Business Investment Analysis: Changes to Corporation Tax and the Super Deduction

The worst kept secret in the Chancellor’s red briefcase was confirmed when the Chancellor announced that Corporation Tax, the tax that businesses pay on profits, will increase. The current 19% rate will go up to 25% in 2023.

Most business owners will be unsurprised to see the rise in Corporation Tax. As Lord Bamford, chairman of construction vehicle company JCB, commented: “[The change in Corporation Tax] needs to be viewed in the context of the economy right now as it emerges from the shock caused by the pandemic. Getting back to economic health is the priority for the country, which includes tackling the deficit as well as stimulating growth and creating jobs.”

The 25 per cent rate of Corporation Tax will not affect everyone. Small firms with profits of less than £50,000 will come under a small profits rate, meaning that they will be unaffected by the tax rise. Additionally, there will be a gradual upwards taper on Corporation Tax for companies with profits above £50,000, so that only the largest businesses with profits of £250,000 or more will pay the full rate of tax at 25%.  

"The government is providing business with over £100bn of support to get through this pandemic, so it is fair and necessary to ask them to contribute to our recovery," the Chancellor told the Commons.

The increase in Corporation Tax will also be tempered by a new Super Deduction capital allowance deduction. This announcement from the Chancellor came as something of a surprise, and means that from April, companies investing in plant and machinery will qualify for a 130 per cent deduction in their capital allowance, allowing them to boost the amount they offset against their tax bill by 25 pence in the pound.

Rishi Sunak has said of the Super Deduction scheme that: “we’ve never tried this before in our country” and gave the example of a construction form buying £10 million of new equipment. Under current tax rules the firm would be allowed to reduce its taxable income for the year by £2.6 million, but after April 2021 by using the Super Deduction scheme it could be reduced by £13 million.

However, further clarification is needed on this new measure. The definition of ‘plant and machinery’ is broad and has at times been brought into question: there was a well- publicised legal test case two years ago on whether an agricultural silo could be included in this categorisation. There is also a question mark about the eligibility of smaller firms who rely on finance such as hire purchase to purchase plant and machinery. The small print of the government’s Budget statement states that plant and machinery investment incurred through “hire purchase or similar contract” will have to meet “additional measures” which are as yet unspecified.

Our business tax advisers are here to give help and support on any of these measures, and can assist with all of your tax issues from straightforward compliance and tax returns through to managing business tax restructuring and HMRC disputes. By taking a 360 degree view of your business structure our advisers can work with you to identify ways in which you can significantly mitigate your tax exposure.

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For help and support on the changes to Corporation Tax and the introduction of the Super Deduction please contact us on 0330 058 6559
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