Planning for increases in corporation tax rates

Apr 5, 2022 | Tax Tuesday, Taxation

Currently the rate of corporation tax is a flat 19% of taxable profits.

As part of the government’s plan to recover financially from COVID, from 1 April 2023 the rate of corporation tax will increase to 25% for companies with taxable profits of over £250,000 per annum.

Companies with profits of up to £50,000 per annum will continue to be charged at 19%.

For companies with profits in between £50,000 and £250,000, there will be an effective marginal rate on the element of profits above £50,000 of 26.5%.

For associated companies (broadly companies under common control) these profit limits are divided by the number of companies and so the higher rates potentially ‘kick in’ much sooner than for ‘standalone’ companies.

So, what can be done to mitigate the punitive effects of these tax increases?

Bringing forward income

Other things being equal, for tax purposes it is usually best to defer the recognition of taxable income wherever possible.

This can serve to defer the date on which the tax is due to be paid and so provide the company with a cash flow advantage in the meantime.

With the tax rate increasing so significantly from 1 April 2023, thought instead should be given to ways of accelerating the recognition of income.

There are strict accounting rules which apply on the timing of income recognition in a set of accounts so speak to us about what scope is available in your specific circumstances.

Deferring expenditure

If expenditure which is deductible for corporation tax purposes is deferred beyond 31 March 2023, then it could be relieved at higher rates than before.

For instance, where it is commercially viable, thought may be given to deferring pension contributions or largescale expenditure on say, a marketing campaign.

With pension contributions specifically there are other factors to consider; care is needed regarding which personal tax year such contributions fall into and to ensure personal contribution limits are not exceeded.

Other rules regarding the spreading of the corporation tax relief for some pension contributions must also be effectively managed.

Use of tax losses

Consider whether it would be better to carry forward losses against taxable profits made in future accounting periods rather than being set against current profits or carried back against prior year profits.

This could ensure the losses are relieved at a maximum of 26.5% rather than 19%.

Capital gains

If a capital asset standing at a gain, such as a property, is to be sold, consider making the sale in a tax accounting period ending before 31 March 2023 so the gain is taxed at 19% rather than higher rates.

Capital allowances

On the face of it, a sensible route would be to defer capital expenditure until after 31 March 2023 in order to increase the rate at which the expenditure will be relieved.

However, this must be weighed up against the large reduction in the annual investment allowance from £1m to £200,000 per annum from 1 April 2023 and the ending of the additional 30% ‘super deduction’ on certain capital expenditure which applies up to 31 March 2023.

If considering capital expenditure over the next year or two, it would be advisable to carry out several calculations to decide the optimal time to buy from a tax perspective.

These would factor in the increase in the rate of corporation tax on the one hand and the reduction in the generosity of tax write-downs for capital expenditure on the other.

How can we help?

These are just some of the ways and means which can be used to minimise the impact of the impending corporation tax increases. To discuss the above, or for any other tax queries raised, please contact your relationship principal or email for more information.

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