Budget 2016 - Key issues for corporates

17 March 2016

In last July’s Budget it was announced that the rate of corporation tax will reduce from the current 20% to 19% in April 2017 and 18% in April 2020. The headline change was a further reduction in the rate from April 2020 to 17%. However in a Budget more concerned with tinkering than making wholesale changes there were several other key issues for corporates.

Where owner managed businesses and other companies with a small number of shareholders make a loan or other payment to a shareholder that is still outstanding nine months after the year end there is currently a 25% charge. This charge is then repaid when the loan is repaid. It was set at 25% as that was the effective tax rate on higher rate dividends (receiving dividends was the most usual method of repaying the loan). However with the dividend changes from 6 April, this rate will be increased for loans made on or after that date. It will therefore be important to ensure that documentation is kept to show when loans were made, and when repayments are made, to ensure that the correct rate is applied.

For the past 50 years, brought forward losses have only been available for use against certain profits in that company. However for losses incurred on or after 1 April 2017 these can be used against any income streams in any companies in the group. Whilst this appears to be a substantial relaxation, it will be interesting to see the details, especially in relation to what constitutes an income stream. It is unlikely that trading losses will be available for use against capital gains, but we will find out on the 24 March (when the finance bill is released).

However in order to continue the current trend of penalising large businesses, losses brought forward can only be used in full if the profits of the group are less than £5m. If the profits are in excess of this, only 50% of the excess can be covered. For example a £6m profit can only be reduced by a maximum of £5.5m of losses brought forward.