So what do those changes announced months ago mean for your company now they have been implemented?
Undoubtedly, the Covid-19 pandemic may have adversely impacted the profitability of your company resulting in possible tax losses. The silver lining to this is that those tax losses arising in accounting periods ending between 1 April 2020 and 31 March 2022 may be available for offset against the previous three years’ taxable profits, a significant extension from the previous one year carry back limit. For many this will result in a repayment of corporation tax from HMRC and now that Royal Assent has been obtained, companies can claim under these rules and benefit from additional cash.
A similar extension to the carry back of tax losses applies to unincorporated businesses so it is not only companies that can benefit from possible tax repayments.
If your company is considering investing in plant and machinery, between 1 April 2021 and 31st March 2023 the new ‘super-deduction’ may allow your company to claim a 130% capital allowance when calculating profits chargeable to corporation tax, reducing the net cost of qualifying spend and helping cash go further.
The government have further encouraged fixed asset spend by extending the temporary Annual Investment Allowance of £1million until the end of 2021.
However, not all changes will positively impact cash flow.
From 1st April 2023, the rate of corporation tax for companies generating taxable profits of more than £250k will increase by 6% to 25%. Those ‘small’ companies with profits less than £50k will avoid the increase altogether, with a ‘taper relief rate’ applying to those companies with profits that come in between the new thresholds.
This calculation of the Corporation Tax rate is further complicated with the re-introduction of the associated company rules. The definition of ’associated companies’ is wide reaching and quite often goes beyond those companies that are in a Corporation Tax ‘group’.
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For businesses that make a tax loss between 1 April 2020 and 31 March 2022, the decision may be whether to carry back losses for a cash repayment now, or carry them forward to reduce taxable profits otherwise subject to a future 25% tax rate. The decision will ultimately be a commercial one.
With cash requirements being at the forefront of most businesses, now is this time to consider these changes and speak to your tax adviser about the impact they might have on your company and the opportunities they might unlock.