Companies must be prepared for changes to the Corporation Tax system in April 2023, as the top rate of corporation tax will rise to 25 per cent.
Despite the headline figure increasing, not every business will pay this higher rate, as the Government is introducing a new tapered system of tax that will see the most profitable businesses pay more.
What is changing?
Companies recording profits of £50,000 or less (the lower-profits limit), will continue to pay Corporation Tax at the same rate as they currently do (19 per cent).
However, firms with profits between £50,000 and £250,000 (the upper-profits limit), will technically pay the main rate of 25 per cent but benefit from marginal relief to cut their tax bill.
This means the rate at which they pay tax increases as profits rise until a company reaches profits of £250,000 or more and no longer benefits from this relief.
The lower and upper-profit limits are reduced proportionately where the accounting period is less than 12 months or where a company has one or more associate firms.
A company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:
The full amount of Corporation Tax at the rate of 25 per cent is calculated before marginal relief is deducted.
The marginal relief calculations are based on offsetting ‘augmented profits’ against the total taxable profits.
‘Augmented profits’ are the company’s total taxable profits plus exempt distributions from non-group companies.
These include dividends, distribution of assets or amounts treated as a distribution on the transfer of assets or liabilities or the repayment of share capital.
As you can see, the calculations involved in reaching a final tax rate and bill, once the marginal relief is applied, will be quite complex going forward and so businesses need to spend time figuring out how the change affects them so that they pay HM Revenue & Customs the right amount.
Can anything be done to minimise the increase in Corporation Tax rates?
There are several steps that companies can take to manage their Corporation Tax liabilities once these new rules are introduced in the next tax year.
Here are just a few steps you can take to help cut the amount of tax your business pays:
Bring taxable income forward – It may be worthwhile accelerating the recognition of income, where possible so that it falls in the current tax year ahead of the changes.
Carry forward losses – Consider whether it might be worth carrying forward losses against taxable profits made in future accounting periods in the new tax year. This could mean that losses are relieved at a maximum of 26.5 per cent rather than the current rate of 19 per cent, depending on your circumstances and rate of marginal relief.
Taxable gains – If you are considering selling an asset it may be worth bringing the disposal forward to the current tax year so that the gain is taxed at 19 per cent rather than higher rates.
Defer expenditure – Planning to spend and invest? Deferring expenditure into the new tax year could reduce your level of taxable profits and, therefore, increase the amount of marginal relief that you enjoy under the new tax system.
This decision must be weighed carefully against the current Capital Allowance schemes, which end before the beginning of the new tax year.
In some circumstances, it may make more sense to benefit from the temporary relief on offer from the super-deduction, first-year allowance and £1 million Annual Investment Allowance, rather than deferring expenditure to increase the amount of marginal relief.
As you can see, the changes to the rules surrounding Corporation Tax and the new rates and reliefs are fairly complex.
We can help you to make sense of these changes and look at solutions that allow you to minimise the amount of Corporation Tax you pay now and in the future.
For an initial consultation with our experienced tax team, please contact us.
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