With the UK corporation tax rate set to increase from 19% to 25% from 1 April 2023, companies should be making sure they are doing everything they can to soften the blow and maximise tax savings.
Corporation tax is charged per ‘financial year’ which runs from 1 April to 31 March. Where a company’s accounting period straddles two financial years, taxable profits are generally apportioned on a time basis. Where there is no change in the corporation tax rate, this does not give rise to any adverse tax consequences.
However, with the upcoming rate change, an accounting period straddling 31 March 2023 will give rise to a higher blended corporation tax rate applying. Whilst this may be unavoidable for ongoing trading profits, where a company has made profit on a one-off transaction, this may result in additional tax payable.
Take, for example, a company with a 12-month accounting period ending 30 September 2023 that makes a significant gain on the disposal of an investment property in January 2023 (the date at which the corporation tax rate is 19%). Six months of the accounting period fall into one financial year where the corporation tax rate is 19%, and six months fall into the financial year where the corporation tax rate is 25%. This results in a blended rate of 22% applying to profits of the entire year.
It would be advantageous for such transactions to be subject to the current 19% corporation tax rate. To achieve this, a company could look to change its year end or shorten its accounting period to 31 March 2023 or pre-31 March 2023 to avoid the higher blended rate applying.
Where an accounting period is shortened, this will bring forward the payment due date for corporation tax. The impact on cashflow will need to be weighed up against the tax savings to be made.
Either way, company shareholders and directors should be mindful of the timing of any large upcoming/completed one-off transactions and the applicable corporation tax rate to avoid any nasty surprises.
WHAT IF MY COMPANY HAS MADE LOSSES?
Under the loss carry back rules, companies can carry back their losses to the preceding 12 months. A temporary extension to these rules was introduced in the Finance Act 2021. This allowed losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022 to be carried back for a period of three years rather than the typical 12 months.
Companies that are loss making may wish to consider carrying losses forward to offset future taxable profits at 25% as opposed to carrying back a loss to generate a repayment of tax at 19%.
SHOULD MY COMPANY ACCELERATE OR DEFER THE PURCHASE OF CAPITAL EXPENDITURE?
Where capital expenditure qualifies for capital allowances, the Super-deduction may be available which entitles companies to 130% first year tax relief on main pool qualifying expenditure and 50% as a first-year allowance on special rate pool qualifying expenditure, compared to writing down allowances of 18% and 6% respectively.
Companies are vitally reminded that the Super-deduction will be coming to an end on 31 March 2023. Qualifying capital expenditure must be incurred before this date to benefit from the generous uplift in allowances available. It is important to consider the date the expenditure is incurred for tax purposes to ensure the relief is available. Expenditure must also be on “new and unused” capital assets.
The Super-deduction provides tax relief at an effective tax rate of 25%. Where qualifying capital expenditure is deferred to post 31 March 2023, companies should still be able to benefit from tax relief at 25% where the Annual Investment Allowance is claimed.
But, be warned. The Annual Investment Allowance which provides 100% tax relief on qualifying capital expenditure has a limit of £1m per accounting period (pro-rated for shorter periods). In contrast, the Super-deduction is uncapped and has no limit per accounting period.
Spend on qualifying capital expenditure should be reviewed on a case-by-case basis. However, where this is expected to exceed the Annual Investment Allowance limit of £1m, there are likely to be tax advantages for companies accelerating the purchase of qualifying capital expenditure to pre-31 March 2023. This makes full use of the uncapped Super-deduction and will maximise tax relief.
IS IT TIME TO REVIEW MY REMUNERATION STRATEGY?
In short, yes. Historically, taking dividends as remuneration has been more tax efficient than salary and bonuses, particularly for higher rate and additional rate taxpayers. However, from 6 April 2023, the dividend versus salary/bonus decision for owner managed companies may not be as straight forward.
From 6 April 2023, the additional rate income tax band will be lowered to £125,140 (45% for ordinary income and 39.35% for dividend income). In addition, the £2,000 dividend allowance will be reduced to £1,000. The combined result of these changes together with the corporation tax rate increase means that the effective tax rates for dividends versus salary/bonuses are expected to become broadly aligned. For the first time in a long time, we will also start to see cases where salary/bonuses trump dividends as the most tax efficient means of extracting profits from a company.
