New Rate of Corporation Tax
For the financial year 2023:
- The main rate of corporation tax will be 25%.
- The small profits rate of 19% will apply to companies with profits of £50,000 (the lower limit).
- A marginal rate of 26.5% will apply where profits are between £50,000 and £250,000 (the upper limit).
Example
ABC Enterprises Ltd has no associated companies and expects to make a profit of £200,000 in the year ending 31 March 2024. The corporation tax charge will be:
Effective rate of tax - 24.625%.
Associated Companies
The basic rule is that two companies are associated with each other if:
- One company is under the control of the other ;or
- Both companies are under the control of the same person or persons.
Examples
- Albert owns all the shares of Ramsbottom Ltd and 51% of the shares in Blackpool Ltd. Albert controls both companies so they are associated.
- Jack, Jill and Jonty each own one-third of the shares in Fells Down Ltd and Crown Ltd. Together they control both companies so they are associated.
Relevance of Associated Companies
The lower and upper profit limits are reduced on a pro rata basis where there are one or more associated companies. The impact of this is illustrated below:
Example:
David owns three associated companies which he has named after his three daughters Angela, Beverley and Cecilia. Their respective profits for the year ended 31 March 2024 are:
Angela Ltd £ 6,000
Beverley Ltd £ 26,000
Cecilia Ltd £ 18,000
Angela Ltd will pay corporation tax at the standard small profits rate of 19% but Beverley Ltd and Cecilia Ltd both fall into the marginal zone. Not all of the lower limit will be utilised. From a corporation tax planning perspective it would have paid David to ensure that the lower limit was at least covered by each of the three companies. An even better solution would be to merge all three companies into one and have its £50,000 profits taxed at 19%. No doubt there would be very good non-tax reasons for avoiding this step.
The Straddle
Where an accounting period straddles 31 March 2023 then profits will be apportioned on a time basis. Profits relating to the period prior to 31 March 2023 will be taxed at the current main rate of 19%. But profits relating to the period from 1 April 2023 will be subject to the new rules.
But note that the lower and upper profit limits will be reduced on a pro rata basis. If the accounting year ends on 30 June 2023 the limits will be:
Lower 3 / 12months £12,500
Upper 3 / 12months £62,500
Further restrictions will apply if there are associated companies.
Tax Planning Opportunities
Here are four very basic opportunities to be considered by companies:
- Where profits are likely to exceed the lower profit limit of £50,000 see if ways can be found to accelerate profits so that they are chargeable at 19% in an earlier year.
- Conversely where the rate of corporation tax after 31 March 2023 is likely to be higher than 19% consider delaying allowable expenditure in order to achieve relief at a higher rate.
- If the company has made trading losses consider whether it will be more beneficial to carry forward these losses rather than carry them back. Note that losses carried forward can now be set against total profits. Normally it is beneficial to carry back and get an early repayment but the higher rate of relief may well justify a carry forward claim.
- Give careful thought to the impact of associated companies. Would some form of restructuring be advantageous?
But in all these things do remember those words of wisdom…Never let the Tax Tail Wag the Commercial Dog. A lot of time can be spent trying to secure a small tax advantage which could be put to better use with the help of some creative thinking.
