Azets has offered insights into how companies may prepare for planned Corporation Tax changes. It was announced in the March 2021 Budget that there would be a 6% increase in the Corporate Tax main rate from 19% to 25%. However, as inflation and soaring costs continue to grip the UK, there are calls to abolish this scheduled increase.
With ongoing political uncertainty, it’s not expected for there to be more certainty n the matter until a revised economic strategy is introduced, giving an opportunity for the government to outline a new vision and any required fiscal changes. It’s therefore important to understand and plan for the possible impact the corporation tax increase and Quarterly Instalment Payment (QIP) rule changes could have should they proceed as proposed.
Azets tax senior manager, Lorna Stark, explored the finer details of the changes: “The rate of Corporation Tax is due to increase to 25% for all companies with taxable profits in excess of £250,000. For companies with profits of up to £50,000, the 19% rate will continue to apply. For those companies with profits between these levels, marginal relief will be available to bridge the 19% and 25% rates.
“The £50,000 and £250,000 thresholds will be scaled down for companies with short accounting periods and additionally these thresholds will be reduced for the number of associated companies.”
A company is associated with another if:
- One company has control of the other
- Both companies are controlled by the same company, person or group of people
Control will usually be determined with reference to percentage of share capital held, and the test is whether an individual/group of individuals are able to exercise direct or indirect control over a company’s affairs.
The rules then require the tax rate thresholds to be divided by the total number of associated companies. For example, if an individual has controlling shareholdings in 2 companies, each company will pay tax at 25% if their profits exceed £125,000 (rather than the £250,000).
It is therefore important to identify the number of associated companies, as this will impact the rate of tax that the company will pay. A company is deemed to be associated with another company if it is associated at any point during the accounting period, or was associated at any time within the preceding 12 months.
If a company’s accounting period spans 1 April 2023, the results will be apportioned such that profits arising before the rate change continue to be taxed at 19%, but profits arising after this date will potentially be taxed at the higher rates.