The Business Magazine May 2024

Corporation tax rate change – Hazlewoods look at the practical implications

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With effect from 1 April 2023, standalone companies with profits exceeding £250,000 are subject to tax at the new main rate of 25%. Companies with profits below £50,000 will continue to be taxed at the current rate of 19%. Companies with profits of between £50,000 and £250,000 will be taxed at the 25% rate but will be entitled to marginal relief.

The introduction of different tax bands and a higher main rate will have a number of practical implications for companies to be aware of, as well as some possible planning opportunities/decisions to consider.

Associated companies

For groups of companies, the above profit thresholds will need to be divided by the number of ‘associated companies’ to determine the rate of tax payable.

From 1 April 2023, a company will be associated with another if, at any time in the chargeable accounting period (a) one company has control of another, or (b) both companies are under the control of the same person or group of persons.

This is an extension to the existing rules where, broadly, one company must be a 51% subsidiary of the other or both companies must be 51% subsidiaries of the same company.

Full details on the new definition for associated companies can be found in our article here

Practical point 1

Taking a simple example, two associated companies will have revised profit thresholds of £25,000 (small profits rate) and £125,000 (main rate). Assuming the first company has profits of £45,000 and the second of £5,000, the companies will pay corporation tax at 25% (with marginal relief) and 19% respectively.

Combining the activities (if commercially viable) and rationalising the number of group entities to just one would result in all profits being taxed at the lower rate of 19%.

Similar rules will also apply to quarterly instalment payments and more companies could find themselves subject to accelerated payments due to the wider definition of an associated company.

Significant transactions

Where the company’s accounting period straddles April 2023, its trading profits will be taxed at a blended rate. For example, a company with profits exceeding £250,000 and a December year end would be subject to corporation tax at a rate of 23.5% on all profits for 2023 (e.g. 3/12 months x 19% and 9/12 months x 25%).

Practical point 2

If a company with a straddling period has received significant one off income prior to 1 April 2023 it may wish to consider changing its year end.

For example, a company with a December year end has exceptional profits of £1,500,000 in its first quarter. If it was to change its year end to 31 March 2023 corporation tax would be payable on the profits at a rate of 19% rather than a blended rate of 23.5%, saving tax of £67,500. Commercial and other business factors should be considered before changing/shortening a year end and in some cases it may instead be possible to apportion on a just and reasonable basis.

Losses

With a change in corporation tax rates, companies will need to consider additional factors when determining the best use of any losses.

Where rates are static, a company that has incurred losses would normally look to carry these back or group relieve where possible to potentially obtain a tax repayment or reduce tax payable in the current year respectively. However, carrying forward any losses realised in the most recent accounting period (ending prior to 1 April 2023) for future offset would potentially attract tax relief at the higher tax rate of 25%.

Practical point 3

If there is uncertainty around when the company will return to being profitable, the company could initially consider claiming loss relief in an earlier period and then reviewing this at a later date.

For example a company makes losses of £250,000 in its accounting period to 31 December 2022. It could initially make a claim to carry back the loss to the period ending 31 December 2021 with a possible repayment of tax of up to £47,500 (at 19%). It would then have the option to potentially revisit the claim before the amendment window for that return closes on 31 December 2024, when there is more visibility around future profitability and potentially save tax at 25%.

Remuneration planning

For owner managed businesses, consideration should also be given to the most tax efficient remuneration package of salary versus dividends. Where the company is paying tax at 25%, in some cases it may now be more tax efficient for a director to be remunerated by full salary and taking dividends only to utilise their tax free allowance (of £1,000 for 2023/24).

Practical point 4

Some scenarios where a higher salary or bonus could be more tax efficient rather than paying a dividend include:

A director whose total remuneration is likely to exceed £550,000 for the tax year
Companies eligible for R&D tax relief where a proportion of the director’s salary costs could potentially be claimed for enhanced relief
An employee/director that has a higher base salary or other non-savings income, such that any dividends received would be taxed at the higher/additional rate.

For more information and expert tax advice, please contact Nick Haines nick@[email protected]