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Corporation Tax Changes – An Overview

Chris Stedman
Senior Partner
November 29, 2021
    

The corporation tax clock is ticking steadily. For many years the main rate has been held at 19% with prospects of an even lower rate. This highly competitive rate internationally is set to increase following the Government’s huge outlay since Coronavirus struck in March 2020. After all someone has got to pick up the bill and companies don’t vote…!

Corporation Tax (CT)

All of a company’s profits, income and capital gains for an accounting period are added together and treated as profits chargeable to CT. Generally speaking, companies do not pay tax on dividends received.

CT operates by reference to “Financial Years” which always start on 1st April and finish on 31st March. Where a company’s accounting period does not end on 31st March it will generally span two Financial Years. Profits are simply apportioned and the rates of tax in each year applied.

For companies with annual profits not exceeding £1.5m CT is currently payable nine months and one day after the end of the accounting period. Special rules apply to larger companies. Note that the £1.5m threshold must be divided among any associated companies. So, if a business owner has two other associated companies the special payment rules kick in if profits exceed £500,000.

The Corporation Tax Increase

The main rate of 19% is to be increased to a new rate of 25% with effect from 1st April 2023.

Companies with annual profits of £50,000 or less will continue to pay CT at the new small profits rate of 19%. If profits are between £50,000 - £250,000 then a marginal rate of 26.5% cuts in on the excess. After £250,000 all profits are taxed at 25%.

For a company earning £300,000 it will need to increase its profits by £24,000 in order to maintain the status quo. Consider the following:

    Before 1st April 2023   After 1st April 2023
         
Profits   300,000   324,000
CT @ 19%   (57,000)    
CT @ 25%       (81,000)
                                       
After-tax Profit £    243,000 £ 243,000

For companies with no associates and a 31st March year end the increased CT bill is not going to hit them until 1st January 2025. The financial year will be the 12 months ending 31st March 2024 and payment date will be 9 months plus one day later.

Special transitional rules apply for the first accounting period which straddles the date on which CT rates change – i.e. 1st April 2023.

Associated Companies

Where a company has associated companies, the lower and upper limits must be reduced accordingly. In broad terms this means that after 31st March 2023 having associated companies will limit a company’s ability to benefit from the small profits rate or marginal relief. The table below illustrates this:

Number of Associates   Lower Limit   Upper Limit
         
0 £ 50,000 £ 250,000
         
1 £ 25,000 £ 125,000
         
2 £ 16,667 £ 83,333
         
3 £ 12,500 £ 62,500
         
4 £ 10,000 £ 50,000
         
5 £ 8,333 £ 41,667

The basic rule is that two companies are associated with each other if:

-         One company is under the control of the other, or

-         Both companies are under the control of the same person or           persons

The rules are widely drawn and beyond the scope of this summary. They do need to be considered carefully.

Practical Tax – Saving

The basic idea is to enhance your CT profits before the tax increase on 1stApril 2023. The main focus will be:

-         Defer expenses.

-         Accelerate income.

-         Accelerate capital gains.

-         Review accounting adjustments (limited).

But as ever the over-riding message must be –never let the tax tail wag the commercial dog. Remember too that a decision to defer expenses (for example to delay pension contributions) may have unforeseen consequences a little later.

Other Implications

The sharp increase in CT rates is going to impact directly on questions such as:

-         When is it best to incorporate?

-         How can profits be extracted from companies tax efficiently?

The answer to these questions always involve detailed calculations in which CT, income tax and NIC rates play a pivotal part. The point at which incorporation becomes beneficial for the majority of business owners will be necessarily deferred with higher CT rates. And taking remuneration instead of dividends will be less expensive, given that remuneration will often be relieved at the CT marginal rate of 26.5%. But the number – crunching still has to be done in both instances.

And the way forward?

Historically the main rate of CT was at a staggering 52% from 1973 – 1982 under a Labour administration. Over the years this has fallen steadily with Conservative Chancellors driving the rate down to30%, then to 20% and finally levelling out at 19% under George Osbourne. Rishi Sunak is taking a big gamble with an increase to 25%. On the one hand he has got to find a lot of cash to plug the Coronavirus hole. On the other, he is reckoning on most other countries doing something similar. What he can’t afford to see is wholesale departure of UK businesses to foreign shores if tax rates there are significantly lower. He’ll be watching the situation very carefully, rest assured.

 

C & H Stedman will gladly assist with any questions on this subject.  

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