In the ever-evolving landscape of corporate finance, staying abreast of tax changes is essential. As of April 1, 2023, significant alterations to the UK’s corporation tax regime came into effect. These changes have impacted companies with profits exceeding £50,000, and it’s crucial for businesses to understand how these alterations may affect them.
Changes to Corporation Tax Rates since April 2023
The most notable change is the shift in the corporation tax rate. The main rate of 19% for all companies remains for those with profits below £50,000. However, for companies with profits over £50,000, a new tiered system now applies. Companies with profits above £250,000 now face the main rate of 25%, while those falling between the £50,000 and £250,000 profit range pay a tapered tax rate falling between 19% and 25%.
It’s important to note that these changes won’t affect all companies equally, but associated company rules could complicate matters for some.
Understanding Associated Companies
A company becomes associated with another when one has control over the other, or both are under the control of the same individual or group. For companies associated with one another, the profit limits of £50,000 and £250,000 will be divided by the number of associated companies. This division may result in a company paying a higher rate of tax. For example, if an individual directly holds 100% of shares in four separate trading companies, all four will be treated as associated from April 2023. Each company will then be subject to tax at rates between 19% and 25% based on its profits.
Control can also extend to substantial commercial interdependence between two companies, even if they’re not owned by the same individuals. Family situations, for instance, might involve such interdependence, making it necessary to consider the shares held by you and your associates, including your spouse, civil partner, parents, children, and siblings.
Exemptions for Certain Companies
Dormant and passive holding companies are exceptions to these rules, provided they meet specific criteria, such as carrying on no trade, having 51% subsidiaries, holding no assets other than shares in subsidiaries, having no income other than dividends from subsidiaries, accruing no chargeable gains, incurring no management expenses, and making no qualifying donations.
Application of the New Rate
Companies with financial year-ends that span April 1, 2023, will experience a time-apportioned hybrid tax rate. This rate will comprise 19% for profits up to March 31, 2023, and the new rate (if profits exceed £50,000) from April 1, 2023.
Instalment Payments and Associated Companies
The requirement for corporations to make tax payments in instalments, typically triggered by taxable profits of at least £1.5 million, will also be influenced by the number of associated companies. Each company’s threshold for instalment payments will be divided by the number of associated companies. For example, in a scenario with four associated companies, each will be subject to this regime if taxable profits exceed £375,000 (£1.5 million / 4).
Close Investment Companies (CIC)
Close investment companies with fewer than five shareholders that hold investments like properties or shares will be subject to a 25% tax rate. However, there are exceptions, such as companies letting property on a commercial basis to third parties, allowing them to benefit from the 19% tax rate on profits up to £50,000.
To navigate these changes effectively, it’s crucial for businesses to understand their association with other companies and forecast their potential tax liability. Additionally, companies should consider the implications of entering the quarterly instalments regime. Proactive planning, including the possibility of merging, eliminating, or disposing of certain companies, may be necessary to mitigate the impact of these rules on your company’s future cash flow.
For personalized guidance on how these changes may affect your business, please don’t hesitate to get in touch with your designated contact at Bush & Co. We’re here to assist you in adapting to the evolving tax landscape and ensuring your business remains financially resilient.