020 to 31 March 2021 and those ending in the period 1 April 2021 to 31 March 2022.

For those companies which incur trading losses under difficult trading conditions in the relevant accounting periods, the additional flexibility offered by the temporary loss carry-back rules could offer welcome access to cash via a refund of tax previously paid.

We are seeing many companies, however, taking a broader view, in particular comparing the benefit of immediate tax relief at lower rates compared to future tax relief at higher rates from April 2023, as well as assessing the applicable conditions and restrictions, alongside interaction with existing loss relief rules and wider reliefs and incentives.

Capital allowances enhancements for companies

To incentivise companies to invest immediately in the UK economy, two new incentives offer additional relief to companies incurring capital expenditure on certain capital expenditure incurred between 1 April 2021 and 1 April 2023.

The incentives take the form of a new 130 percent first year capital allowance for qualifying plant and machinery assets known as the super deduction (increased from the ordinary 18 percent annual rate) and a 50 percent first-year allowance for qualifying special rate assets (increased from the ordinary 6 percent annual rate). Special rules apply where the company’s accounting period spans 1 April 2023, where a hybrid rate for the super-deduction of between 100 percent and 130 percent is calculated on a pro-rata basis. Detailed conditions apply for each of the reliefs, which were covered in the June 2021 edition.

One of the main nuances with the super-deduction is that where a company disposes of an asset on which it has been claimed, it gives rise to a balancing charge, rather than the proceeds being taken to the relevant pool. This means that those items of plant and machinery subject to super-deduction claims will need to be tracked over their period of ownership. For companies contemplating a super-deduction claim, especially where a large number of assets are being acquired, it is worth considering whether the tax software being used to prepare the company’s tax return can manage this tracking, or whether an alternative arrangement may be needed.

In addition, depending on the profile of the company’s expenditure, the anticipated life and residual value of the assets being acquired etc., the possibility of a short life asset election and the availability of Annual Investment Allowance (where the limit has been maintained at £1 million for the year 1 January 2021 to 31 December 2021) may mean that a super-deduction claim may not actually result in the optimal position for the company.

As a result of the detailed conditions and the need to assess how and when allowances may be clawed back when an asset is disposed of, what at first seems like a very generous measure may not be the best choice for a company, depending on its particular facts and circumstances. Most companies and groups will benefit from modelling a number of capital allowance scenarios, combined with a review of their forecast profits and their loss attribute profile, before filing their tax return, to determine the best combination of claims and elections.

At a minimum, however, companies undertaking capital expenditure in the relevant period should consider a review of relevant contracts to acquire potentially eligible plant and machinery to ensure that they are drafted in such a way as to allow a super-deduction claim, to facilitate maximum flexibility when filing the relevant tax return.

One further area where care will be needed where super-deduction claims are made is in the area of asset sales or share sales of a business. For example, significant balancing charges could arise on asset sales, and for a purchaser of shares when acquiring a business, taking account of a potential future balancing charge on the sale of assets subsequently will be important where the quantum is material.

Other notable changes

The operation of the UK’s Research and Development incentives (the Small and Medium Enterprise (“SME”) R&D tax relief scheme and the R&D Expenditure Credit (“RDEC”)) scheme are largely unchanged following the Finance Act 2021, though for the SME scheme a cap on the payable credit linked to the company’s PAYE bill has been introduced for accounting periods beginning on or after 1 April 2021. A wider review of these regimes is underway which is intended to ensure that the UK remains a competitive location for cutting edge research. One to watch for companies which perform R&D activities.

There was also a repeal of the UK’s implementation of the EU Interest and Royalties Directive. While the UK’s extensive treaty network should mitigate any adverse tax implications in most cases, there may be additional administrative steps to be taken to benefit under a Double Tax Treaty, so if not already undertaken, consideration well in advance of making the first payments following the repeal of the legislation is recommended.

Anticipated changes

There are also several further changes anticipated in the upcoming Finance Bill and beyond, which businesses are starting to think about, including:

Notification of uncertain tax treatment by large business

Draft legislation has been tabled for inclusion in Finance Bill 2021–2022, to implement a new requirement for large businesses to notify HMRC where they have adopted an uncertain tax treatment. It is intended to provide HMRC with accurate and timely information, which should facilitate earlier identification and resolution of uncertain tax treatments.

This legislation will apply to returns due to be filed on or after 1 April 2022, but will only apply to large businesses (either or both of (i) turnover above £200 million; or/ and (ii) a balance sheet total over £2 billion). The definition of taxes in scope has been limited to corporation tax, income tax (including PAYE) and VAT and the threshold for reporting has been set at £5 million. Potentially impacted companies may wish to consider if they have provisions recognised under accounting principles which reflect reliance on an interpretation of law which is at odds with HMRC’s known position. If so, they’ll need to assess whether there is a substantial possibility that a court would disagree with the position taken to assess their notification position.

Transfer pricing documentation

Transfer pricing is a key area of focus for HMRC and the Government is consulting on proposals for the introduction of mandatory transfer pricing (“TP”) documentation. For large multinationals this would likely take the form of a master file and local file under OECD recommendations, which many multinational groups may be familiar with from other jurisdictions.

It is expected that impacted groups will need to prepare their specific TP documentation when preparing their tax return filings, unlike at present where they merely need to maintain sufficient records to demonstrate that their tax returns are complete and accurate, with no specified requirements for TP support.

However, two additional requirements may also be introduced, namely:

• a supporting evidence log, which may require the setting out of the of the key facts underpinning the transfer pricing arrangements; and
• an international dealings schedule (which would be relevant for all UK businesses to which transfer pricing legislation applies, not just the largest groups). This may contain requirements to disclose the nature and amount of cross border intra-group transactions, the identity and location of counterparties, details of the pricing arrangements and methodologies applied and reporting may potentially be limited by a determined level of materiality.

Such changes would see a greatly increased compliance burden for many companies subject to UK transfer pricing rules and it’s not yet clear whether as a result, taxpayers would benefit from fewer or more focused TP audits. Work on this area continues and further updates are expected in due course.

Conclusion

The UK government, HM Treasury and HMRC continue to seek to drive desired taxpayer behaviours through a mixture of targeted anti-avoidance measures and the introduction of new tax measures, whilst seeking to maintain the UK’s competitive tax landscape. Further changes in global tax trends will likely lead to ongoing changes, as will the UK economic environment, so attention to changing UK tax rules to ensure effective management and compliance of UK taxes should continue to be an area of focus for businesses operating in the UK. An Autumn Budget will be announced by the Chancellor on 27 October 2021 the key features of which will be included in the November 2021 edition of tax.point.