New Corporation Tax Rates
From 1 April 2023, the rate of Corporation Tax (CT) increased from 19% to 25%.
However, the lower rate of 19% can still apply, dependent on the level of “augmented profits” of a company (i.e. taxable total profits plus dividends received from companies other than from those within the same (common control) group). The rate is based on the augmented profits compared against the corporation tax rate thresholds, of £50,000 (the lower limit) and £250,000 (the upper limit).
The following rates apply to the corresponding corporation tax thresholds:
- Augmented profits – £50,000 or less – a rate of 19% applies (e., the ‘small profits rate’)
- Augmented profits between £50,000 and £250,000 – a rate of 25% applies, however marginal relief is available (although, when the marginal relief fraction calculation is applied, this results in an effective marginal rate of 26.5% for those profits that fall within the ‘margin’ between £50,000 and £250,000!)
- Augmented profits – more than £250,000 – a rate of 25% applies (e., the ‘main rate’)
Note: The Government has confirmed that the same main rate and same small profits rate will apply for the financial year beginning 1 April 2024.
For accounting periods that cover less than 12 months, the above thresholds are reduced on a time basis accordingly.
The corporation tax rate thresholds are reduced in proportion by the number of associated companies in the accounting period.
For example, if there are 2 associated companies of the company, there will be 3 in total during the year, company A and its associated companies. The lower limit and upper limit will be split as £16,667 and £83,333, respectively.
The new associated company rules are discussed in more detail below.
A company with a financial period straddling 1 April 2023 will apportion the company’s taxable profits arising in an accounting period between the financial years in which the accounting period falls.
For e.g. Company A, year ended 31 December 2023, the accounting period will be split as follows:
- A first notional period running from 1 January 2023 to 31 March 2023 – at the old CT rate of 19%
- A second notional period running from 1 April 2023 to 31 December 2023 – at the new CT rates and thresholds as stated above (and reduced on a time apportioned basis to £37,671 and £188,356).
Chargeable Gains
Questions have arisen recently as to what rate would a chargeable gain realised by a company in an accounting period that straddles 1 April 2023 be taxed at.
As seen in the example above, the total taxable profits for the full year are time apportioned for a company straddling this transitional period. So, would the gain be time apportioned in this way, or would it be allocated to the notional period in which the disposal occurred? Clearly, one may have more of an advantage over the other.
It has been confirmed by HMRC that the total taxable profits, i.e., including any chargeable gains, arising in a period straddling 1 April 2023 are to be time apportioned between the two notional period pre and post-1 April 2023 and not limited to the notional period in which the disposal occurred.
Quarterly Instalment Payments (QIPs) change
Prior to 1 April 2023, a ‘Related 51% group companies test, was used to determine the limits that apply to a company’s augmented profits in order to test whether it is a ‘large’ or ‘very large’ company for the purpose of the QIPs regime. The test was applied by reference to the number of related 51% group companies at the end of the prior period.
The related 51% company rules have been replaced by the ‘Associated Companies rules’ for accounting periods starting on or after 1 April 2023 or for the financial year 2023.
The upper and lower profit limits are reduced where there are two or more ‘associated companies’ at any point in the accounting period.’ The profits limit thresholds for each associated company is therefore divided by the total number of associated companies, The new rules are a wider test than the previous related 51% group companies test, resulting in more companies being subject to QIPs than previously.
Associated Companies Rules
So, what are ‘associated companies’? Associated companies are ‘associated with each other if one controls the other, or both companies are controlled by the same person or persons.
In determining the number of associated companies, the new rules will mean that two or more groups owned by the same person or persons will now be associated for this test, whereas previously under the 51% related group test they would not have been.
The definition of ‘control’ is modified for the purpose of the associated company rules to determine whether a person has control and consider whether there is any ‘substantial commercial interdependence’ between the two companies.
These rules mirror those that applied to accounting periods ending on or after 1 April 2011 and before 1 April 2015 and can deem two companies/groups to be associated if they are commercially interdependent on one another.
Factors include:
- financial interdependence (in particular, where one company gives direct or indirect financial support to the other, or two companies together have a financial interest in another business, a creditor relationship)
- economic interdependence (in particular, if they seek the same economic outcome, one undertakes activities benefiting the other or they have common customers), or
- organisational interdependence (share common management, employees, premises or equipment)
When applying the rules, each case will be reviewed on an individual case basis and will vary depending on the facts for each case but for substantial commercial interdependence to exist, it is not necessary for all three types of links to exist.
Conclusion
In summary, the new rules are more complicated than they first appear. Where previously the scope for companies to have been caught within the remit of QIPs may have been limited, the associated company rules now make it more likely that companies under the common control of various family members may become associated, subjecting the company to QIPs and affecting cashflow.
We would therefore recommend a review of your Corporate Tax Compliance position as the above rules are complex.
We hope that you find this briefing note helpful. However please note that it has been prepared for awareness purposes only and, as such, represents only a high-level and simplified summary of the rules. It does not constitute advice and is not a substitute for taking proper advice tailored to your specific circumstances.
