Corporation Tax Rate Changes

Author: George Ian Hope BAcc(Hons), MSc(IT), FCCA, CGA, CPA
https://www.linkedin.com/in/gihope
Ian is a general practicing member of the Association of Chartered Certified Accountants with fellowship
status (FCCA). He is also a member of the Certified General Accountants Association of Canada (CGA),
and a member of Chartered Professional Accountants of Canada (CPA).

In the March 2021 Budget Rishi Sunak proposed a number of changes to the way that Corporation Tax will be calculated and applied and these changes will come into effect from 1st April 2023.

In summary of the changes:

• The “Main Rate” of Corporation Tax will increase from 19% to 25% with effect from 1st April 2023.
• Companies with profits of £50,000 or less will remain on the “Small Profits Rate” of 19%.
• Companies with profits between £50,000 and £250,000 will effectively pay Corporation Tax between 19% and 25% by applying ‘Marginal Relief’ to the full 25% value.
• Marginal Relief is given as: 3/200ths of the value of profits less than £250,000 (i.e. Marginal Relief = (250,000 – Profit)*3/200). So the overall tax payable for these companies will be calculated as follows: (Profit x 25%) – Marginal Relief
• Companies with profits of £250,000 or more will pay the “Main Rate” of 25%.
• Short Accounting Periods – Where the company has a short accounting period of fewer than 12 months, the limits (£50k and £250k) are reduced on a pro-rata basis, based on the days in the accounting period.
• Long Accounting Periods – Where the company has a long accounting period of greater than 12 months, this is treated as two accounting periods (12 months plus the remainder).
• Associated Companies – The limits (£50k and £250k) are reduced where the company has associated companies. In order to apply this, divide the limits by one plus the number of associated companies.
• Transitional Rules – Transitional rules will apply to all companies that don’t have a 31st March 2023 year-end. In these instances, accounting periods that straddle the 1st
• April 2023 must be time apportioned and treated as two separate short accounting periods for Corporation Tax purposes. This means that BOTH the profits and limits (£50k and £250k) must be time apportioned by the accounting period. The period before the 1st of April 2023 will have Corporation Tax applied at 19%, and the period after 1st
• April 2023 will have Corporation Tax applied at the new rates.
• Dividends – While dividends received by Companies are not subject to Corporation Tax directly in the company of receipt, dividends received from non-subsidiaries must be included along with profits when determining the amount the marginal relief that should be applied.

There are some exceptions to these rules: close investment holding companies, non-resident companies, multinationals, oil and gas companies, banks, and companies based in Northern Ireland, where other specific rules will apply. But most “typical” SME businesses will be subject to the new rules.

There are a number of key takeaways from the above changes that need to be considered by our clients. Specifically:

• Corporation Tax rates are increasing for everyone!
• The calculation that must be applied for the accounting period, which straddles the cutover date of 1st April 2023 is quite complicated by virtue of the transitional rules. Albeit the overall rate of Corporation Tax payable this year will be lower than in future years because for companies which earn more than £50k in profits, some of the profit this year will still be subject to tax at 19%.
• The number of “Associated Companies” (defined in more detail below) becomes very significant in calculating the rate of Corporation Tax that must be applied in each company.
• While the effective rate of Corporation Tax will be between 19% and 25% for companies with profits between £50k and £250k, the “Marginal Rate” (or the amount of CT paid on each additional £1 of profit) is 26.5%! This is essential knowledge for tax planning because it means that our clients can save 26.5% (or 26.5p in CT) of every £1 reduction in profitability between these limits (e.g. by recording additional expenses, pension contributions, etc).

Associated Companies

With the exception of: Dormant Companies, or Holding Companies (where certain qualification criteria are met), companies are associated if:

• One company is under the control of another, or
• Both companies are controlled by the same person (or persons).

“Control” is assumed to exist where a person (or persons) owns more than 50% of the company’s: Share capital, voting rights, distributable income, or assets on a winding up.

Furthermore, the holdings of other “Associated Persons” (spouse, parents, grandparents, children, grandchildren, siblings, business partners, or a trust or estate where any of the above relatives is a settlor / beneficiary) must also be considered where two or more companies have what is referred to as “Substantial Commercial Interdependence”.

Substantial Commercial Interdependence – Occurs when two companies have ANY of the following:

• Financial Interdependence – One provides financial support to another (e.g. loans), or if both have a financial interest in another business.
• Economic Interdependence – They share the same economic objectives, the activities of one benefit the other, or they have common customers.
• Organisational Interdependence – They have a common management, employees, premises, or equipment. Excludes people who live together and run otherwise separate businesses.

The above content can seem quite confusing! But to try and simply this: The number of associated companies is effectively the: Number of companies you control, or you and a close relative control where the businesses have some form of interdependence.

The fact that associate status now impacts the corporation tax paid by each associated company is also important for tax planning. Because where associated companies exist it is important to ensure that the 19% rate band is not wasted in one or more of the companies. Likewise, where losses exist, Group Relief can be used to offset the profits in group companies which are paying tax at higher or marginal rates.

Conclusion

As you can see, unfortunately, the new rules have made life a lot more complicated for companies when calculating the value of Corporation Tax. But our Team are here to help you. Whether you are an existing client or considering using our services for the first time, please contact us if you would like to discuss any of these matters in more detail with one of our Accountants!