You need to be mindful of wider factors when reviewing an owner-manager’s remuneration strategy, however. These include for example the timing of tax payable (PAYE versus self-assessment), salary costs which may qualify for a company’s R&D tax relief claim, pension contributions, entitlement to state benefits, applications for mortgages or loans etc.
WHAT IS THE IMPACT OF THE NEW ASSOCIATED COMPANY RULES?
1 April 2023 sees a return to associated companies and the marginal relief mechanism. Companies with profits of less than £50,000 defined as the ‘lower limit’ will remain subject to corporation tax at 19%. Companies with profits more than £250,000, the ‘upper limit’ will be subject to corporation tax at 25%. Where a company’s profits fall between the lower and upper
limit, it will pay corporation tax at 25% but entitled to marginal relief. The upper and lower limits are reduced where there are associated companies.
As well as affecting the corporation tax rates that apply, companies may also find themselves impacted in other ways by the new associated company rules. In particular, this includes companies falling into the Quarterly Instalments Payment (“QIPs”) regime.
The normal due date for corporation tax is nine months and one day after the end of an accounting period. Where QIPs applies, a company is due to pay its corporation tax in four equal instalments. Depending on the level of profits, at least half or all the instalment payment dates will fall due before the end of a company’s accounting period. This can have a significant impact on cashflow and warrants estimated calculations of corporation tax based on forecast profits.
Under the current rules, the profit thresholds for determining whether QIPs apply, £1.5m for ‘large’ companies and £20m for ‘very large’ companies are simply divided by the total number of 51% related companies. A company is related to another company where one company is a 51% subsidiary of another or both companies are 51% subsidiaries of the same company. Two companies held separately by the same individual are not 51% related companies.
From 1 April 2023, a company is associated to another company where one has control of the other or both companies are under the control of the same person or persons, i.e. under common control.
Take for example Mr X who owns 100% of five companies, A, B, C, D and E Ltd. Companies B and C are 51% subsidiaries of A Ltd. Companies D and E Ltd are owned 100% separately as stand-alone companies. Under the current rules, the QIPs threshold will be £500,000 for A, B and C Ltd (£1.5m divided by three 51% related companies). Companies D and E Ltd will each be entitled to £1.5m profits threshold as they have no 51% related companies.
From 1 April 2023, all five companies are under the control of Mr X and are therefore associated companies. The profits threshold of £1.5m is reduced to £300,000 for all five companies (£1.5m divided by 5 associated companies). The same principles apply to the ‘very large’ profit threshold of £20m.
Depending on the level of profits, this illustrates that companies that were not previously within QIPs could find themselves fall into the regime under the new associated company rules. It’s important to conduct appropriate tax planning to find ways to potentially avoid this or where this is not possible, at least being prepared from a cashflow perspective.
ANY CONSIDERATIONS IF MY COMPANY MAKES R&D CLAIMS?
Absolutely. With the incoming reductions in SME R&D rates (for profit and loss makers), the corporation tax rate rise mitigates some of the loss of benefit. Conversely, the taxable R&D Expenditure Credit (RDEC) for large companies will get reduced by 25%, not 19% (though the huge hike in the gross RDEC rate from 13% to 20% still leaves companies better off).
There are also new costs being brought in for the first time (data and cloud costs for instance) but also some costs that will be disallowed going forwards for example the use of overseas externally provided workers and subcontractors.
Some of these changes align to the corporation tax rate change and come in from 1 April 2023, others will only apply for accounting periods beginning on or after 1 April 2023. A full explanation and insight into R&D tax planning opportunities in light of these changes can be found in this article by my CP Innovation colleague, Chris Knott.
ANY LAST WORDS?
Yes! Think ahead and plan to maximise tax relief and mitigate corporation tax liabilities. Some of the measures in this article are simple to implement for example shortening an accounting period where relevant.
Overall, companies should be thinking about the timing of their income and expenditure. Payments of bonuses and pension contributions could be delayed until a later date to save tax at the higher corporation tax rate, but be aware of any personal tax implications for the recipient. Reviewing any existing tax sensitive items such as provisions may also help.
