The Chancellor has taken us back in time today with the increase in the rate of corporation tax. Some of you may recall that before 1 April 2014, there were three corporation tax rates – the main rate, the marginal rate and the small profits rate. This system is being re-introduced from 1 April 2023.
The main rate will increase from 19% to 25% from 1 April 2023 and will be charged on profits exceeding £250,000. The small profits rate will be 19% on profits up to £50,000 with the marginal rate of 26.5% applying to profits between £50,000 and £250,000.
These bands will be reduced if the accounting period is less than 12 months, or if there are associated companies – another flash back in time, as the associated company rules are dusted off and brought back on the statute book to replace the related 51% group company test (which has wider implications, including in relation to the quarterly instalment payments regime).
Just as a reminder about associated companies – two companies are associated if one controls the other or both are controlled by the same person or persons. The common control does not have to be by the same group of persons, so each of the companies might have a different number of associates, as there are different methods of determining control, and the exercise of identifying associated companies can be (to put it mildly) horrendous. We can only assume that inactive companies will not count as associated for this purpose, as was the case in the past.
And then some more history – do you remember close investment-holding companies? If not, then dig out an old copy of the legislation, as this definition will be reintroduced in it’s original form and the small profits rate won’t be available to these, they will pay tax at the main rate of 25%.
Having had stability in corporation tax rates for a while, we haven’t had to worry about accounting periods that straddle 1 April. The change in rates in April 2023 will need profits apportioning between the two fiscal years (as relevant) which might have a bearing on the timing of certain expenditure.
Finally, these changes may also affect decisions on how profits are extracted (whether by salary/bonus or dividend), especially for companies whose profits fall in the marginal band where it could be more advantageous to have a tax deduction for a bonus.
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