Planning for higher corporation tax rates

Corporation Tax (CT) is the fourth biggest revenue generator for the government (Income Tax, National Insurance & VAT are the top 3) bringing in roughly £60 billion in 2019-20, just before the pandemic struck.

In this article we discuss the radical upward lift in rates to become effective from 1st April 2023 and what you can do to soften the blow.

From 1 April 2023, there will be two rates of CT:

• A small profits rate which will stay at the present 19% and will apply to companies with profits up to £50,000.
• An increased main rate, which will be set at 25% on profits in excess of £250,000.

Marginal relief provisions will also be introduced such that, where a company’s profits fall between the lower and upper limits, it will be able to claim an amount of marginal relief that bridges the gap between the lower and upper limits providing a gradual increase in the CT rate.

There will be further complications, and possibly increased tax bills, for companies associated with other companies and companies that fall under the definition of a close investment holding company.

Deferring expenditure

Companies that are planning for profits in excess of £50,000, after undertaking significant expenditure in the financial year beginning 1 April 2022, may be advised to consider deferring this expenditure until their trading period beginning 1 April 2023.

In this way, they may reduce liability for 2023-24 taxable at 25% or at marginal rates and increase CT payments for 2022-23 at 19%.

Accelerating income

If commercially possible, companies could plan to bring forward income from 2023-24 to 2022-23.

As with deferring expenditure, this would reduce CT at potentially higher rates in the later year.

Utilising tax losses

Similar care will need to be taken when considering the surrender of tax losses. Should they be used during 2022-23 and provide much needed cash-flow benefits or deferred and utilised from 2023-24 when CT could potentially be reduced at higher rates?

Timing issues

Clearly, many companies will not be in a position to defer expenditure or bring forward income as they will not have taxable profits above the £50,000 small profits limit. Also, they may not be willing to increase CT payments for 2022-23 even though CT payments for 2023-24 could be reduced by a higher amount.

As with all tax changes there will be complications, grey areas that need to be considered. But the transition to higher rates of CT will offer one-off opportunities for certain companies to save tax.

Investing to reduce tax liabilities with Super-deductions

Remember that until 31 March 2023, you can considerably reduce your corporation tax bills by investing in qualifying plant and machinery assets.

Investing companies will benefit from a 130% first-year capital allowance that will effectively cut your tax bill by up to 25p for every £1 you invest.

Limited companies will also benefit from a 50% first-year allowance for investing in qualifying special-rate assets, including long-life ones.

Summary

This is the first Corporation Tax rise in 47 years but “fair and necessary to ask businesses contribute to our recovery” in light of spending of more than £100bn on emergency support for companies during the coronavirus pandemic.

This could send a worrying signal to those planning to invest in the UK and despite Mr Sunak’s assertion that the UK’s corporation tax rate would still be favourable on international comparisons, the increase would make the UK’s effective rate higher than that of other key nations.

If you need some help planning ahead with your CT or taking advantage of saving on your tax liabilities through investment, get in touch.