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Corporation tax is charged on the profits made by companies, public corporations and unincorporated associations such as industrial and provident societies, clubs and trade associations. The tax is charged at a flat rate of 19%.[1] Dividends paid out are taxed as income in the hands of shareholders at special dividend rates.[2] 

Corporation tax (CT) is estimated to raise £40.3 billion in 2021/22. It is the fourth largest contributor to the Exchequer after income tax, National Insurance contributions (NICs) and VAT.[3] Nearly all corporation tax receipts are accounted for by ‘onshore’ corporation tax; a separate corporation tax regime is in place for offshore firms operating in the oil and gas sector.[4] Onshore corporation tax receipts have risen as a share of GDP since 2011/12. As the Office for Budget Responsibility note, “this has been driven by a rising tax base as well as a rising effective tax rate. The tax base reflects strong growth in commercial and industrial company profits from the depressed level they reached in the 2007/08 recession.”[5] This trend is notable as the headline rate of CT was successively cut from 28 per cent in 2010/11 to 20 per cent in 2015/16, and cut again to 19 per cent in 2017/18.”[6]

In his Budget statement on 3 March 2021, the Chancellor, Rishi Sunak, announced a major reform to the corporate tax regime:

  • an increase in the rate of tax from 19% to 25% to apply to companies with profits over £250,000, from April 2023.
  • the introduction of a separate rate for companies with profits under £50,000, set at 19%, with a tapered rate to apply for businesses with profits above this threshold but under £250,000.
  • a new ‘super-deduction’ to allow companies to claim a 130% first-year capital allowance for investment in qualifying new plant and machinery assets, to apply from 1 April 2021 until 31 March 2023, and a 50% first-year allowance for qualifying special rate assets.
  • a temporary two-year extension in ‘loss carry-back’ which allows companies to offset losses in the current year against taxable profits in the past year – from one year to three years.[7]

The scale of these reforms is considerable. The Budget report estimates the new rates of corporation tax will raise £11.9 billion in 2023/24, rising to £17.2 billion in 2025/26. Prior to this the two reforms to capital allowances are forecast to cost £12.3 billion in 2021/22, rising to £12.7 billion the following year.[8] Total CT receipts are forecast to rise from £40.3 billion in 2021/22 to £85.3 billion by 2025/16.[9]

This paper discusses the details of the Chancellor’s announcement, and the response there has been to it to date. A second historical paper looks at reforms made to the corporate tax regime since 2010.[10]

Notes 

[1]     HMRC, Corporation Tax rates and reliefs, ret’d March 2021

[2]     HMRC, Tax on dividends, ret’d March 2021

[3]     Office for Budget Responsibility, Economic and fiscal outlook, CP387, March 2021 p103 (Table 3.4: Current Receipts). Receipts from these taxes are estimated to be: income tax: £198bn; NICs: £147bn; VAT: £128bn.

[4]     HMRC, Oil and gas: Ring Fence Corporation Tax, July 2015

[5]     OBR, Onshore corporation tax, updated 14 January 2021. A statistical overview of the tax is provided in, HMRC, Corporation Tax Statistics 2020: commentary, September 2020.

[6]     see, OBR, Why have onshore CT receipts performed so well since 2013-14?, 4 December 2018

[7]     HC Deb 3 March 2021 cc256-8; Budget 2021, HC 1226, March 2021 para 2.81-2, para 2.111, para 2.51

[8]     Budget 2021, HC 1226, March 2021 p42 (Table 2.1 – item 22, item 18)

[9]     OBR, Economic and fiscal outlook, CP387, March 2021 p103 (Table 3.4: Current Receipts).

[10]    Corporate tax reform (2010-2020), Commons Briefing paper CBP5945, 2 April 2021


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