Corporate tax charge and rate from April 1, 2022 and small profit rate and marginal relief from April 1, 2023

Who is likely to be affected

Unincorporated companies and associations that pay corporation tax.

General description of the measure

The measure sets the corporate tax charge and sets the main rate at 19% for the fiscal year beginning April 1, 2022 and also sets the corporate tax charge for the fiscal year beginning April 1, 2023.

This measure also announces that from 1 April 2023 the main rate of corporation tax for unrestricted profits will be raised to 25% applying to profits over £250,000. A small rate of profit (PSR) will also be introduced for companies with profits of £50,000 or less to continue to pay corporation tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at the main rate less marginal relief allowing for a gradual increase in the effective rate of corporation tax.

Political objective

The move supports the government’s aim of raising revenue while keeping the UK corporate tax rate competitive with other major comparable economies and excluding less profitable companies from a rate increase.

Context of the measure

In Budget 2020, the government announced that the main corporate tax rate (for all profits except closing profits) for the years beginning April 1, 2020 and 2021 would be 19%.

Detailed proposal

Effective date

The charge and main rate of corporation tax for the 2022 financial year will be in effect from April 1, 2022 to March 31, 2023.

The corporate income tax expense, main rate and small profit rate for fiscal year 2023 will be in effect from April 1, 2023 to March 31, 2024.

Current law

The charge and main rate of corporation tax for the 2021 financial year were set by article 6 of the 2020 finance law.

Proposed revisions

Legislation will be introduced in the 2021 Finance Bill to set the corporate tax charge and set the main corporate tax rate for all non-closing profits at 19% for the 2022 financial year and to set the corporate tax charge and set the main rate at 25% for the 2023 financial year.

The legislation will also introduce a small profit rate and set it at 19%.

The small profits rate will apply to profits below the lower limit of £50,000 and profits above the upper limit of £250,000 will be charged at the main rate. The thresholds which apply to determine whether a company is subject to the closing small profits rate at s279E of the Corporations Tax Act 2010 will be aligned with these limits.

Consistent with the approach taken with the old rules, the small profits rate will not apply to closed investment holding companies. The definition of a related investment holding company will follow the definition previously found in Article 34 LCV 2010.

Marginal relief provisions will also be introduced so that where a company’s profits fall between the lower and upper bounds, it can claim an amount of marginal relief that bridges the gap between the lower and upper bounds, providing a gradual increase in the Company’s Tax Rate.

The lower and upper limits will be proportionally reduced for short accounting periods and when there are associated companies.

The related 51% group company test S279F to S269H CTA 2010 will be repealed and replaced by the associated company rules. This will be the case for its application to determine whether a company is large or very large for the purposes of quarterly installment payments or to determine whether a company can elect to use small claims processing for the Patent Box, and so on. .

Basically, a company is associated with another company at any given time if at that time or at any time during the preceding 12 months:

  • one company controls the other
  • both companies are under the control of the same person or group of persons

Summary of impacts

Treasury impact (£million)

2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026
-5 +20 +2390 +11900 +16250 +17200

These figures are presented in Table 2.1 of the 2021 budget and have been certified by the Office for Budget Responsibility (OBR). More details can be found in the policy costing paper released alongside the 2021 budget.

Economic impact

This measure should have a significant economic impact and the OBR adjusted its economic forecasts to take this measure into account. More details can be found in their March 2021 economic and financial outlook.

A behavioral adjustment was made to take account of changes in the incentives for multinational companies to shift profits in and out of the UK. An adjustment has also been made to take into account the reduced incentive to incorporate as a result of this measure.

Impact on individuals, households and families

There should be no direct impact on individuals since corporation tax is levied on businesses.

However, if businesses struggle or are unable to pay the increased corporate tax, it could impact their family formation, stability or breakdown. To help you, HMRC can provide a Time To Pay arrangement.

Equalities impacts

This measure is not expected to have an impact on groups sharing protected characteristics.

Impact on businesses, including civil society organizations

This measure is expected to have a significant administrative impact on approximately 2 million businesses which will need to be informed of the changes even if they are not currently subject to corporation tax.

The introduction of a low profit rate will mean that around 1.4 million businesses will continue to pay neither corporation tax nor the 19% corporation tax.

There will be a one-time cost as businesses become familiar with the rate changes and determine the corporate tax rate they should pay. Some companies will need to update their internal software systems. The one-time implementation cost for all businesses is estimated to be around £50 million.

There will also be negligible ongoing administrative burden for companies claiming marginal relief, particularly where the number of associated companies changes. These changes are expected to affect agents acting for companies and software vendors as well. HMRC has no data to suggest agents or software providers will increase fees as a result of this change, which would increase ongoing costs, but we will keep this under review.

This measure will have no impact on civil society organisations.

The customer experience is expected to remain broadly the same as this measure does not change the way businesses interact with HMRC.

Compliance cost estimates are presented in the following table:

Estimated one-off impact on administrative burden (£million)

One-time impact (£million)
Costs 50
Savings

Estimated ongoing impact on administrative burden (£million)

Ongoing average annual impact (£million)
Costs negligible
Savings
Net impact on annual administrative burden negligible

Operational impact (£million) (HMRC or other)

The additional costs to HMRC of implementing this change are expected to be around £5.1 million.

Other effects

Other impacts were taken into account and none were identified.

Monitoring and evaluation

This measure will be tracked using information collected from corporation tax receipts.

Additional tips

If you have any questions about this change, contact Eva Upali on phone: 03000 542465 or email: [email protected]

Luisa D. Fuller