Getting ready for the corporation tax rate increases in April 2023

It was announced in the March 2021 budget that there would be a significant rise in corporation tax, coming into effect from April 2023. Whilst these changes may not affect all businesses, it is still imperative that companies are aware of the changes. Here we will explain more about the corporation tax rate increases in 2023 and how businesses can get ready.

What are is the current corporation tax rate?

Currently all UK trading companies pay the same amount, regardless of how much profits they make. This rate is 19% of their taxable profits.

What are the changes?

As of 1^st April 2023, the main corporation tax rate will be increasing to 25%. However this will only be applicable for those companies whose profits exceed £250,000.

What about companies that make smaller profits?

For those companies that have taxable profits of £50,000 or less, they will be classed as “small profits rates” and the corporation rate of 19% will remain.

Those companies whose profits range between the values of £50,001 and £250,000 will pay tax at the main rate of 25% but at a reduced marginal relief. This provides a gradual increase for tax in line with the increase in profits until the main rate of 25% is reached.

Associated Companies

Associated companies can benefit from lower corporation tax rates, through reduced marginal relief. However, the profit ranges will be split by the number of associated companies. A company is classed as an associated company if it is controlled by another company or where several companies are controlled by the same company or people (under common control). They will still class as an associated company even if they are only associated for part of the accounting period. Corporation tax is calculated by dividing the profit limits by the number of associated companies.

However, it must be noted that the rules have recently changed and companies under common control, but the relationship between the companies is not one of “substantial commercial independence”, will not be classed as associated companies. If there are no financial or economic links between the companies, and they are independent from an organisational point of view and they are not classed as associated when it comes to Corporation tax.

How can companies prepare for the changes?

Whilst some companies may not notice significant changes to their corporation tax when the changes take place in April 2023, those affected by the changes can consider doing the following:

• Try and accelerate the profits so that they fall within the 2022 financial year and not after April 1^st
• If you will be paying more than 19% corporation tax, try and delay expenses so that you can secure a higher rate of relief which will help keep the corporation tax level lower.
• If your business is experience a loss, consider carrying them forward rather than back. This creates a tradeoff between later relief at a potentially higher rate or earlier relief at the lower rate. This is something you will have to decide which option works best for you.
• Consider restructuring if your business is impacted by associated companies.

In these scenarios there is still time for you to plan ahead so that the increase in corporation tax doesn’t take you by surprise. Having a solid understanding of the rate you will probably be paying is great and always seek professional advice if you have any specific questions.

Things can obviously change however if the proposed changes go ahead as planned, businesses need to understand these changes and how they could potentially impact them moving forward. There will no longer be a one size fits all approach companies need to understand whether they will be affected by the new changes. If you have any questions about corporation tax and need advice on how best to proceed, get in touch with one of our tax specialists at Wright Vigar.