Unfortunately, the corporate world doesn’t portray the same optimistic, hopeful feeling, as stepping into April 2023 means there is a significant rise in corporation tax, which has now increased to 25%.
It was announced in 2021 that the corporation tax rate was set to rise from 19% to 25% for companies who make more than a £250,000 profit. But what does the increased amount really mean for businesses?
We’ve caught up with Connor Smith, Senior Tax Manager, who explains the controversial reasoning behind the increased rate, and how it could affect your business.
Over to Connor, The Corporation Tax Connoisseur
We’ve anticipated the increase for the last two years and after a U-turn in the mini budget 2022 and the subsequent reinstatement, the time has finally come for the increase to take effect. It’s the first corporation tax hike in almost 50 years, with the logic being to try and raise an extra £17 billion a year by 2025/2026.
Tax is already an intense subject. Add a 6% corporation tax rate increase to the mix and it can really get you wondering how your business will be affected in the current climate.
Despite the rise overwhelming many businesses across the country, I’ve run through below what you need to know about the increase, the potential repercussions it could have on your company so you are well prepared, should the inevitable happen, and how you can plan to keep your business afloat.
So, what is changing?
I think we’ve established corporation tax has risen from 19% to 25%, despite The Chancellor being inundated with requests to reconsider the decision ahead of his Spring Budget announcement that took place in March. The UK however, is still the lowest country for corporation tax in the G7 – France nonetheless, is not far behind, with their rate currently sitting at 25.8%.
Now the rise has been implemented, a new system of marginal relief has been introduced, which links the rate of tax suffered, to the amount of annual profits generated. If your profits fall between the lower limit (£50,000) and the upper limit (£250,000), you will pay corporation tax at the main rate, but you will receive the marginal relief, to help reduce the amount you pay.
If your accounting period is shorter than 12 months, then these limits are respectively reduced. The number of associate companies your company has will also have an effect on this.
You won’t be able to claim marginal relief if the following applies:
- You’re a non-UK resident company
- You’re a close investment holding company
- Your profits, which includes distributions from unrelated, unassociated companies goes over £250,000
What will it cost my company?
Here’s a working example to give you some insight into what the increase could cost:
A company makes £1m taxable profits – previously, tax would be due at 19% which equates to 190k. But going forward, corporation tax will be due at 25% (or £250k), so a £60k tax hike per £1m of taxable profits will be incurred.
My company is associated with other companies, am I still affected?
The short but sweet answer – yes. For associated companies, the new corporation tax upper and lower rates will be divided by the number of associate companies. In other words, if your company is associated with 4 others, there are 5 associated companies, reducing the upper threshold from £250,000 to £50,000. Similarly, the lower threshold would be reduced from, £50,000 to £10,000.
Note that this also applies to Group companies- they’re treated as an associated company.
How will it affect small businesses?
I mentioned above how company’s whose profits are between the lower and upper limit will receive a marginal relief. The good news is if your profits are below the lower limit, which is a profit of less than £50,000 a year, you will be protected from the increase, and will continue to pay corporation tax at 19%.
How can I prepare?
Although the rise hasn’t been well received, there are key things that you can plan, to ensure your business adapts.
Losses
Losses are always key when planning for your business and there needs to be an effective decision made about how to utilise them. Sometimes losses can be carried back, and if a company is in a group with other companies that are tax paying, a sideways loss relief can be made via group relief. Where companies have previously surrendered losses for tax credits, an amendment can be made within two years of the period end in order to reverse the claim.
This should be taken into consideration with the tax hike, as it allows those losses to now save tax at 25% as opposed to 19%, but be careful with repayments – any previous repayments received would need to be repaid and interest on underpayment of tax needs to be encountered for.
Income
Where possible, consider reversing within your business where cash flow isn’t an issue. This will help to accelerate income and profits will be able to take advantage of the lower rate. The general rule is that income ascends as and when the work is complete or goods have been supplied, not when a business is paid. Potentially, you could accelerate income into an earlier accounting period, or defer it into a later one, but accounting policies must be applied on a regular basis and be compliable with GAAP (Generally accepted accounting principles).
Expenditure
Luckily, there can be some flexibility when it comes to which accounting period expenses fall into. For example, planned repairs expenditure can be strategically placed to fall into an earlier or later period. Supplies can be made in the accounts for any future costs to then accelerate a tax deduction. Provisions can be put in the accounts for future costs to accelerate a tax deduction. You could review existing provisions to help see whether they could be reduced or reversed. Generally, if a provision aligns with GAAP, then it is allowable for tax purposes, unless there are specific rules prohibiting deduction for the particular expenditure being provided for.
I recommend reviewing the following key areas of expenditure to be more savvy around the tax hike;
- Stock
- Bonuses
- Pension contributions
- Bad debts
Capital Allowances
A significant change has been made for capital allowances. The Annual Investment Allowance (AIA) remains at the new rate of £1million. March 2023 marked the end of the Super Deduction scheme, which allowed a huge 130% tax deduction for any qualifying plant or machinery.
Companies can now only get 100% relief through AIA, which is subjected to a £1 million limited shared between any associated companies.
If you’re thinking about accelerating a purchase for capital allowances reasons, consider the timing of capital expenditure. If you have purchased equipment on the basis of a hire purchase, it must be brought into use by the year end.
R&D Changes
And finally, the last change its worth being aware of is the rates at which you can claim R&D relief.
For companies who fall into the large company Research and Development Expenditure Credit scheme, the effective rate at which a credit is given increases from 10.53% to 15%. It would therefore be advantageous to defer any planned eligible expenditure to on or after 1 April 2023 in order to gain relief at the higher rate.
For companies within the small and medium-sized (SME) Research and Development scheme, the rate at which the R&D uplift is calculated decreases from 130% to 86%, and the rate at which tax credits are paid will decrease from 14.5% to 10%.
It’s important to note that it is now compulsory for companies to claim R&D relief as a digital submission, and will need to demonstrate a breakdown of costs and a summary of any R&D accomplishments made.
For more tax planning tips from our experts, click here.
We’re here to guide you through
We understand the stress owning a business can have. The corporation tax rise has certainly had an unwelcomed response, but we are here to ensure your business remains intact. If you have any worries about the rise, or are looking for tax advice, you can speak to one of our specialist Tax Advisors by emailing info@djhmittenclarke.co.uk
