In preparation for the upcoming corporation tax changes coming into force from 1 April 2023, Jack Parker, a Tax Senior Executive and joint head of our Cowbridge office, explains the new rate of corporation tax and details actions businesses can take to ensure they avoid any unexpected tax consequences.
Quarterly Instalment Payments
Ordinarily, a company’s corporation tax liability is due for payment 9 months and 1 day following the end of the relevant accounting period.
However, when a company is large, they are expected to pay their corporation tax liability in quarterly instalments.
A large company is one that, in any given accounting period, has taxable profits of more than £1.5 million but not exceeding £20 million.
The first year a company is considered a large company, it is given a year’s grace and is exempt from making quarterly instalment payments, provided its taxable profits for that year are less than £10m. Their liability will therefore be due as normal, 9 months and 1 day after the year-end. The following year, they will need to pay at the following intervals.
- 14th day of 7th month during the accounting period
- 14th day of 10th month during the accounting period
- 14th day of 1st month following the accounting period
- 14th day of 4th month following the accounting period
For example, for a 31 December year end, the company would be expected to make quarterly instalments as:
- 14th July (during the year)
- 14th October (during the year)
- 14th January (after the year-end)
- 14th April (after the year-end)
The first year that a company falls into the quarterly payment regime is likely to have a negative impact on its cashflow, as the tax payment dates will overlap, with a quarterly payment being due less than 2 weeks following the prior year’s full tax liability.
If a company has profits of over £20 million, it is considered a ‘very large company’ and its instalment payments will be accelerated, such that all payments will be made within the accounting period to which the liability relates.
51% Group Companies and Associated Companies
There are several circumstances where the threshold limit of £1.5m will be adjusted:
The Upper limit is reduced accordingly when the accounting period is less than 12 months.
i.e. Accounting Period Upper Limit
Equally, the limit will be proportionally reduced where the company has any related group companies, excluding dormant entities:
i.e. No. of Companies Upper Limit
For example, where a non-trading holding company has two trading subsidiaries, there would be 2 group companies and the limit would be £750,000 for each of the trading companies.
If, however, the holding company charges a management charge to either or both of its subsidiaries, this would make the holding company an active company; there would therefore be 3 group companies and the limit would be £500,000 for each of the companies.
The threshold is split equally amongst the companies, regardless of their relative profits.
The New Rate of Corporation Tax, Effective 1 April 2023
The current rate of corporation tax is a flat percentage of 19% across all taxable profits.
Effective from 1 April 2023, the rate of corporation tax to 25% for companies with profits of more than £250,000. For companies with profits up to £50,000, the 19% rate will continue to apply. For companies within these limits, a hybrid rate will be calculated to bridge the 19% and 25% rates.
Profits in excess of Tax Rate
Where there are associated companies, these thresholds will be divided accordingly between the number of associates.
A company is associated with another company if one company controls the other, or if they are both under the control of the same person or persons.
i.e., for a company with 1 associated company, the thresholds will be adjusted as follows for each of the companies:
Profits in excess of Tax Rate
If a company’s accounting period spans 1 April 2023, the results will be apportioned so that profits made before the rate change continue to be taxed at 19%, but profits arising after this date will be taxed at the new rates.
The thresholds will also be apportioned for shorter accounting periods.
*Marginal relief is calculated by
- Multiplying annual profits by the main 25% rate.
- Subtracting annual profits from the £250k threshold.
- Multiplying step 2 figure by multiplier 3/200.
- Subtracting step 3 from step 1 to give liability.
Broadly, the marginal profits between £50,000 and £250,000 will be taxed at 26.5%.
Accounting periods beginning on or after 1 April 2023
Aligned with the introduction of the new rate of corporation tax on 1 April 2023 also comes a change to the quarterly instalment regime.
From 1 April 2023, the reduction in the threshold limit will be calculated by reference to a company’s associated companies, rather than any related group companies.
This means that where two or more standalone companies are owned by the same shareholders, they will need to consider whether they have breached the reduced threshold limit.
Summary
The changes from 1 April 2023 will be felt most by associated companies who have not previously had to consider the profit levels and the impact these will have.
It is important to consider the activities of all associated or group companies to understand if these are all required, or if any can be made dormant to help mitigate unwanted tax consequences.
Get in touch…
If you or your business requires assistance with tax planning, then please get in touch either by calling us on 01446 502520 or by sending us an email