Upcoming changes you need to know

The end of the tax year is fast approaching and there are a number of upcoming tax changes for UK businesses which are effective from April 2023.

We can help you understand the key changes that are likely to affect most businesses and their owners and what you should be considering in the run up to the changes.

Rate of Corporation Tax

Currently, there is a single rate of Corporation Tax, being 19%. This rate applies regardless of a company’s level of profits or the number of related companies (for example fellow group members). From 1 April 2023, companies with profits of £50,000 or less will continue to be taxed at 19%, but a new 25% rate will apply for those with profits above £250,000. In addition, these thresholds will be affected by the number of related companies.

The new 25% rate will apply to all profits, not just those over £250,000 threshold. This means that if a company has profits between £50,000 and £250,000, a marginal tax rate will be used to bring the average tax rate up to 25% the nearer the profit figure is to £250,000. In practice this means that profits between £50,000 and £250,000 will be taxed at a marginal rate of 26.5%.

The above thresholds will be reduced depending on the number of ‘associated’ companies. Generally, two companies are associated if one controls the other, or both are under the control of the same person(s). For example, if there are 4 associated companies, then from 1 April 2023 the revised thresholds will be £12,500 and £62,500 for each respective company, when determining the applicable rate of tax.

Associated companies will also determine whether a company is required to pay Corporation Tax in instalments, with the £1,500,000 threshold similarly being apportioned. Prior to 1 April 2023, it is only 51% group companies that affect the threshold.

What should I be considering? It may be possible to defer non-essential expenditure into a later accounting period so that it attracts tax relief at a higher rate. If you are in the process of selling an asset, the timing of the disposal may be significant and if you have losses to be utilised, it may be beneficial to carry them forward for delayed relief at up to 26.5% rather than at 19% at an earlier date. Finally, the number of companies under common control should be reviewed and, if necessary, consolidated to remove any unnecessary companies (for example those with small or negligible trades).

Changes to Personal Tax

The government are introducing a number of personal tax changes from April 2023 which may affect those with business interests. These include:

• Reducing the threshold from when the ‘additional’ rate of tax becomes payable from £150,000 to £125,140. This revised threshold was chosen as it is the point at which a taxpayer has lost their entire personal allowance. The rate of tax will depend on the income source and the taxpayer’s location, but in England, Wales and Northern Ireland the rate is 39.35% for dividends and 45% for most other sources of income.
• The annual dividend allowance is reducing from £2,000 to £1,000, with a further reduction to £500 from April 2024. Dividends falling within the allowance are taxed at 0%.
• Reducing the Capital Gains Tax annual exempt amount from £12,300 to £6,000. A further reduction to £3,000 will be effective from April 2024.

What should I be considering? Again, timing of income and expenditure can be critical if you are affected by the above changes and you may well consider taking dividend income from your business earlier, albeit it may mean an earlier tax payment. The same may be true if you are considering selling a business asset. For jointly owned business assets (for example by spouses or civil partners), the effects of the above are multiplied.

There may also be some tax traps to avoid – for example an additional rate taxpayer loses their £500 savings allowance, which taxes interest at 0%. Someone earning over £125,140 may not only see a higher rate of tax on their income from April 2023, but they may also find more income being chargeable, particularly as interest rates continue to increase.

Capital Allowances

The Government has confirmed that the Annual Investment Allowance (AIA) will be permanently set to £1,000,000, which otherwise would have decreased to £200,000 from 1 April 2023. The AIA allows businesses to deduct the full value of a qualifying capital item from their profits before paying tax.

However, for companies that have accounting periods that straddle 1 April 2023, a quirk in the legislation may mean that the company does not receive the full allowance, depending on when the expenditure is incurred.

Furthermore, the super-deduction, which allows companies to claim 130% of the purchase price of qualifying assets as tax relief, is set to cease on 31 March 2023. The allowance is generous when compared to the AIA, particularly as it has no overall limit.

What should I be considering? If you are considering significant capital expenditure in the coming months, the timing can be critical in terms of the tax relief obtained and should be carefully managed.

Research & Development (R&D)

Currently there are 2 schemes available under which companies can claim R&D tax relief, depending on the size of the company.

Historically, the scheme aimed at small and medium sized enterprises (SMEs) has been particularly generous, offering an extra 130% of qualifying expenditure as a deduction against taxable profits and the ability to surrender losses for a tax-free cash payment at the rate of 14.5%. For larger companies, using what is known as the RDEC scheme, 13% of qualifying expenditure is available as a taxable credit.

From 1 April 2023, the SME scheme is being curtailed so that the extra deduction against profits is reduced to 86%, and the tax-free payment exchanged against losses is reduced to 10%. There is better news for those claiming under the RDEC scheme, as the rate is increasing from 13% to 20%, although this is still considered taxable income.

What should I be considering? If your business relies on tax incentives from R&D activities, the impacts of the changes could be significant. If you are not claiming R&D tax relief, you should consider whether it may apply to you and if so, making a claim.

VAT

Finally, the quarter ending 31 March 2023 will be the first quarter under which HMRC’s new VAT penalty regime will apply. Penalties for late submission and late payment will now be based on penalty points – each time a deadline is missed a point will be awarded. Penalties will be due when a threshold of points is breached, which is dependent on the frequency of VAT submissions.

What should I be considering? As with all compliance, you should have suitable systems and procedures in place to ensure that deadlines are not missed and penalties are not incurred.

If you require any further information and advice regarding the topics discussed in this article, please get in touch.