Insights

There are plenty of press articles currently focusing on households struggling with the cost of living increases, and of course businesses are not immune either. Rising inflation can have unexpected consequences and businesses will need to review the impact of inflation on their tax position and plan well ahead. This article discusses tax changes coming up and their implications due to rising inflation.

Firstly, tax revenues have risen to their highest levels for many decades and inflation will further increase this. Companies need to prepare themselves for the impact this will have on post-tax profitability and be ready to take mitigating action where possible.

According to the Bank of England, inflation will exceed 7% by Spring 2022.  The increase in prices due to inflation has the effect of increasing the size of the economy and therefore, tax receipts. Around the time of the last Budget, the Treasury was expecting to generate £50 billion in tax revenues but with inflation running at 7%, this is likely to be higher. Although more money is in circulation, its value is decreasing, 7% inflation will halve the value of money in a decade, which will have a long term impact.

Corporation Tax increase

From 1 April 2023, companies who generate profits above £250,000 will pay 25% corporation tax. If corporate profits do not increase, shareholders will see a decrease in post-tax returns without any inflationary pressures coming through the supply chain. The small profits rate of corporation tax of 19% remains in place for profits of up to £50,000, with taper relief applying on profits of up to £250,000, except for close investment holding companies. Due to the impact of fiscal drag and inflation, more companies will be pulled into the higher tax rates even though the limits are actually lower in real terms. To mitigate this impact, deferring the use of any loss relief until 2023 could be advisable where this is possible.

Employers’ national insurance increase

Employers now have to pay 1.25% higher national insurance on payroll (an above inflation 9% increase). NICs are tax deductible and although this will cut the net increase to around 1%, it is still an additional business overhead. One way around this increase is to use salary sacrifice schemes if possible.

VAT thresholds

The VAT threshold is not changing from the current level of £85,000. Inflation of 7% reduces the value of the threshold in real terms to just under £79,500 after a year. This has an impact on microbusinesses, some of whom will be better off outside the VAT regime because it will result in a further price increase. It also affects the value of the thresholds for registering for the flat rate scheme, cash accounting and the annual accounting schemes.

Tax payment date

Companies and groups that make taxable profits of less than £1.5m must pay their corporation tax nine months after the end of their accounting period. Companies who make profits above this level must pay corporation tax earlier (up to 18 months earlier) and with inflation at 7%, the profit limit is less in real terms. The effect of this is that companies who used to rely on having 9 months may find they are paying tax much earlier, which will of course affect cash flow.

Capital allowances decreasing

The increased Annual Investment Allowance started to revert back to its original level from 1 April 2022. In addition, the Superdeduction Annual Allowance offering 130% capital allowances tax relief ends on 1 April 2023. If a company starts its accounting period after 1 April 2022, time apportionment will result in the relative tax benefit being reduced. It will also have a further impact on companies due to the rise to corporation tax rates of 25%. We have commented on this in an earlier blog (link) through time apportionment. It means very careful planning of any future investments is advisable to the tax relief available is maximised.

In summary

Overall the effect of inflation will mean that companies will be suffering from the effects of fiscal drag at a time when they are trying to recover from the disruption of Covid. Further adding to the challenges they will face, some of policies designed for larger businesses will start to impact SMEs. Through careful financial and tax planning, it may be possible to mitigate the worst effects of the current economic situation.

If you would like some help with navigating the impact of inflation, please contact us via partners@rjp.co.uk.