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Tax Changes - Getting Your Business Ready For When They Arrive

Some tax changes have already landed, however, there are still more to come.

A lot has happened over the course of the last couple of years. Businesses have dealt with many new policies which have shaped the way they operate. This is certainly the case for how businesses are taxed. 

Some changes have already landed, however, there are still more to come. That’s why business owners in the United Kingdom need to be prepared for what happens next. To help guide you through everything you need to know, we’ve created this easy to digest article so nothing is left up to chance. 

The most important changes which will be discussed include the switch of the corporate tax rate, which will commence in April 2023, and the new incentive called ‘super-deduction’. Both of which can have major implications on businesses and require a solid understanding to figure out how best to continue once they take effect.

Corporation Tax Changes

In March 2021, Boris Johnson and his cabinet announced that from April 2023 the corporation tax rate will rise from 19% to 25%. This announcement is an unprecedented change considering the corporation tax rate hasn’t risen since the 1970s. 

However, that’s not all. The change in tax rate will only be applicable to companies that have more than £50,000 in profits. Any business below this threshold will continue to pay the original 19%. There is also a marginal rate of 26.5% that will be applied for companies that have profits between £50,000 to £250,000. 

Unfortunately, there is no escaping the economic impact that the pandemic has caused. Therefore, it’s come as no surprise that the government is taking steps to balance its books. Similar approaches have been taken in the past and have provided effective results without hurting small and medium businesses. 

Diving Deeper into the Changes

Throughout the years, the OECD has identified that corporation tax rates around the world have significantly reduced. In the 1970s and 1980s, the typical rate was around 40% to 45%, moving forward to 2020 where it has dramatically changed to 23.5%. As you can see from the current rate in the United Kingdom, the corporation rate is consistent with the average trend.

One of the main arguments for keeping corporation taxes high is to ensure revenue is generated for the government which can be invested in different social services. However, it was shown that companies would attempt to find loopholes to prevent paying such high rates. Therefore, by reducing the rates, it incentivised businesses to pay taxes.

Overall this approach has been successful with still huge amounts of tax revenue still being collected by the government.

A recent survey even found that corporation tax collected to GDP continues to rise, so it will be interesting to see the result when the UK government goes against this trend and increases the rate.

Although, with this being said, the pandemic has significantly drained the UK treasury’s finances and requires new ways to replenish their funds. Furthermore, the UK isn’t the only western country that feels this way. Joe Biden has announced similar plans for the future to up the US tax rate from 21% to 28%. What will be interesting is to see if this sparks a new trend with more countries doing the same by raising corporation tax, or if this method will be a short-term solution that will fizzle out in the next couple of years.

The Introduction of a ‘Super-Deduction’

Businesses that have been operating for many years have grown accustomed to ever-changing government policies and learning how to adapt when they happen. For instance, the new rise in corporation tax may result in unexpected impacts on the market.

However, it seems the government has identified the possible implications of implementing the new tax rate, as they predict that capital investment will slow considerably. This is because businesses are most likely to defer capital expenditure purchases until after 2023 to receive a better tax relief rate. 

To prevent this from becoming too much of an issue, the government has announced that it will be implementing what’s known as a ‘super-deduction’. The purpose of this is to encourage UK businesses to invest in new machinery and plant equipment before 2023. The new ‘super-deduction’ provides the ability for companies to receive a 130% deduction from the cost of the machinery or plant equipment. It will only be available until March 2023 when the new corporate tax change begins. 

Although this policy is aimed at incentivising UK businesses to keep capital investment at the same levels before the new changes, it’s still viewed as a welcome tax relief that many companies are looking forward to using during its duration.

Tax Is Becoming More Complicated

From 2015 onwards, the tax structure for UK businesses has been somewhat simple to follow, due to the rate being exclusively set at 19%. But, as 2023 approaches with new rules that consist of rates at different thresholds, trying to calculate the correct amount of tax may become more challenging.

If we look at this further, you can see firsthand the complexity it brings. This new method to collect corporate tax will implement the ‘Associated Company’ rules which includes different thresholds of £50,000 to £250,000 to be diluted depending on the amount of ‘Associated Companies’ or other similar companies. 

This basically means the tax rate a company has to pay depends on the number of other companies that are related. Therefore, the more businesses that are connected, the higher the rate will be, compared to if all operations were channelled through just one business. Following on from this, when a business group produces a loss, the decision process can be confusing. This is due to trying to determine which company in the group surrenders the loss when factoring in the different rates.

Furthermore, with the introduction of the ‘super-deduction’ a possible loophole has been identified. As it currently stands, there is no rule stopping businesses from using the 130% super-deduction to purchase machinery or plant equipment and then selling or leasing the item straight away. 

However, new legislation has been created to combat this by adding a possible balancing charge of 25% on assets that are sold when using the ‘super-deduction’. Overall this means the businesses most likely wouldn’t benefit from the ‘super-deduction’ if they were looking to just buy and sell assets. 

Keep Tax under Control through Planning

The new changes to the corporation tax rate and the implementation of the ‘super-deduction’ to keep capital investment steady until 2023 are seen as big developments to the business tax scheme in recent years.

It’s recommended that companies operating in the United Kingdom should start creating plans to prevent negative implications from the new rules and to even capitalise on the potential opportunities.

Whether businesses decide to use the ‘super-deduction’ or not will be a big decision to make. Furthermore, considerations about other reliefs that are still active need to be made, such as the Annual Investment Allowance. For businesses to proceed with confidence all these factors that are relevant must be examined closely to determine the best strategy.

However, that’s not all. Company owners will need to fully understand the new thresholds to determine how much tax must be paid from April 2023 onwards. Along with, factoring in how the ‘Associated Company’ rules will impact their tax rate and payment terms if the company belongs to part of a group. 

Apart from the recent announcements, there hasn’t been a significant drawback from setting up multiple businesses in previous years due to the fixed tax rate being 19%. But now, company groups that have been structured this way may experience a dramatically higher tax rate. Leading to the question of whether it’s beneficial for them to re-structure under one entity to lower the ‘Associated Companies’, helping lessen the tax rate incurred. 

So, as we get closer and closer to the April 2023 deadline, it’s predicted that businesses will try to reduce unnecessary spending until the new changes are implemented. Business owners will need to assess the situation to determine what their tax amount will most likely be in 2023, and make the important decision on whether tax saving should be implemented or not. 

Help from the Professionals

Suretax is a well-established chartered accountancy firm that provides advice and services to businesses of all sizes throughout the United Kingdom. The upcoming changes have been closely examined, so Suretax can provide recommendations to companies that aren’t sure what the best approach is to take. Contact us today.

Not only do the seasoned accountants at Suretax assist in the best tax strategies for businesses, but we also provide the ability for companies to action the plans through many of our services. This way, essential finance processes can be managed with high attention to detail, giving clients peace of mind while they focus on other priority tasks. 

Following on from the corporation tax services offered, there are also other key accounting services provided by Suretax. This includes managing payroll, dealing with VAT, helping with bookkeeping, filing self-assessment forms and more.

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"The financial success of every business is dependent upon an effective and insightful understanding of their current standing."

— Julie Cameron, Managing Director of Suretax