For the first time in 8 years we have returned to a system of two rates of Corporation Tax– but what does this mean?
The UK returned to a system of two Corporation Tax rates from April 2023, with the main rate of Corporation Tax increasing to 25%, and the old 19% rate being retained for companies making smaller profits.
This has signalled the revival of some rather nasty tax rules around “associated companies” that many in the tax profession hoped they may have seen the last of.
So what does this mean for your business? There are two potential impacts of this change, the second being potentially a lot more significant than the first.
The small companies’ rate of 19% is available to companies with annual taxable profits of under £50,000. For profits between £50,000 and £250,000 there is a sliding scale between 19% and 25%.
However, where there are other companies that are “associated”, then these profit limits have to be divided down by the total number of companies involved. In simple terms, associated companies means companies that are in the same group, or are under the control of the same shareholder or shareholders. Needless to say where there are multiple shareholders this can quickly become very complex.
So for a company with 3 associated companies, we have to divide by 4 (the 3 plus itself) meaning the profit limits become just £12,500 and £62,500.
The differences in tax payable here are fairly marginal, but it is the second impact of these changes that may have much more significant consequences, and potentially much sooner.
This additional impact is to do with the timing of tax payments. Where a single company has taxable profits of over £1.5 million, it must pay Corporation Tax quarterly on much earlier dates, and again where there are associated companies this profit limit is divided down in the same way. So in our example above this threshold would be reduced to £375,000.
This is important for companies to review immediately because the first instalment for a period affected is due around halfway through the year – so the impact might be felt almost immediately depending on your company’s choice of accounting date.
This problem is compounded by the fact that the £1.5 million threshold has not moved since the instalment regulations were written in the late 1990s, meaning that with inflation it has become a much more achievable profit level for small businesses than when the rules were first conceived.
Returning to this system or two rates makes tax rules even more complicated, so we would urge you to speak to your advisers about this if you think it may be an issue.