2020 Vision: the outlook for Corporation Tax

We are now coming to the end of a most unusual year – the first without a Budget for at least 120 years. But that doesn’t mean there won’t be any tax changes next year, especially given the December general election.

So what might 2020 have in store for Corporation Tax (CT)? Below we take a quick look at some of the key potential changes. It should be noted these are just highlights – it would take more than one article to cover all potential changes to CT, never mind other taxes – and that this article was written before the election and is therefore subject to change.

The end of rate cuts?

In recent years we have become used to seeing the Corporation Tax rate fall on a regular basis. From a high of 52% back in the 1970s, we currently have a record low rate of 19%. That rate was scheduled to drop again to 17% from April 2020 – a cut which was actually legislated for in Finance Act 2016.  However, it appears that this might no longer happen. The Conservative party manifesto states that they would not go ahead with the cut but instead maintain the rate at 19%.

Labour by contrast would reverse recent cuts in CT rates. Their manifesto proposes a gradual increase to a final rate of 26% – which would take CT back to its 2011 level.  Under this plan the initial increase in April 2020 would be to 21%, followed by 24% from 2021 and 26% from 2022.

Labour have also said they would reintroduce a small companies rate. Again, the proposal is that this would gradually increase over the next few years – starting at the current rate of 19% from April 2020 before increasing to 20% from April 2021 and to the target of 21% in April 2022. Looking beyond CT rates, Labour’s manifesto commits to a review of corporate tax reliefs with a target of reducing them by £4.3bn.

The Liberal Democrat manifesto indicates that they would introduce a slight raise in the CT rate, restoring it to 20% and keeping it stable there.

Of course, these plans may never come to fruition, especially if none of the parties get their desired majority. But, whatever happens, it looks like the trend of ever decreasing CT rates may well have come to an end.

R&D

April 2020 is scheduled to see the return of the cap on the repayable credit available under the R&D regime for small and medium sized businesses (SMEs). The previous cap was abolished in 2012.

In outline, the amount of payable tax credit that a loss-making company can receive in any year through the SME scheme will be capped at three times the company’s total PAYE and NICs liability for that year.

The cap is being reintroduced as HMRC have identified fraudulent attempts to claim payable tax credits totalling over £300 million by using companies or structures with little employment or R&D activity in the UK.

There are a couple of suggested measures to limit the adverse impact of this change on legitimate businesses, including a threshold below which claims would not be subject to the cap.  The level of this threshold has not been confirmed, but £10,000 was used as an example in the most recent consultation document.

We have not yet seen draft legislation for this cap, which will presumably need to be included in the next Finance Bill if it is to go ahead from April 2020. However, it is one to watch for businesses which claim under the SME scheme and have low PAYE and NICs bills – this may include start-ups, but also those using tax efficient share schemes or owner-managed companies where remuneration is drawn mainly as dividends.

Depending on the outcome of the election, we may also see changes to large company R&D relief in the coming years. The Conservatives have indicated that they would raise the relief available under the Research and Development Expenditure Credit (RDEC) scheme from 12% to 13% and look into widening the definition of R&D.  By contrast, Labour have said they would phase out both RDEC and the patent box entirely in favour of more direct funding of R&D.

Overseas corporate landlords

From 6 April 2020, non-UK resident companies will be chargeable to Corporation Tax rather than to income tax on their UK property income. This change isn’t dependent on a Budget or Finance Bill as the relevant legislation was included in Finance Act 2019.

This transfer to CT will be a big change for affected companies. They will be taxed at a different rate(s) (possibly lower, possibly higher, depending on the election results) and they will also come into the remit of some complex rules such as those restricting interest deductions and the use of carried forward losses.  Companies will also have to get to grips with administrative changes including the requirement to file CT returns and use iXBRL tagging.

All of this means that non-resident corporate landlords are likely to see an increase in compliance costs from next year, both one off and on-going.

Looking ahead

The above is not an exhaustive list of all the CT changes which could be introduced in 2020. The eventual picture will depend significantly on the composition of Parliament after 12 December.

Whoever ends up in government, we cannot rule out additional or different measures making it through to any subsequent Budget and Finance Bill. It therefore seems that 2020 could be an eventful year, and that’s without even mentioning Brexit or Making Tax Digital.

Emma Rawson is Technical Officer at the Association of Taxation Technicians (ATT).