Generally speaking, corporate and financial tax received more attention than sole proprietorship and partnership tax in the Chancellor’s budget last week.
The “super-deduction”, a new capital allowance of 130% in the first year with a duration of two years from April 2021, is only available to companies, in part to compensate for an increase in the corporate tax from April 2023.
This measure is a welcome incentive for companies considering investing in plant and machinery, as they now enjoy an accelerated benefit of two years before higher corporate tax rates go into effect, said Simon Tapp, who leads accountant Moore Scarrott’s farming team.
The spending schedule needs to be carefully considered by what would typically be the end of the year on March 31, Tapp said.
Until March 31, purchases of new and used plant and machinery are eligible for 100% tax relief up to £ 1million through the Annual Investment Allowance (AIA ), available for businesses, partnerships and sole proprietorships until December 31, 2021, scheduled date. to reduce to £ 200,000.
Businesses claiming the 130% super-deduction on purchases from April 1 should be aware that this only applies to new equipment. While saving 19% tax at first, they could end up paying 25% tax on the sale price or trade-in value when they dispose of the equipment, as the corporate tax rates will drop. at 25% from April 2023, warns Tapp.
“With the existing AIA declining on any subsequent purchase or replacement in the same year, it’s more important than ever to talk to your accountants and agree on the timing of proposed machine changes over the next four to four. next five years, ”he says.
Sam Kirkham, farm and estates team partner at Accountant Albert Goodman, says it will be important to weigh the interaction between AIA and the new improved allocation.
“We have already had inquiries as to whether it is more tax efficient to use the AIA for used kits or the super deduction for new equipment,” she said. .
Key points of super-deduction
- New factory, machinery and equipment eligible only (AIA is available on used items)
- No ceiling on eligible expenses
- Not available on contracts concluded before March 3
- Could reduce business tax bills by 25p for every £ 1 spent
- When planning for machine replacements, be aware that when the kit purchased using the 130% super-deduction is disposed of, there could be a 25% tax on the sale or trade-in value, essentially refunding the additional relief offered. More details on this and any relief are expected from the government.
Corporate tax rate
For business profits of £ 50,000 or less, the current corporate tax rate of 19% will continue to apply.
From April 2023, those earning £ 250,000 or more will pay 25% corporate tax.
Where a company’s profits fall between the lower limit of £ 50,000 and the upper limit of £ 250,000, the company may apply for marginal relief which will close the gap between the upper and lower limits, with a gradual increase the corporate tax rate.
Corporate tax vs personal tax rate
Although the rise in corporate tax rates is relatively large, corporate tax rates remain well below personal tax rates, says Kirkham.
“For those who are considering incorporating, a business structure can still be of benefit to many, especially when they do not plan to derive profits from the business for personal use, but rather consider doing so. keep in the business for reinvestment or to reduce debt.
“We have seen an increased use of public limited companies in the rural sector in recent years. In our company alone, the use of public limited companies in the agricultural sector more than doubled, with 25 to 30% of companies having a company involved in some way in the structure of the company.
“This is in part due to the low corporate tax rate of 19%, but also the limited liability protection offered by a business, with a larger portion of the public coming to the farm for weddings, vacations and holidays. farm shops; and increased food production in rural areas. companies.
“With the contentious world we live in now, limited liability provides additional insurance against a potential claim against the business, thereby protecting valuable farm assets.”
Raising corporate taxes may lead to changes in compensation policy and the mix between salary and dividends, says Kirkham.
Super-deduction and AIA
Catherine Vickery, Associate Director at The Old Mill Accountant, says, “What is really telling? [about the super-reduction] is that there is no ceiling for eligible expenditure; the government wants to revive the economy and encourages businesses to join it.
However, she cautions that the savings resulting from using the super-deduction may not be as attractive as they appear at first glance. For example, every £ 100,000 invested using it before the corporation tax increase to 25% will potentially reduce the tax payable by £ 24,700, compared to a tax saving of £ 25,000 once. the 25% tax hike in place.
“Don’t let the allure of the super-deduction cause you to postpone your investments, especially if you borrow a lot. Consider the risk of inflation and the possibility of an associated rise in interest rates and determine the impact before changing investment plans, ”says Ms. Vickery.
“When you run the numbers it’s a lot, so anyone investing less than £ 1million may be better off sticking to their current investment plans.
“One caveat is that if AIA declines over the next two years, it could negate any benefits of waiting, which could mean missing out on the benefits of super-deduction.
“The decision to invest must be based on plans to become more profitable and productive; then assess which tax year it should be in. There is a good chance that in two years the government will still encourage investment.
On integral features, such as plumbing and electrical installations in farm buildings, farmers (sole traders, partnerships and businesses) will still be able to claim up to £ 1million under 100% AIA for the current year.
Under the new super-deduction, anything on top of that is now also eligible for a 50% first-year allowance for those special rate assets that previously would only have been entitled to an 8% annual rate. .
“Beware that this [the super-deduction] only applies to new contracts – those signed before March 3, 2021 or amounts spent before April 1 are not eligible for the allowance, ”warns Ms. Vickery.
Following the Budget, individual traders, partnerships and corporations can carry forward their losses for three years instead of one.
“This means that anyone who has suffered significant losses or who will invest heavily using the super-deduction – and therefore losing – can now carry that back three years to recover the tax paid during that period,” Ms. Vickery.
It applies to losses of up to £ 2million per year in the years ended April 5, 2021 and April 5, 2022.
“One thing to keep in mind is that the HMRC cannot process any claims or issue refunds until the new rules receive Royal Assent – which should be in June or July – so there is is no rush to file complaints, “advises Ms. Vickery. .
Loss relief or carry-back
- Trade losses for individual traders, partnerships and corporations can now be carried forward for three years instead of one against profits from the same trade for the years up to April 5, 2021 and 2022
- Unlimited carryback in the first year, limit £ 2million on losses carried forward thereafter
- The losses must first be compensated by the commercial profits of the most recent years
- Where companies are part of a group, the £ 2million cap should apply to the whole group for each relevant year
- The deadline for a claim for losses in the 2021 tax year is January 31, 2023
Other main fiscal measures
- Hospitality and tourism diversification – reduced 5% VAT rate continues until end of September, followed by 12.5% VAT rate from October to April 2022
- Recovery grants of £ 6,000 to £ 18,000 for non-essential retail businesses
- New £ 25,000-10million business stimulus loans, government backed for first 80% of loan
- The Stamp Duty Property Tax (SDLT) holiday has been extended until July 1, 2021, reducing the rush to complete before the end of March. This means no SDLT on residential real estate transactions under £ 500,000 or on non-residential land and real estate transactions under £ 150,000.
- The leave scheme extended until the end of September 2021, but from July companies will have to contribute 10% of their employees’ salary and 20% from August
- Help for the self-employed extended to those who could not get help before (e.g. new self-employed), but they must have submitted a 2019/20 income tax return
- Extension of the incentive to hire apprentices in England until September 2021 and doubling of the employer’s payment to £ 3.00 for an employer hiring an apprentice between April 1, 2021 and September 30, 2021
- £ 4million to help develop projects to encourage more locally produced biomass