Measure
Under the previous government’s plans, the rate of corporation tax was to increase from 19% to 25% from 1 April 2023 for companies making more than £250,000 profits. Companies making between £50,000 and £250,000 were also facing a rise in corporation tax, with the rate increasing incrementally from 19% to 25% depending on how much profit a company made. The banking surcharge was going to be reduced from the current 8% to 3%, accompanied by an increase in the surcharge allowance from £25 million to £100 million.
The government has now cancelled the planned rate increase. The corporation tax rate will remain at 19% for all companies, regardless of the amount of profit made. The banking surcharge, however, will remain at 8% such that the banks will continue to be taxed at the total rate of 27%. The increase in the surcharge allowance to £100 million will go ahead to ensure that the UK banks remain competitive.
The rate of diverted profits tax was legislated to increase from 25% to 31% from 1 April 2023 but will now be retained at 25% to keep the current 6 percentage point differential from the main corporation tax rate.
All companies subject to corporation tax, including banks.
The increase in the corporation tax rate (and the corresponding reduction in the banking surcharge) was enacted to apply from 1 April 2023. The timing of the legislation required to reverse the increase (and the consequential amendments to the banking surcharge and the diverted profits tax) is yet unknown.
The cancellation of the rise in the corporation tax rate was a key element of Prime Minister Liz Truss’s leadership campaign and was widely expected by the business community. At 19%, the UK corporation tax rate remains the lowest of the G7 member countries and is amongst the lowest rates of OECD countries. It is expected (together with other investment-boosting measures) to stimulate growth and create jobs.
The cancellation must be legislated to repeal the increase, and the timing of this is important for businesses preparing their financial statements under IFRS or FRS102, particularly for recognising deferred tax assets or liabilities. The rate to be used in measuring such assets or liabilities is the rate enacted or substantively enacted by the end of the reporting period. Businesses with a 31 December year end will need to monitor the legislative process closely.