Corporation tax rates and deferred tax impacts
Legislation will be introduced in the Finance Bill 2012 to reduce the main rate of corporation tax from 26% to 24% from 1 April 2012 and to 23% from 1 April 2013. Finance Bill 2012 also sets the small profit rate at 20% for the financial year commencing 1 April 2012.
Legislation will be introduced in Finance Bill 2013 to reduce the main rate of corporation tax to 22% for the financial year commencing 1 April 2014.
This is an acceleration of the reductions proposed in Budget 2011 which announced that the main rate of corporation tax would be reduced by 1% to 25% from 1 April 2012.
Who will be affected?
Companies reporting deferred taxes for UK taxable entities in their financial statements under most accounting systems including United Kingdom Generally Accepted Accounting Practice (UK GAAP), United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS).
Under both UK GAAP and IFRS, the changes relating to the 24% and 23% rates will arise for balance sheet dates falling on or after substantive enactment of the charge.
The Government has utilised the Provisional Collection of Taxes Act 1968 to bring in the 24% rate, therefore substantive enactment of the 24% rate for UK GAAP and IFRS purposes will occur when the resolution having statutory effect has been passed (which is likely to be in the week commencing 26 March). Substantive enactment for the 23% rate will occur when the Finance Bill 2012 has passed through the final reading in the House of Commons which usually occurs at some point in June or July 2012. Substantive enactment of the 22% rate will likely occur when the Finance Bill 2013 has passed through the final reading in the House of Commons in the summer of 2013.
For US GAAP filers, the changes will apply to balance sheets falling on or after the full enactment of the Finance Bill 2012. For US GAAP purposes enactment of the 24% and 23% rate will occur when the Finance Bill 2012 receives Royal Assent which is likely to be in July 2012 and for the 22% rate in July 2013.
The rate changes will reduce the value of deferred tax assets and liabilities held on the balance sheet and impact the effective tax rate for the period in which the first balance sheet falls following the substantive enactment (or enactment for US GAAP purposes). As multiple rates are substantively enacted scheduling of deferred tax reversal may be required.