Corporation Tax Rates
The rate of corporation tax will increase from April 2023 to 25% on profits over £250,000.
Although the rate for small profits under £50,000 will remain at 19% and there will be relief for businesses with profits under £250,000 so that they pay less than the main rate, in practice this is unlikely to be relevant to most significant real estate businesses (as the thresholds are pro-rated dependent the number of associated companies).
In line with the increase in the main rate, the Diverted Profits Tax rate will rise to 31% from April 2023 so that it remains an effective deterrent against diverting profits out of the UK.
Although the increase in corporation tax in 2023 could decrease the UK’s competitiveness globally, this will depend on whether other countries may also increase their own rates in response to the COVID-19 fiscal demands.
Loss carry back relief
The trading loss carry back rule will be temporarily extended from the existing one year to three years. Companies will be able to obtain relief for up to £2 million of losses in each relevant accounting period ending between 1 April 2020 and 31 March 2021 and between 1 April 2021 and 31 March 2022 subject to a group level limit of £2 million.
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2 million of unused losses will be available for carry back against total profits in the earlier 2 years. This £2 million limit applies separately to the unused losses of each 12-month period within the duration of the extension.
The £2 million cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of a de minimis of £200,000 to apportion the cap between its companies.
The loss carry back rules did not apply to property rental business losses, and therefore the time extension is equally not applicable.
This measure is likely to benefit companies making taxable profits in periods prior to the pandemic. However, it is disappointing the 50% corporate loss restriction will not be relaxed temporarily and so denies companies the ability to fully offset losses made during the pandemic period against profits in future periods.
Additionally, as the measure only applies to trading losses this will only be relevant for property trading (developer) businesses.
Amendments to Corporate Interest Restriction (CIR) rules
As previously announced, legislation will be introduced in Finance Bill 2021 to provide two amendments to the CIR rules. One of the amendments will seek to clarify the way special provisions in the CIR rules apply in the context of a Real Estate Investment Trust (REIT), to take into consideration that UK property business of non-resident companies are now within the scope of UK corporation tax as opposed to income tax.
It is welcomed that HMRC are seeking to clarify the way the special provisions for a REIT under the CIR rules was intended to apply to ensure there is no ambiguity.
Hybrid mismatch provisions
Following on from the published response to the Consultation in November 2020, the Government have confirmed that they will be amending the UK’s hybrid mismatch provisions. Key changes are to the treatment of exempt investors under the hybrid entities provisions, extension of dual inclusion income for groups and the exclusion of investors with less than 10% in transparent funds. The vast majority of these changes will apply from Royal Assent of Finance Act although taxpayers may elect to the dual inclusion income changes earlier. In addition, a number of changes are retrospective from 1 January 2017 and seek to ensure the provisions operates as intended (e.g., excluding the release of debt from the rules).
We welcome the Government’s confirmation that the changes to the hybrid mismatch provisions will still be implemented especially as these changes should put the UK provisions on a level playing field with comparable provisions in other European territories (such as Luxembourg and the Netherlands). Given the complexity of the rules, it will not be possible to understand the extent of these changes until draft legislation is released later in March.
The Government is seeking to stimulate business investment by introducing a “super-deduction” for qualifying expenditure on plant and machinery from 1 April 2021 to 31 March 2023. The temporary tax reliefs will be available to companies in the form of enhanced capital allowances:
- A super-deduction in the form of an enhanced first-year allowance of 130% on assets that ordinarily qualify for 18% main rate writing down allowances
- A first-year allowance of 50% on assets that ordinarily qualify for 6% special rate writing down allowances
Multiple conditions and exclusions apply, including:
- The expenditure is incurred from 1 April 2021 to 31 March 2023
- Expenditure is excluded if incurred under a contract made before 3 March 2021
- A reduced super deduction applies in a period straddling but ending on or after 1 April 2023
- A clawback of all or some of the relief (in the form of a balancing charge) can arise, depending on the date of the disposal
- Any tax advantage obtained as the result of “relevant arrangements” can be counteracted by the making of adjustments
An additional tax saving of up to £25 per £100 invested will be welcomed by businesses in the current environment, but like all first-year allowances, these enhanced allowances are only available in the period of investment. For many this may simply create additional tax losses to carry forward and, as the use of losses is restricted against profits in excess of £5 million on a group basis, some modelling may be required to see whether the overall result will be beneficial.
Other factors to consider will be the interaction with the annual investment allowance, which remains at £1 million until 1 January 2022, and any additional compliance requirements arising in consequence of the balancing charge on a future disposal.
The government has used the existing FYA regime (which is now otherwise limited in its scope) as the framework to deliver the super deduction for expenditure on plant and machinery. The FYA regime includes a number of general exclusions which don’t apply to AIAs, for example. In particular, there is an exclusion for plant and machinery provided for leasing, which means that expenditure incurred by property investors on assets in properties that are let out is excluded from benefitting from the new allowance. It is unclear at this stage whether the Government may be minded to reconsider, given that an exception from the leasing exclusion applied to certain plant and machinery in buildings under the ECA scheme until it was withdrawn last year.
The Government announced plans to create “Freeports” in the UK in early 2020. A total of eight Freeport areas have now been announced and legislation will be included in Finance Bill 2021 to designate tax sites within these locations.
