Tax changes from 1 April 2023

The rate of corporation tax has increased by a third from 19% to 25% for the largest businesses from 1 April and full expensing is available for three years

Businesses with profits below £50,000 will not be affected as the government has introduced a small profits rate for those companies. A tapered rate will also be introduced for profits above £50,000 so that only businesses with profits of £250,000 or more will be taxed at the full 25% rate.

The corporation tax hike is expected to raise an additional £17bn a year, bringing the annual corporation tax take to £70bn in 2023-24.

In line with the increase in the main rate, the diverted profits tax rate will rise to 31% from April 2023 to deter multinationals from diverting profits out of the UK.

Zubin Patel, international tax partner at Deloitte, said: ‘Small businesses can breathe a sigh of relief with the additional measures to mitigate the impact of the tax rise, including the introduction of a small business tax rate, the carry back of losses and a new enhanced deduction for some capital expenditure.’

However, the small profits rate is seen as a minimal benefit for SMEs. Toby Ryland, corporate tax partner at HW Fisher, said: ‘Despite a tiered system, the lowest band is so small that anyone other than the smallest companies are going to face significant tax rises.’

Timings and cashflow will be important issues for larger businesses to consider.

Malcolm Pengelly, tax principal at BDO, said: ‘For large or very large corporate groups within the scope of the QIPs regime, the issue of timing and cash flow could also be a significant additional factor to be considered.

‘Finally, advisers should be wary of the knock-on effects that the increased tax rate will have from a planning perspective.

‘It would be prudent for corporate groups to review their current group membership to determine where they sit for threshold purposes under the post-2023 rules.

Capital allowances

There are also changes to capital allowances after the withdrawal of the 130% super deduction from 31 March.

Companies incurring qualifying expenditure on the provision of new plant and machinery on or after 1 April 2023 until 31 March 2026 will be able to claim one of two temporary first-year allowances. These allowances are:

• a 100% first-year allowance for main rate expenditure – full expensing; and

• a 50% first-year allowance for special rate expenditure.

The annual investment allowance has been set at £1m on a permanent basis from 1 April. This will be a welcome change after years of yo-yoing limits. This capital allowance is available to nearly all incorporated and unincorporated businesses, covering expenditure on most plant and machinery including second-hand assets and those acquired for leasing.

The first-year allowance for electric vehicle charge-points has been extended until 31 March 2025 for corporation tax purposes and 5 April 2025 for income tax purposes.

Research and development (R&D) tax relief 

The legislation will apply generally to accounting periods starting on or after 1 April 2023 except for the requirement to provide additional information, which will apply to all claims made on or after 1 August 2023.

In future companies will have to inform HMRC of plans to make a claim for R&D tax relief using a new digital form. This requirement will apply for claims to relief for accounting periods starting on or after 1 April 2023.

Companies will also have to provide a digital additional information form with their claims. This requirement will apply to all claims made on or after 1 August 2023.

This information will include a description of the R&D undertaken, breakdown of qualifying costs, detail of any agent who has advised on the R&D claim and space for sign off from a senior officer of the company.

This measure is expected to have significant impact on the administrative burden of approximately 90,000 businesses claiming R&D tax reliefs. One-off costs would include familiarisation with the changes and updating systems to reflect them.

In future, companies will also be able to claim R&D relief on data licences and cloud computing services.

A new credit rate will be available to loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure. Qualifying companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure instead of the 10% credit rate for companies claiming support under the existing SME scheme.

The previously announced restriction on some overseas expenditure has been delayed by a year and will now come into effect from 1 April 2024. The delay will ‘allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief which has been consulted on recently’.

The government is still reviewing responses to a consultation on merging the current R&D tax relief schemes and is considering how to proceed. Any changes will not be announced before the autumn.

Global base rate of 15% tax

During the tax year, the government will also introduce a multinational top-up tax which will require large UK headquartered multinational groups to pay a top-up tax where their operations in a foreign jurisdiction have an effective tax rate of less than 15%.

This is expected to raise £2.1bn in 2024-25, with similar projections for subsequent tax years.

There will also be a supplementary domestic top-up tax which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.

These changes will apply to large groups with over €750m (£660m) global revenues in at least two of the previous four accounting periods. The rules will take effect for accounting periods beginning on or after 31 December 2023.

One-off costs to businesses affected by the measure are estimated to be £13.7m due to investment in IT systems, reporting processes and staff training. HMRC is expected to face costs of £47m to implement this change, covering IT and staff costs.

‘The change is complex and requires additional tax administrative tasks to be completed,’ the Treasury admitted.

Creative reliefs

The rates for theatre tax relief and museums and galleries exhibitions tax relief, which were due to taper to 30% (for non-touring productions) and 35% (for touring productions) on 1 April 2023, will remain at 45% and 50% respectively until 31 March 2025.

From 1 April 2025, the rates will be 30% and 35% and rates will return to 20% and 25% on 1 April 2026.

The rates for orchestra tax relief will remain at 50% for expenditure taking place from 1 April 2023, reducing to 35% from 1 April 2025 and returning to 25% from 1 April 2026.

The government has confirmed that the galleries relief will be abolished on 31 March 2026.