Are you ready for the corporation tax rise?

The main rate of corporation tax is increasing from 19% to 25% for companies with profits over £250,000 on the 1st of April 2023. The 19% rate will be used as a small profits rate, for companies with profits of £50,000 or less. Any companies with profits between the margin of £250,000 and £50,000 will pay tax at the main rate, but it will be reduced by a marginal relief. This will lead to a gradual increase in the effective corporation tax rate.

Calculating profits and the profit limits:

To determine the correct rate to apply, a company must establish its ‘augmented’ profits. These are the company's taxable total profits of that period, plus certain non-taxable dividends (and some other kinds of distributions), received from companies that are not subsidiaries of the company.

The £50,000 and £250,000 limits will be divided by the number of associated companies. For accounting periods shorter than 12 months, these limits are also proportionately reduced.

What should I do if my accounting period doesn’t line up?

For companies whose year-end is the 31st of March, the changes are more simple: they will pay 19% corporation tax for the whole of the 2022/2023 period, and then 25% for the whole of the 2023/2024 period. However, companies whose accounting period straddles the 1st of April, a hybrid rate of the two taxes will be applied at 22%. This represents the 19% tax for the proportion of their accounting period leading up to and including the 31st of March, and then 25% for the remaining period. It’s important to base your estimates on this rate, rather than your usual 19% rate.

Associated companies:

For associated companies (note: not group companies), the new corporation tax upper and lower rates will be divided by the number of associated companies. This means that if your company is associated with 4 other companies, 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.

According to HMRC, a company is an associated company of another, if one of the two has control of the other, or both are under the control of the same person or persons.

The definition of ‘control’ includes rules that attribute to a person all the rights and powers held by any companies they control or associates of the person. This means, for example, that an individual would be treated as controlling a company that a member of their family controls. It could therefore lead to situations where, for example, a company controlled by sister A and a company controlled by sister B are treated as associated. There are rules that ensure that such attribution only occurs where there is substantial commercial interdependence between the companies concerned.

Quarterly instalment regime:

If your tax payments are made quarterly, you may have already had to adapt your practices to accommodate the upcoming rate changes. Similarly to those with whose accounting period falls outside of the changes, you will face a hybrid rate of corporation tax at first. For example, if your first instalment of tax payments in 2023 is due in January and your year end is in June, you should have based your estimate of payable tax on a 20.5% hybrid rate.

If you have any questions please do get in touch with your Swindells’ partner who will be able to advise you further.