Legislation will be introduced in Finance Bill 2021 to set the main rate of corporation tax at 19% from 1 April 2022 and 25% for non-ring-fenced profits from 1 April 2023. Legislation will also introduce a small profits rate of 19% from 1 April 2023.
The small profits rate will apply to profits of £50,000 or less (the lower limit) and profits exceeding the upper limit of £250,000 will be charged at the main rate.
Provisions will also be introduced so that a company with profits falling between £50,000 and £250,000 will be able to claim an amount of marginal relief such that there is a gradual increase in the effective corporation tax rate.
The small companies’ rate will not apply to close investment-holding companies; these companies will continue to be subject to the main rate of corporation tax.
Alongside the increase in the main rate of corporation tax, Diverted Profits Tax will increase from 25% to 31% from 1 April 2023.
Changes will be introduced in Finance Bill 2021-22.
Linked to the increase in the corporation tax rate, the Chancellor commented that a review of the bank surcharge was needed to ensure this industry remains internationally competitive. The government will set out its approach on the bank surcharge in the autumn with proposed changes included in Finance Bill 2022.
Any company or permanent establishment subject to the UK corporation tax regime, and businesses preparing financial statements which include these companies or permanent establishments.
Following substantive enactment of Finance Bill 2021, companies reporting under either UK GAAP or IFRS should use the new tax rates when measuring deferred taxes to the extent that temporary differences will reverse after 1 April 2023.
For entities that expect marginal relief to be a significant factor, judgement should be exercised in determining the appropriate average tax rate to be used when measuring deferred tax assets and liabilities.
For entities reporting under US GAAP, the changes will apply to the deferred tax calculations for reporting dates (full year or interim) ending on or after the date of full enactment of Finance Bill 2021. The 19% enacted rate should therefore continue to be used until Finance Bill 2021 receives Royal Assent, which is expected to be in summer 2021.
Businesses falling within the bank surcharge legislation will reflect the changes in their deferred tax calculations in due course once the relevant legislation has been substantively enacted (IFRS) or fully enacted (US GAAP).
The new rates will be effective from 1 April 2023.
Despite the increase in the corporation tax rate for 2023 and beyond, we welcome the fact that the UK’s corporation tax rate remains competitive.
Companies will need to consider the applicable rate to use for both interim and annual financial reporting purposes under the relevant financial reporting standard. Businesses reporting their financial results before the legislation is substantively or fully enacted will need to consider whether any post balance sheet disclosure is required to explain the expected impact.
Companies will also need to consider the interaction between these rate changes and any decision to carry losses back to earlier periods.