Rishi Sunak’s budget on Wednesday 3rd March contained some announcements that will directly affect taxation in the project finance sector, with the major ones being the increase in the corporation tax rate and the enhancements to capital allowances available to main and special rate pool additions.
Corporation Tax Rates
The rate of corporation tax will increase from 19% to 25% from 1 April 2023. The 19% rate will continue to apply where taxable profit is less than £50,000 with tapering between £50,000 and £250,000. However, this reduced ‘small business rate’ is unlikely to apply to transactions in the project finance sector and so we would expect financial models to assume that a 25% corporation tax rate applies from 1 April 2023 onwards.
Companies will be able to claim a 130% Super Deduction on new qualifying main rate pool plant and machinery expenditure incurred from 1 April 2021 until 31 March 2023. This will mean that any qualifying expenditure incurred between these dates that would normally be added to the main rate pool and be allowable at a rate of 18% per annum on a reducing balance basis will actually lead to an immediate deduction in the corporation tax calculation equal to 130% the total qualifying expenditure.
In addition, companies can claim a 50% first year allowance on qualifying special rate (including long life assets) pool capital expenditure incurred between 1 April 2021 and 31 March 2023. The remaining 50% of the qualifying expenditure will be added to the special rate pool and be allowable at a rate of 6% per annum on a reducing balance basis in future years.
Other measures that might affect some companies in the project finance sector include:
Temporary extension of loss carry back
Companies incurring a trading loss in an accounting period can normally make a claim to offset the loss against total profits of the previous 12 months after first having set the losses against any profits of the accounting period in which the loss occurred.
The budget extended this one year period for which trading losses can be carried back against previous profits to three years. The extension applies to trading losses made by companies in accounting periods ending between 1 April 2020 and 31 March 2022.
After carry back to the preceding year, a maximum of £2 million of unused losses will be available for carry back against profits of the same trade to the earlier 2 years. This £2 million limit applies separately to any unused losses of each 12 month period within the duration of the extension.
There is therefore a cap of £2 million on the extended carry back of losses incurred in accounting periods ending in the period 1 April 2020 to 31 March 2021 and a separate cap of £2 million on the extended carry-back of losses incurred in accounting periods ending in the period 1 April 2021 to 31 March 2022.
The £2 million cap is subject to a group level limit. This will require groups with companies that have capacity to carry back losses in excess of a de minimis amount of £200,000 to apportion the £2 million cap between companies within the group.
The amount of trading losses that can be carried back to the preceding year remains unlimited for companies.
Landfill tax rates
From 1 April 2021, the standard landfill tax rate increases to £96.70 per tonne with the lower rate increasing to £3.10 per tonne.