In this article, we discuss how corporation tax is changing, and more importantly how businesses can plan ahead for this change.
How is corporation tax changing?
Whilst the main rate of corporation tax is changing, there are some thresholds which mean not all businesses will be exposed to the full 25% rate:
- A small profits rate of 19% will apply to companies whose profits are equal to or less than £50,000.
- Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25% reduced by marginal relief. The marginal relief acts to adjust the rate of tax paid gradually increasing liability from 19% to 25% (see effective tax rate at various levels below). The £50,000 and £250,000 limits will be reduced if a company has associated companies (see below) or an accounting period of less than 12 months.
Profits £50,000 £75,000 £100,000 £150,000 £200,000 £250,000 Effective CT % 19.00% 21.50% 22.75% 24.00% 24.63% 25.00% - The main Corporation Tax rate is increased to 25% and will apply to companies with profits in excess of £250,000.
Groups face increased pressure
The new upper and lower limits will be reduced in proportion to the number of companies which are associated for tax purposes, and this includes companies not based in the UK.
Companies are associated when:
- One of the companies has control of the other
- Both companies are controlled by the same companies or people
For example, a group with two companies will see the upper and lower limits divided by two, meaning the profit level at which a marginal rate will apply could be more easily breached.
Where companies are under common control but the relationship between one or more companies is not one of ‘substantial commercial interdependence’, they will not be treated as associated for the purpose of the new rules.
Planning ahead for the corporation tax changes
In light of the above changes, there are considerations and decisions that businesses can take, which we discuss below.
1. Holding off making investments
With the Annual Investment Allowance (AIA) extended indefinitely businesses can claim 100% relief against qualifying spending up to the value of £1 million. If your profit will be over £50,000 and you are planning on making a substantial purchase (but which doesn’t qualify for the Super Deduction), by delaying this until after 1 April 2023, it will attract relief at a higher level that it would before 1 April 2023.
For example, a company making over £250,000 profit is purchasing some equipment for £100,000. Before 1 April 2022 this purchase would result in a reduction in taxable profits of £100,000 and reduce tax payable at 19% by £19,000. However, after 1 April 2022 the tax rate will be 25% meaning the reduction in tax payable is £25,000, gaining the company £6,000 in additional relief against profits.
Delaying significant purchases that qualify under AIA can provide worthwhile tax savings, however this very much depends on whether a company can delay a purchase decision from a commercial perspective without negative impact to the business. Also, the risk of inflationary price rises in the interim should be considered as a risk to this strategy.
2. Carrying forward losses
Where losses are made, consider whether it would be more beneficial to carry them forward rather than carry them back. There is of course a cash flow trade-off between receiving a later relief but potentially at a higher rate Vs earlier relief (or repayment) but at a lower rate.
3. Reviewing your group structure
Companies in group structures or where the common control issue is relevant, may wish to review their structure to determine whether any planning or advice is required to mitigate their reduced group corporation tax threshold.
4. Incorporations and new start-ups
Given the rise in main corporation rate, ‘tax motivated incorporations’ may become less common, leaving other deciding factors such as image, separation and limited liability as more prominent to the decision. However, we would always advise you to speak to an experienced advisor before making a decision on incorporation.
5. And finally, review your remuneration planning
With a higher rate of corporation tax, it effectively means there will be less profit on which to pay dividends. Therefore, businesses should review their dividend spending to ensure that do not exceed their profits or reserves. However, dividends remain an effective route for director remuneration and all other things being equal, they remain more tax efficient than salary – but care should be taken to achieve the most tax efficient salary / dividend split.
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With more than 20 years in tax, Paul provides tax compliance and advisory services to clients, and specialises in R&D and capital allowance claims.