Will you be affected by upcoming changes to corporation tax?

From 1 April 2023, the rules on calculating a company’s taxable profits will be more complex.  Also changing are the rates of corporation tax that a company pays and the rules on associated companies.  Below, Michael Webb explains the upcoming changes and what you need to be aware of to ensure you're tax plan is effective. The key point to take – are you putting enough profits aside to pay for the future tax liability?

Rate of Corporation tax

From 1 April 2023, the main rate of corporation tax is changing to 25%, an increase of 6% on the current rate of 19%.  However, if taxable profits are under £250,000 (the upper limit), the following applies:

• companies with profits of less than £50,000 (the lower limit) will pay tax at 19%
• companies with profits of between £50,000 and £250,000 will be taxed at 25%, but will receive marginal relief

Marginal relief

Companies with profits of between £50,000 and £250,000 will be entitled to marginal relief.  Marginal relief means that you will receive a gradual increase in corporation tax for profits between these thresholds, rather than an immediate increase to 25%. 

HMRC has an online calculator to check a company’s eligibility for marginal relief, and/or calculate the marginal relief a company could be entitled to. You can view the calculator here.

To calculate this manually, you will need to use the following formula:

(Upper Limit – ‘Profits’) x ‘Basic Profits’/’Profits’ x ‘MSCR Fraction’

• ‘Upper Limit' (adjusted for any 'associated' companies)

• Basic Profits’ are the company’s trading profits/gains

• ‘Profits’ are Basic Profits plus FII (Franked Investment Income - generally dividends received from other companies)

• ‘MSCR Fraction’ is 3/200^ths

Associated Companies

The upper and lower limits are divided by the number of ‘associated’ companies.

A company will be associated with another, if at any time during the chargeable accounting period, where:

• one company has control of the other, or
• both companies are under control of the same person(s)

For example – if an individual owns a controlling shareholding in 5 separate companies, all will be treated as associated for tax purposes from 1 April 2023.  The lower and upper limits would change in this case to £10,000 (£50,000/5) and £50,000 (£250,000/5) respectively. 

Dormant/non-trading companies can be ignored for these purposes.  Overseas companies must be considered.

Shares held by an individual’s spouse or civil partner, lineal descendants, ancestors, and siblings must be considered for this test, unless it can be demonstrated that there is no substantial commercial interdependence between the companies (financial interdependence, economic interdependence or organisational interdependence).

Periods that straddle 1 April 2023

For periods that straddle 1 April 2023, the accounting period is split.  For example, a company with a 31 December 2023 year end will have the following ‘chargeable accounting periods’ for corporation tax purposes:

• 1 January 2023 to 31 March 2023 – current rules (main tax rate of 19%)

• 1 April 2023 to 31 December 2023 – new rules (main tax rate of 25%)

 The taxable profits will be time apportioned based on the number of days in each period.

Quarterly payments

The rules on quarterly instalments remain the same (as shown in the HMRC link below) however, the associated company rules will affect the applicable thresholds.

The threshold for quarterly payments is when taxable profits are in excess of £1.5m.  Again, if you have any associated companies, this threshold is divided by the number of associated companies. 

A year of grace is generally available for the first year that profits exceed the threshold, but there is no year of grace if your profits exceed £10m (reduced appropriately by the number of associated companies). 

There is also no year of grace if you are deemed to be “very large” - this threshold is where taxable profits exceed £20 million (again divided by the number of associated companies). If this is the case, accelerated instalment payments will be due

Next steps

To ensure that you are putting aside the appropriate amount of tax, consider the following:

1. The taxable ‘chargeable accounting periods’

2. How may associated companies are there in each of those periods

3. Based on this, the relevant upper and lower thresholds in each period

4. The expected taxable profits?

5. The rate(s) of tax relevant to the company

6. Whether instalment payments are due

7. From this, you can determine the amount and timing of your estimated tax liability

How can Haines Watts help?

We advise clients with a broad range of tax and compliance matters throughout the South West region.

If you would like to have a conversation to understand the complexities of the above, please get in touch with your usual Haines Watts contact.