• Date

    02 Aug 2022
  • Category

    Corporate Tax

Preparing for the 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 and a differing of opinion in this regard between the frontrunners for UK Prime Minister, it’s not expected that there will be any sort of clarity until there’s a new PM, revised economic strategy and likely Cabinet re-shuffle or perhaps further out until the Autumn Statement, which gives an opportunity for a new PM 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.

Lorna Stark, Tax Senior Manager, explores the finer detail of the changes below.

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.

Tax Payment Date

Currently companies are required to pay their Corporation Tax liability nine months and one day after the end of the accounting period, unless they are considered “large” or “very large”, in which case they must pay their tax by quarterly instalment during the year.

From 1 April 2023, the rules to determine which companies are required to pay their Corporation Tax by quarterly instalment are changing. Whilst the thresholds for large/ very large remain the same, (Profits ≥ £1.5m “large”, Profits ≥ £20m “very large”) from 1 April 2023, these limits need to be divided by the number of active worldwide associated companies. Previously these limits were divided by the number of group companies, but the definition has been changed to associated companies, in line with the rules for the higher tax rate. From 1 April 2023 therefore, a company will need to pay tax by quarterly instalment if their profits exceed the relevant limit as divided by the number of associated companies. The definition of associated company is the same as described above, and again would apply if at any point during the accounting period, or during the preceding 12 months, companies were associated.

Where an individual controls two companies, they will need to pay tax by instalment if taxable profits in those companies exceed £750,000, whereas previously they would not have needed to pay by instalment until profits reached £1.5m. This change will impact cashflows, particularly in the year of transition, where tax liability payment dates will overlap.

The dates for quarterly instalment payments are shown below:

 

“Large” Companies

“Very Large” Companies

First (25% of liability)

14th day of 7th month during AP*

14th day of 3rd month during AP

Second (50% of liability)

14th day of 10th month during AP

14th day of 6th month during AP

Third (75% of liability)

14th day of 1st month following AP

14th day of 9th month during AP

Fourth (100% of liability)

14th day of 4th month following AP

14th day of last month during AP

*AP= Accounting Period

The requirement to pay tax by quarterly instalment accelerates the dates by which the liability for the period needs to be paid and also requires estimates of the liability to be made, as payments are required before the end of the relevant accounting period. Interest will be payable/ will be due on under/over payments made.

There are provisions which allow for a “period of grace” from the quarterly instalment rules. The first year in which a company is “large”, they will only be required to make quarterly instalment payments if their profits exceed £10m for the period (this limit also being divided by the number of associated companies). This gives time for companies to plan their cashflows accordingly.

As these rules are scheduled to apply from 1 April 2023, they will apply first to companies with an April year end. Assuming a company has one associated company and taxable profits of £750,000 in accounting periods ended 30 April 2022, 30 April 2023, and 30 April 2024, the tax payment dates/ amounts are shown below:

 

Tax rate

Tax Due

QIP^

Payment Date (s)

AP 30.04.2022

19%

£142,500

N/A

1 February 2023

AP 30.04.2023

19.5%*

£146,250*

Large but “period of grace”

1 February 2024

AP 30.04.2024

25%

£187,500

£46,875 on each quarter date

14 November 2023

14 February 2023

14 May 2024

14 August 2024

*Rounded rate/ amount based on 11 months at 19% and 1 month at 25%

^QIP = Quarterly Instalment Payment

The change in rules therefore requires this company to start paying its liability for the 2024 period, before it has paid its liability for the 2023 year end.

Summary

The increase in tax rate is likely to have a significant impact on companies and the full 25% rate is more likely to apply if there are associated companies. It is therefore important to understand all shareholdings of the majority shareholder(s) to ensure that the full position is considered in advance of 1 April 2023. This may be a good time for companies to review their group structures.

The number of associated companies may also have an impact on the timing of tax payments, with more companies being brought within the quarterly instalment payments regime. Again, it will be important to understand the full associated companies’ position, so we can assist you in planning for when this change may apply.

We are here to help

For further information regarding the planned Corporation Tax changes, please speak with your usual Azets contact or a member of our Tax team.

About the author

Lorna  Stark Photo

Lorna Stark

Tax Senior Manager Godalming
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