The tax incentives available will include:
- An enhanced capital allowances in the form of a first-year allowance of 100% for qualifying expenditure on new and unused plant and machinery for use within the tax site until 30 September 2026
- An enhanced rate of structures and buildings allowance of 10% on a straight-line basis for expenditure on qualifying assets brought into use by 30 September 2026
- An SDLT relief for purchases of land and buildings within a Freeport tax site, subject to a ‘control period’ of up to 3 years and the land being acquired and used in a ‘qualifying manner’, until 30 September 2026. The relief will be subject to a clawback if the property is not used for a qualifying commercial purpose within the control period.
Freeport policy is one of the Government’s widely trailed post Brexit policies. The capital allowances available for plant and machinery and SDLT relief mimic those given for expenditure and acquisitions in designated assisted areas in enterprise zones / disadvantaged areas.
Stamp Duty Land Tax (SDLT) – Extension and staged withdrawal of the temporary reduction for purchasers of residential property
The SDLT nil rate band increase has been extended to 30 June 2021 and from then until 30 September 2021 will be £250,000 before it reverts to £125,000. Purchases of second homes and corporate purchasers of residential property are generally subject to an additional 3% charge, but they benefit from the reduction in the standard rates.
The extension of the measure, which reduces a significant transaction cost and has a positive effect on the industry, is welcomed, as is the decision to phase it out in two steps rather than one.
Stamp Duty Land Tax (SDLT) – Increased rates for non-UK resident purchasers of residential property in England or Northern Ireland
The previously enacted 2% surcharge for non-UK residents purchasing residential property will go ahead as planned on 1 April 2021. The rules are being slightly amended so that those subject to the surcharge will benefit from the extension to the increase in the nil rate band. They have also been tightened slightly to include leases for more than 7 years rather than 21 years and also to restrict the relief for OEICs to PAIFs only.
Most corporate purchasers will not be affected by this measure since a purchase of 6 or more dwellings can be charged at the commercial rate of 5% and this is not subject to the 2% increase.
The changes to these rules are fairly minor and the measure was expected to go ahead.
Annual Tax on Enveloped Dwellings (ATED) – Annual Chargeable Amounts for 2020/21 Chargeable Period
ATED charges increase automatically each year in line with inflation. The ATED charges will rise by 0.5% from 1 April 2021 in line with the September 2020 CPI.
Annual Tax on Enveloped Dwellings (ATED) and Stamp Duty Land Tax (SDLT) – Relief for Housing Co-operatives
Following consultation on draft legislation over Summer 2020, the Government has introduced new reliefs from ATED and the 15% SDLT rate for certain qualifying housing co-operatives effective from 3 March 2021. For SDLT purposes the relief can be claimed for transactions with an effective date on or after this date, however, for ATED purposes the relief will be available for chargeable periods beginning on or after 1 April 2020.
It is welcomed that the Government has provided relief for certain taxpayers who were not within the original ambit of the measures.
Business rates relief
The Government will continue to provide eligible retail, hospitality and leisure properties in England 100% business rates relief from 1 April 2021 to 30 June 2021. This will be followed by 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2 million per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties.
The extension of the business rate relief will be welcomed by businesses in the retail, hospitality and leisure sectors as it will help those businesses with their cashflow whilst they return to normal operations.
Extension of the VAT Reduced Rate in the Hospitality and Leisure Sector
On the 8 July 2020 the Government announced the reduction in the VAT rate to 5% for certain services in the hospitality and leisure sector, including catering and take-away services, hotel accommodation and admission to attractions. This reduction was to end on 31 March 2021, but will now be extended a further six month to 31 September 2021. Furthermore, a new reduced rate of VAT of 12.5% will be introduced from 1 October 2021 until 31 March 2022 which will again apply to those services before reverting back to 20%.
The extension of the temporary reduced rate will be welcomed by businesses in the hospitality and leisure sectors as it will help those businesses either with their margins, or potentially allow discounts to be made as the COVID-19 restrictions are eased. Businesses will be disappointed that the 5% will not be extended to 31 March 2022, but the new reduced rate of 12.5% will at least cushion the impact of the VAT rate increasing.
It is worth noting that many EU Member States operate a reduced rate of VAT for their hospitality sectors, so it will be interesting to see whether this new reduced rate will be extended beyond March 2022 to put UK businesses on a more equal footing with their EU counterparts.
Repeal of Interest and Royalties Directive
Following the UK’s withdrawal from the European Union and the end of the transition period on 31 December 2020, the UK Government have resolved to repeal the UK’s implementation of the Interest and Royalties Directive with effect for payments made from 1 June 2021 (although there are provisions to prevent the payments due after 1 June 2021 being brought forward to benefit from the rules). From 1 June 2021, payments of interest and royalties to EU associated enterprises which would have previously been exempt will now be subject to UK income tax at a rate of 20% (unless a double taxation agreement applies).
Interest and royalty payments from UK companies to major EU territories (including Germany, France, the Netherlands and Spain) are likely to qualify for relief under the relevant double taxation agreement such that the repeal of the Interest and Royalties Directive is unlikely to have a significant economic impact. However, there are a number of instances where either interest or royalties are not reduced to 0% under the relevant double taxation treaty (e.g., interest / royalties paid to Italy, royalties paid to Luxembourg, interest / royalties paid to Portugal). Companies making interest payments under the directive may need to make new treaty claims to obtain reduced withholding rates.