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Summer Budget: Large companies will have to pay corporation tax earlier from 2017 but rate reduced to 18% by 2020


Large companies will have to pay their corporation tax earlier, but the rate of corporation tax will be reduced to 19% in 2017 and to 18% in 2020 UK chancellor George Osborne announced in the summer Budget. 

Osborne announced several "surprise" measures affecting companies in his summer Budget today. Tax relief will be removed for purchases of goodwill on or after 8 July.

The chancellor announced that groups of companies with annual profits of £20 million or more will have to pay corporation tax in the third, sixth, ninth and twelfth months of their accounting period – bringing forward the time each instalment is currently payable by four months. The Budget document says that under the current system "large UK companies pay tax later than in most other G7 countries, and later than most individuals".

Under the current regime companies with profits of £1.5 million pay corporation tax in quarterly instalments, in the seventh, 10th, 13th and 16th month after the beginning of the accounting period.  The policy costings for this measure estimate that it will raise £4.495 billion in 2017-18 and £3.135bn in 2018-19.

The chancellor announced the removal of corporation tax relief for companies which write off the cost of purchased goodwill. Under the previous rules tax relief is given to companies for the costs of purchased goodwill and intangible assets that are recognised in the accounts. Relief is given as and when the expenditure is written off in accordance with generally accepted accounting practice. No such relief is available where a company acquires shares in the target company. The government says that this change will "remove a distortion in the market which is artificially altering the way companies choose to expand" 

Heather Self, a tax expert at Pinsent Mason, the law firm behind Out-law.com, said: “Removing tax allowances on goodwill for acquisitions from today is a nasty surprise. The regime for taxation of goodwill has been in place since 2002, and such a sudden change is not justified for a measure which addresses an “imbalance” in the tax system, rather than aggressive avoidance”.

It is intended that provisions in the Summer Finance Bill to be published on 15 July will remove  relief for debits for all purchased goodwill and customer related intangible assets, except in respect of acquisitions made before 8 July 2015, or acquisitions made afterwards pursuant to an unconditional obligation entered into before then.

In another measure, taking effect from 8 July the chancellor announced that the government will remove the ability for companies to use UK losses and reliefs against a controlled foreign company (CFC) charge. A CFC is company that is resident outside the UK for tax purposes and controlled by one or more persons resident in the UK. The aim of the CFC regime is to prevent the avoidance of UK tax by storing up profits in low tax jurisdictions. It operates to attribute the profits in some circumstances to UK resident persons.

The chancellor announced that the current rate of corporation tax of 20% will be reduced to 19% from 1 April 2017 and 18% from 1 April 2018. He also announced that the permanent level of the annual investment allowance will be increased to £200,000 for investment in plant and machinery made on or after 1 January 2016. The permanent rate of the allowance is currently £25,000 but it was temporarily increased to £500,000 for 2015. The annual investment allowance gives 100% capital allowances to businesses on expenditure qualifying for plant and machinery allowances.

Heather Self said "Business will welcome the reduction in the rate of corporation tax to 18%, which the CBI called for in its submissions during the Coalition Government.  However, the receipts from bringing forward the Quarterly Instalment Payments more than outweigh the costs – under government cashflow accounting, receipts of £7.6bn are recorded in the two years from 2017, while the reduced rate has a total cost of £6.6bn over the forecast period”

The chancellor has also committed to producing a 'business tax roadmap' by April 2016, setting out the government's plans for business taxes over the rest of the parliament. This was one of the measures called for by a number of commentators including the Confederation for British Industry (CBI) CBI. The CBI said that the roadmap produced in 2010 was "extremely valuable in providing businesses with the direction of travel for the corporate tax system, enabling businesses to make long term investment decisions".

The chancellor announced reductions in the bank levy and that the government will legislate in this parliament to change the tax base to UK operations from 1 January 2021. However a supplementary tax on banking sector profit of 8% will be introduced from 1 January 2016. This will apply to banks' corporation tax profit before the use of any existing carried forward losses and will not apply to the first £25 million of profit within a group. The expected extra taxes from banks is “around £2bn over the forecast period”, according to the budget document.

“The manifesto commitment to raise £5bn a year from avoidance and evasion has been met by widening the definition to include 'imbalances in the tax system'.  For example, almost £1bn a year comes from removing the climate change levy exemption on renewable energy” said Heather Self.

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