In this article we look at some of the changes which are taking place to Corporation Tax from April 2023 and discuss some planning points which many businesses may want to consider.
Corporation Tax Rate change
From April 2023 the corporation tax rate will increase to 25% for companies whose taxable profits exceed £250,000. For companies with profits of less than £50,000, the current 19% rate will still apply.
Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate reduced by marginal relief such that overall they will pay on a sliding scale between 19% and 25%.
Certain investment companies will pay tax at a rate of 25% regardless of the level of their profits.
Where a company's accounting period straddles April 2023, the company will pay tax at a blended rate between 19%-25% by apportioning profits pre and post April 2023.
The £50,000 and £250,000 thresholds above are reduced where a company has any associated companies (see below).
Depending on a company's accounting date, bringing forward income (where possible) could be advantageous as it will be taxed at the current 19% rate of Corporation Tax. Alternatively, expenditure could be deferred, for example bonus payments or pension contributions could be made after April 2023 to benefit from greater relief from Corporation Tax. If the accounting date for the company straddles April 2023, then shortening the accounting period could be of benefit to reduce the overall exposure to Corporation Tax.
Similarly, where a company intends to sell assets which are standing at a gain, selling them before the new rate of Corporation Tax applies will mean that the taxable gain will be charged at 19% rather than 25%. As above, where an accounting period straddles April 2023 this may require a shortening of the year end.
Note that there are other factors to be taken into consideration when changing year ends and therefore whilst this may be beneficial from a tax perspective, the wider picture will need to be taken into account as well.
New Associated company rules from 1 April 2023
There are new rules to determine which companies fall within the “Associated Company” umbrella. The rules are far more inclusive than they have been until now and therefore it is important to take a look at which of your companies will be affected.
Broadly, any two companies which are under common control will be considered associated.
Here are some common examples:
- Company A and Company B are both controlled by the same person or the same group of individuals (even if they aren't within the same Corporation Tax losses group).
- Company A is owned by Mr Smith and Company B is owned by his wife, Mrs Smith. If the companies have no commercial interdependence they will not be associated, but if they have commercial interdependence then they may be 'associated'.
- Company A is owned by Mr Smith and Company B is owned by his wife, Mrs Smith. Mr Smith lends to Company B. Company A and Company B may be associated irrespective of whether they have commercial interdependence.
- Company A receives financial support from an unrelated company, Company C, they will both be 'associated'.
From April 2023 the number of associated companies is relevant in determining the rate at which a company pays Corporation Tax (19%-25%) and it will also be relevant in assessing whether a company falls within the Quarterly Instalment Payment Regime.
Corporation Tax Thresholds
The new corporation tax threshold will be 25% for profits over £250,000 however if your company has “associated companies” you will need to divide this threshold by the number of its associates. For example if your company has 4 associates, the 25% corporation tax rate will begin from profits in excess of £62,500 i.e. 25% of the standard £250,000 threshold.
Holding companies that don't have a trade will generally be excluded from the number of associated companies calculation.
Quarterly Instalments Payments Regime (QIPs)
Companies which breach the QIP threshold must estimate their corporation tax liability and pay it in four quarterly instalments. This is earlier than the usual due date of 9 months and one day after a company's year end.
For example, if a limited company has a 31 December 2022 year end, its corporation tax will fall due 1 October 2023. However, if it breaches the QIP threshold, the liability must be paid in four equal instalments on the following dates, 14 July 2022, 14 October 2022, 14 January 2023 and 14 April 2023.
The threshold for QIP's is £1.5m taxable profits (annually), therefore if a company breaches this threshold it receives a year grace period following which it will need to start paying under the QIP regime. (Companies which breach the £20m threshold will have different payment due dates which are earlier than those mentioned here).
From April 2023, the £1.5m threshold will be divided by the number of associates that a company has. For example, if a limited company has four associates, the threshold will be reduced to £375,000 and if it has taxable profits above this level, corporation tax will become payable in line with the quarterly instalment due dates.
Please note that associated dormant companies will not need to be included for these purposes.
Take a few minutes to review your portfolio of limited companies and see whether there are any which are associated. Do you control more than one company or do you control more than one company together with other shareholders, or perhaps your spouse?
Please discuss with us if you have any questions.
Use of losses
The flip slide of the increase in corporation tax rates is that losses relieved after 1 April 2023 will grant tax relief at 25% rather than 19%.
If you have brought forward corporation tax losses it would be worth considering delaying the offset of those losses until periods commencing after 1 April 2023 so that the loss relief will be at the higher rate of 25%.
New changes have been introduced with regards to R & D claims. In brief, for small and medium companies, the additional tax relief granted will decrease from 130% to 86% and for those wishing to claim the tax credit, this will reduce from 14.5% to 10%.
With effect from all accounting periods commencing on/after 1 April 2023 HMRC will implement three key reforms to the R&D tax relief schemes in addition to the rate changes referenced above:
- An extension of qualifying expenditure to include data licensing and cloud computing costs. To better reflect the current use of technology within R&D, HMRC have added these two new categories of expenditure that were previously excluded.
- Refocusing the relief towards innovation in the UK.
- Target abuse and improve compliance. HMRC have identified a recent emergence of some R&D advisers who may not be members of professional bodies or have the relevant expertise and are known to submit dubious claims. To stem the tide and reduce the abuse HMRC will implement various process changes.
For further details regarding the Research and Development Tax Relief Regime and the latest changes, please visit our article on Research & Development Expenditure.
Annual Investment Allowance (AIA)
The AIA will remain at £1,000,000. This is intended to encourage continued investment in qualifying expenditure.
This page is for general guidance only and you should seek professional advice before taking any action.