Steps to consider ahead of the Corporation Tax Rate change

From 1 April 2023 the rate of corporation tax is set to increase to 25% from 19%.

What does this mean for your company, and what should be considered over the next few months to help you and your company be best prepared?

Which companies will pay the 25% rate?

Contrary to the headlines, the 25% corporation tax rate only affects companies with profits of £250,000 and over.

For companies with profits up to £50,000 they will continue to pay corporation tax at 19%, and those companies whose profits fall between £50,000 and £250,000 will pay tax at a tapered rate.

Therefore, not all companies will be subject to the full impact of the new 25% rate.

Main rate threshold – Associated (not Group) companies

Consideration also needs to be given to the new ‘associated company’ rules that are being brought into effect alongside the new 25% tax rate.

The upper and lower profit limits are divided by the number of associated companies, potentially increasing the number of companies which need to be included in the count, compared to the current rules which count only group companies.  

This means that if your company is associated with 3 others, there are 4 associated companies, reducing the upper limit (£250,000) to £62,500 and the lower limit (£50,000) to £12,500. 

The associated company definition brings in those companies under common control, i.e., where one company controls the other, or both companies are controlled by the same person(s). This brings active worldwide companies into the total (dormant companies are excluded).  

As noted, this has the potential to bring in an increased number of companies and lower the threshold at which the 25% tax rate might apply – it will be really important to consider the other business interests of your controlling shareholders and the effect of this ahead of these changes coming into force.

Accounting periods straddling 1 April 2023

The new rate comes into effect on 1 April 2023.  A company with a 31 March 2023 year end will pay tax at 19% for the whole of that period (prior to the tax rate change); and 25% for the whole of its next accounting period starting on 1 April 2023 (subject to taxable profits being above the thresholds noted above).

However, a company with (say) a 30 September 2023 year end (and taxable profits over £250,000) will pay tax at a hybrid rate of 22% (i.e. 19% for the period 1 October 2022 to 31 March 2023, and 25% for the period 1 April 2023 to 30 September 2023).  

Generally, HMRC will expect profits to be time apportioned across 1 April 2023.

Quarterly instalment payments

Companies paying tax under the quarterly instalment regime may already have needed to consider the increased tax rate. 

For instance, for its first instalment due on 14 January 2023, a company with a 30 June 2023 year end, will need to have based its estimate of tax payable on a hybrid rate of 20.5%.

Preparing for the increasing tax rate - Steps to consider

In the recent past, year-end tax planning might have considered the impact of advancing expenditure or delaying revenue to reduce year end profits, and defer liability to, and payment of, corporation tax into the next accounting period.  

However, with an increasing tax rate, looking at opportunities to achieve the opposite effect could be advantageous, or at very least it would be unwise to push more profit into a later period where the tax rate is likely to be higher.

To mitigate the impact of the 25% rate, it may be prudent for companies to consider delaying expenditure or bringing forward profits or gains to be taxed at 19% before the rate change happens on 1 April 2023.

Actions points: issues to consider now

Some things that could be considered, particularly for companies with a 31 March 2023 year end, are noted below:

Crystallising gains

Where a company disposes of a capital asset at a gain (e.g. land and property, certain shares and other assets), the gain is assessed to corporation tax.   

As the rate of corporation tax is set to increase for companies with taxable profits (including gains) in excess of £250,000, where it is possible to crystallise gains before 31 March 2023 this could have the advantage of the gain being subject to tax at the current 19% rate.  

It will be the exchange of unconditional contracts which is key in determining the date of disposal.

This will be the case for a company with a 31 March 2023 year end.  

However, for companies with different year end dates, as noted above, the effect for a period straddling 1 April 2023 will be different. You might also look at shortening the company’s accounting period to 31 March 2023 so that all of the gain is taxed at 19%.

Bring revenue forward

With regard to trading income and profits, the ability to advance these prior to 1 April 2023 to take advantage of the current 19% tax rate is governed by accounting standards.  

The company’s accounts should reflect a true and fair view of a company’s profitability and match/accrue for future obligations in relation to delivering those revenues.  This can be a complex area of accounting, depending on whether sales transactions relate to goods or services and whether this relates to longer term projects/contracts etc.   

Care is required to ensure that the measurement of profits aligns with accounting standards.

However, to the extent that contracts might be able to be concluded, completions brought forward, or the economic risks or rewards of goods sold transferred ahead of 31 March 2023, this might achieve the effect of advancing the related profits.

It is perhaps not so much a case of aggressively seeking to bring revenue forward, so much as seeking to ensure that profits are not unnecessarily or unwittingly deferred into the next period to suffer tax at the increased rate.

Delaying bonuses, remuneration or other large, planned expenditure

Depending when the company pays its bonuses (i.e. if on an annual cycle or discretionary), if possible it may be prudent for these to be delayed where payment might have otherwise been planned prior to 31 March 2023.  

Bonuses are deductible from taxable profits as a trade expense, and so by delaying these payments to after 1 April 2023 the company could save 6% of tax relief against the increased rate.

The rules on when a bonus might be required to be accrued in the accounts (if there is a contractual obligation/expectation in place pre year end, for instance) and when this is deemed to have been ‘paid’ will be important for the deductible cost to fall in the correct accounting period.

For ordinary employees, the payment rules are quite simple, and it is the earlier of when a payment of earnings is made, or when an employee becomes entitled to be paid.  

For directors, it can be a bit more complex, so it is worth checking that anything you might be planning will have the desired effect.

Similarly, where there is discretion over the timing of large remuneration or pension payments (and given the changing dynamic for owner managers between drawing dividends or salary – see: Impact on owner managers of the 2022 Mini Budget), there is merit in deferring/delaying such remuneration payments to save corporation tax at 25% 

The company may also have upcoming projects or planned expenditure in the pipeline where delaying commencement and pushing related costs into the next accounting period may save tax at the higher rate, albeit this has to be weighed against the commercial pros and cons of any such delay.  

Carry forward losses

There is a point to consider here in relation to the best use of any current year tax losses.  

Current year losses are always matched against current year profits, but there is also a choice as to what to do with any excess losses.  

There is a cashflow benefit to perhaps carrying back losses for a refund of prior-year tax paid, or (where available) to surrender for a repayable R&D Tax Credit.  However, the benefit of such action is limited to the 19% tax paid (for a loss carry back) or 14.5% (for the repayable R&D Tax Credit).  

Whereas, if good taxable profits (or gains) are expected in the coming few years, the additional tax saving through carrying forward losses to be relieved at 25% could be of significantly greater value.

Clearly, there is a trade off between seeking to reduce tax payable at the higher rate of 25%, and the cashflow impact of accelerating a tax liability (albeit at a lower rate), the implications of which will be different for each business.  

Contact us

If you would like to discuss how this tax change will affect your company's position, please contact a member of our Business Tax team or your usual Bishop Fleming advisor.