Budget 2021: Corporation Tax

UK Corporation Tax; key measures included in Budget 2021 are as follows.

From the change in the main Corporation Tax rate to the repeal of the EU Interest and Royalties Directive, the changes to the Corporation Tax system as announced in the Budget are as follows:

Corporation tax rates

• The Corporation Tax rate will remain at 19% until FY2022.
• From April 2023, the main rate of Corporation Tax will increase to 25%. 
  • Companies with chargeable profits of £50,000 or less are liable to tax at the current rate of 19%. This will be the Small Profits Rate (SPR).
  • Companies with chargeable profits of £50,001 to £250,000 will pay tax at 25% but will have the benefit of marginal relief.
  • The SPR will not apply to close-investment companies.
  • The thresholds for marginal relief will be apportioned for the number of Associated companies and for short accounting periods.
  • The Diverted Profits Tax rate will increase proportionally, from 25% to 31%.

Company losses

• There will be a temporary extension to the period in which a Company loss can be carried back.
• Companies will be able to carry back trade losses up to three years.
  • This applies for up to a maximum of £2 million of tax losses.
  • The £2 million limit applies to losses incurred in each of the following years: 2020-21 and 2021-22. For accounting periods ending between 1 April and 31 March 2021 and 2022.
  • The limit will be apportioned for groups of companies.

R&D relief

• The proposed cap on R&D Small to Medium-sized Enterprises (SMEs) tax credits has been confirmed. The maximum amount a company can claim will be £20,000 plus three times the company's total PAYE/NICs.
• The R&D tax reliefs, as they currently stand, will also be subject to consultation. The government wants to keep the UK as a competitive location for research companies and review whether the reliefs are still fit for purpose.

Northern Ireland Housing Executive

• The Northern Ireland Housing Executive will be exempt from Corporation Tax from 1 April 2020, bringing its treatment into line with other equivalent UK bodies.

Large corporates

• Following a consultation announced in the 2020 Budget, the legislation addressing arrangements using hybrid mismatches to generate a tax mismatch (and a tax advantage) will be amended to ensure a fair and proportionate application. Exemptions from counteraction payments are included and the definitions of those caught under the "acting together" rules are amended.
• Finance Bill 2021 will repeal the EU Interest and Royalties Directive. This exempts payments of withholding tax on intra-group interest and royalties between EU and UK companies. The legislation will be repealed from 1 June 2021. Withholding taxes will then apply in line with the relevant Double Taxation Agreements.
• The increase in the main rate of Corporation Tax to 25% will unfairly disadvantage banks due to the additional 8% surcharge. The government will review this in the Autumn to ensure that UK banks do not suffer a substantial tax increase and that UK banking tax rates remain globally competitive.

Useful guides on this topic

Budget 2021: At a glance
A summary key budget announcements together with items published without announcement.

Budget 2021: Subscriber guide
A detailed guide with links to more detail on all the key topics for SMEs and their owners.

Tax adjustments to profits: Corporation Tax
This briefing provides a non-exhaustive, but a fairly typical list of the range of accounts that may need to be reviewed when preparing Corporation Tax computations together with the adjustments that Small to Medium-sized Enterprises (SME) need to make in adjusting their accounting profits for Corporation Tax.