Is now the time to tidy up your group structure?
Corporate Tax Planning
With upcoming changes to legislation, Louise Cottam discusses whether now is the time to reorganise your group structure.
In the wake of the economic turmoil caused by the pandemic, it was less than surprising when the Chancellor announced an increase to corporation tax.
Whilst the increase in rates will go some way in helping to repay the debt ensued over the course of the pandemic, undoubtedly the increase in rates will have a huge impact on businesses across the UK.
Now, with less than 6 months until the new rates come into play, business owners need to forward plan to ensure that the rates don’t have a significant impact on cash flow – especially if you have associated companies within your structure.
What is the current position?
Currently there is one rate of Corporation Tax (CT), 19% which is applied to all companies regardless of profits. However, the deadlines for CT payment do vary depending on a company’s profit and how many companies are within the 51% group.
The CT payment regimes are as follows:
- Not large – such companies pay CT 9 months and 1 day after the year end.
- Large – companies with profits over £1.5m (divided by the number of worldwide 51% group companies) pay tax in quarters, on the 14th of the 7th, 10th, 13th and 16th month after the start of the accounting period.
- Very large – companies with profits of over £20m (divided by the number of worldwide 51% group companies) pay tax in quarters, on the 14th of the 3rd, 6th, 9th and 12th month after the start of the accounting period.
What are the changes?
As of 1 April 2023, we’ll see three tax rates come into effect:
- Small profit rate – The 19% rate will continue to apply for companies with profits up to £50,000.
- Main rate – 25% for companies with profits over £250,000.
- Marginal rate – Companies with profits between £50,000-£250,000 will pay tax at 25% with a marginal tax relief.
Furthermore, both the tax bands above and the bands for the payment deadlines for CT will be based on a wider definition. Going forward companies will need to consider the number of companies it is associated to, rather than just the number of companies in the 51% group.
What is an associated company?
A company is an associate of another company if one of the two has control of the other, or both are under the control of the same person/persons. ‘Control’ for this purpose is defined as for close companies i.e. 51% ownership.
So, if a person owned 100% of 5 companies individually (rather than in a group), currently each individual company would pay tax at 19%. They would have to earn taxable profits over £1.5m or £20m to fall into a large or very large quarterly instalment payment regime. Following the change, any of the companies earning profits of over £50k (£250k divided by 5) will pay tax at 25%, plus if any of the companies earn over £300k or £4m they will fall into either the large/very large quarterly instalment regime.
Are there any exclusions?
It is worth noting that some associated companies are excluded for the purposes of the new rules, including:
- Dormant companies.
- Passive holding companies - where a company only receives dividends from its subsidiaries and pays these to its shareholders, and the company receives no other income or expenses.
- Where businesses are owned by associates of that person/persons (including business partners and relatives such as spouses and children). As long as the relationship between one or more companies is not one of substantial commercial interdependence.
What does this mean for businesses?
In summary it is likely that more companies have to pay a higher percentage of CT and sooner.
With the changes just around the corner, it’s worth considering whether you will be liable and whether you will be paying tax at a higher rate than anticipated.
If so, will you be able to fund this? And could these changes be a catalyst for reorganising your companies?
It’s worth noting that HMRC charge interest on late payments of tax. This rate of interest has gone up 5 times so far in 2022 and is currently at 3.5%. It is also possible that HMRC could charge penalties if it believes that a company is deliberately not paying tax by instalments when it should be.
What would a group structure mean?
Because companies will now be linked for CT rate purposes, payment deadlines and Annual Investment Allowance purposes, there could be a benefit from creating a group structure:
- Losses arising after the reorganisation could be group relieved.
- It may be possible to apply the substantial shareholders exemption for the future sale of companies out of the group. Where this applies no tax arises immediately on the disposal, instead tax would arise when the profits are extracted from the holding company.
Speaking to an expert
Reorganising your companies can seem like a daunting exercise, especially if you’re already trying to navigate your way through the implications of the CT rate changes.
Our team of tax experts are on hand to support you in the lead up to 1 April. If you would like to discuss any of the issues raised, or have any queries, please feel free to get in touch.