The Chancellor's Autumn Statement in November 2022 confirmed an increase in the Corporation Tax rate from 19% to 25% effective from 1 April 2023.
To download our Autumn Statement summary, visit: Our summary: Autumn Statement 2022 - Lubbock Fine.
The key aspects of the Corporation Tax rate changes are highlighted below, including strategies that companies may wish to consider prior to 1 April 2023, to minimise the impact of the rate increase in the first year.
From 1 April 2023, the increase in the rate of Corporation Tax means that accounting periods straddling this date will need to apportion profits into those incurred before and after 1 April 2023, which HMRC generally expects to be done on a time basis.
Not all companies will be paying the higher Corporation Tax rate: companies making total profits below £50,000 will continue paying tax at 19%, whilst companies with total profits between £50,000 and £250,000 will pay tax at rates rising incrementally from 19% to 25%. This is referred to as marginal relief.
Only total profits over £250,000 will be taxed at the full 25% rate.
Companies paying Corporation Tax by quarterly instalments will already be affected by the rate change, as the instalments are based on projected liabilities.
The associated companies rule is also being amended from 1 April 2023 to adopt a wider definition than previous legislation, with the change designed to prevent an entity from splitting or fragmenting activities across several companies to benefit from a lower tax rate overall.
This affects the £50,000 and £250,000 total profit limits for the 19%, as well as tapered Corporation Tax rates above: the limits will be divided between the total number of companies deemed associated, creating lower thresholds for the 19% and tapered tax rates.
While companies cannot control the long-term Corporation Tax rate, there are strategies they can consider to mitigate the impact of the rate increase in the year of transition.
For example, capital gains on which companies pay Corporation Tax could be crystallised ahead of 1 April 2023 and revenue may be able to be brought forward, accounting standards permitting, to take advantage of the lower tax rate.
On the other hand, they could delay planned expenditures until after April 1 2023, to save on the higher rate.
For companies which incurred losses, they may consider carrying back the losses for a refund of prior tax paid at 19%, or carry the losses forward for the potential of saving 25% on future profits.
In some cases, companies may benefit from shortening their current accounting period to March 31 2023, to avoid having to apportion income and gains if the accounting period straddles April 1, 2023.
Finally, it is worth considering whether company structures can be rationalised before 31 March, as the profit limits are divided by the number of associates, it may be a good opportunity to strike off companies with minimal activity or consolidate trades.
If you would like to discuss the impact of the rising Corporation Tax rate on your company, please contact our Corporation Tax Director Robert Hoad (roberthoad@lubbockfine.co.uk), or your usual Lubbock Fine contact.
