Corporation tax changes

A raft of tax changes have been implemented as the government grapples with balancing the need to fill the hole in public finances left by the pandemic, whilst continuing to encourage growth and investment in the UK in light of ongoing macroeconomic pressures.

When it comes to companies, the response has been to raise the headline rate of tax whilst simultaneously providing greater relief for capital expenditure to encourage longer term business investment. We look at these changes in turn below.

Rates

Corporation tax rates changed from 1 April 2023. For businesses whose profits are in excess of £250,000 all profits will be taxed at the higher rate of 25% and where companies have profits less than £50,000 all profits will continue to be taxed at the previous rate of 19%. For businesses with profits between £50,000 and £250,000 all profits are taxed at 25% but then tapered down using a marginal relief calculation. Practically this means that the effective marginal rate of profits between these thresholds is 26.5% with the first £50,000 of all profits being taxed at the lower 19% rate.

The thresholds will be divided by the number of worldwide associated companies and adjusted for periods shorter than 12 months. Broadly associated companies are those companies in the same group or under the control of the same person or persons. Generally, dormant companies and holding companies which only receives dividends and pays them to shareholders should not count as associated companies.

Where an accounting period spans 1 April 2023, the profits are strictly time apportioned so that regardless of when the profits were generated in the period, they are taxed equally over that period at the previous 19% rate and new rates depending on the number of days before and after April 2023. Therefore, where taxable profits are generated unevenly over a period (say due to a large capital disposal or seasonal trade), they could be subject to additional tax of up to 7.5%.

Businesses could consider shortening the accounting period to before the 31 March 2023 to ensure all the profits are taxed at 19% but this may accelerate the due date for the tax payment and lead to additional administrative cost. Conversely, if significant profits are expected after April 2023, this could mean an extension of the accounting period may reduce the overall tax paid on these profits. Thus business owners will need to weigh up the cost of changing a tax year end against the potential tax savings.

Where a company has made a loss, the use of those losses will require careful consideration. Normally these losses are carried forward and therefore could obtain tax relief at up to 26.5%, but business owners have to weigh up whether it is worth carrying them back instead to generate a refund from HMRC at a lower rate of 19% but with a repayment from HMRC and the cashflow advantage this brings. The losses can also be surrendered to other companies under the same group for group relief and in this instance companies that have profits which are taxed at the highest rates should be prioritised.

Companies will also need to be mindful of quarterly instalment payments as HMRC interest for late quarterly payments are based on the Bank of England base rate plus 1% which is significantly higher than this time last year at 6.25% (the late payment interest for payments made after 9 months of the year end are base rate plus 2.5% so currently 7.75%).

Furthermore, businesses should also consider reviewing their corporate structures to see if they can be made more efficient. For example, they could be simplified to reduce the number of associated companies and therefore not breach quarterly payment thresholds (currently £1.5m, £10m and £20m+). Alternatively companies outside a corporate group (but still within consideration for the associated company rules) could be brought into the group to allow efficient use of losses so that the tax liability is calculated on the economic profits.

Capital Expenditure

Other notable changes from 1 April 2023 are the end of super deduction 130% or 50% for main pool and special rate pool expenditure respectively. Instead a new ‘full expensing’ regime has been introduced which allows businesses to fully deduct the cost of plant and machinery (or 50% if the expenditure falls into the special rate category) after this date as a first-year allowance.

This relief only applies to items that are unused and not second hand and has the usual exclusions that apply to all first-year allowances, mainly cars and items for leasing.

The Annual Investment Allowance has also been maintained at £1m instead of dropping to £200,000 as originally proposed until 2026 but this may be extended further. This is in addition to the expensing of capital expenditure and means most companies will be able to offset all capital expenditure incurred against taxable profits for the foreseeable future.

However, in the current climate commercial factors such as inflation and rising interest rates might be more important considerations for when to invest, than making the most of the overall tax reliefs available.

If you would like further advice on the corporation tax changes, get in touch with our team today.