Budget 2021: Super-deduction and the future impact on SME businesses

Budget 2021: Super-deduction and the future impact on SME businesses

The pressure was on Rishi Sunak to come up with a budget that would help repair the Covid 19 damage to public finances while still supporting businesses under enormous pressure due to the continuing effects of the pandemic. For SMEs, there was some good news, with measures such as the furlough scheme extension, the launch of a Help to Grow digital training and grants scheme aimed at small business and extended self-employed Covid 19 financial support to a further 600,000 people.

With a special nod to those small businesses in manufacturing, construction and utilities, the Chancellor also announced a super deduction tax break for companies investing in new equipment beginning April 2021. This will cut companies’ tax bills by 25p for every pound they invest, meaning they can reduce taxable profits by 130% of the cost. This is worth £25bn to businesses over the two-year period the super-deduction will be in effect.

Timing

The relief will end before the higher rate of corporation tax comes in in 2023, more of which later. Regarding the super deduction, though, there is a planning point in terms of timing. The super deduction covers contracts entered into after 3rd March 2021, with spend between 1 April 2021 and 2023, and because there’s an interaction with the 100% annual investment allowance, owner managers need to think about whether they are better off claiming 50% or 100%. In a measure to provide further help for struggling businesses, the Government has extended the period which trading losses can be carried back for tax relief purposes for relevant accounting periods ending between 1 April 2020 and 31 March 2022. This means that it will be possible to carry back relevant losses to set against profits incurred in the three years leading up to the period in which the loss was incurred, rather than the current one year.

Corporation Tax Time Machine

Now, back to corporation tax. As I’ve mentioned, one of the headline announcements in the budget was putting it in a time machine and taking it back to where it was in 2011, with an increase to 25% in 2023. Any small business with profits of £50,000 or less will be exempt from the increase - that’s around 70% of small businesses.  After that, a tapered rate will also be introduced for profits above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate. A quarter of a million pounds may sound a lot, but we’re not talking Amazon here, and if you’re going to be one of those companies paying 25% you might want to carry losses forward not back - it depends on whether you need cash now or would rather save for the future.

If you would like to discuss any of the tax advice further, please get in touch with our team today.