With the increase in corporation tax going ahead on 1 April 2023 for companies with taxable profits over £50,000, is there anything you should be doing now to take advantage of the current lower rates?
Corporation tax rate increase
Having been initially reversed by Kwasi Kwarteng’s mini-Budget in September 2022, the corporation tax (CT) rate increase announced in the Spring Budget 2021 is to go ahead as planned on 1 April 2023. The rate of CT will be increasing to 25% for companies with taxable profits above £250,000 (although this threshold will be proportionately reduced for short accounting periods and where there are associated companies).
Companies with taxable profits below £50,000 will continue to be liable to CT at the current rate of 19%. Companies with taxable profits between £50,000 and £250,000 will pay CT at 19% on the first £50,000 and 26.5% on the next £200,000.
Non-March 2023 accounting periods
While the changes to CT rates do not apply until 1 April 2023, if your company has an accounting period that straddles that date, it is necessary to split the accounting period in two - the period prior to 1 April 2023 and the period on or after 1 April 2023.
The profits for the accounting period are time apportioned. Those for the period before 1 April 2023 are taxed at 19%, while those for the period after 1 April 2023 are taxed at the relevant rate depending on the level of profits.
Tip. Where the accounting period spans 1 April 2023, remember to time apportion the upper and lower limits to arrive at the relevant limit applying for that period.
Example.
ABC Ltd has profits of £300,000 for the year to 30 September 2023. It has no associated companies. The accounting period is split into two periods - the six-month period from 1 October 2022 to 31 March 2023, the profits for which are £150,000 (6/12 x £300,000) and which falls in financial year 2022 and the profits for the six months to 30 September 2023 (also £150,000) which falls in the financial year 2023. Its profits for the financial year 2022 (£150,000) are taxed at 19% resulting in a CT bill of £28,500.
Its profits for the financial year 2023 (£150,000) exceed the time-apportioned upper limit of £125,000 (£250,000 x 6/12) and are taxed at 25% resulting in a CT bill of £37,500.
The total CT for the year to 30 September 2023 is £66,000, an effective rate of 22%.
Tax planning
While it may be difficult for ongoing trading profits, if your company is expecting profits from large one-off transactions such as chargeable gains on the sale of a property, where possible it would be beneficial to bring forward such transactions so that they are liable to the current 19% CT rate.
Example.
ABC Ltd, with a 30 September year end, made a chargeable gain of £2 million before 30 September 2022. Therefore, this gain will be liable to CT of £380,000 (£2m x 19%).
If the company had instead made the gain on 1 October 2022, it would be liable to CT at the effective time apportioned rate of 22% so would have to pay tax of £440,000 (£2m x 22%).
Tip. If your company has made a substantial one-off gain in an accounting period that straddles 1 April 2023, consider whether you could shorten the accounting period to end on 31 March 2023.
Example.
ABC Ltd made the gain on 1 October 2022 and decided to shorten its accounting period to six months ending 31 March 2023. In this case, the whole £2m gain would be taxed at 19%, a saving of £60,000.
If you’re anticipating large profits from a one-off transaction such as the sale of a property, where possible it would be beneficial to bring forward that transaction to an accounting period that doesn’t straddle 1 April 2023.
If the transaction is already in a period that straddles that date, you could look to shorten the accounting period.