Farmers urged to plan for corporate tax changes

Farmers who operate their businesses as LLCs should plan now to ensure they minimize their tax bills ahead of upcoming rule changes.

Changes to corporation tax are coming in 2023, along with the end of the super-deduction and raising the annual investment allowance (AIA) by £1million, says Martyn Dobinson, partner at the accountant Saffery Champness.

Corporation tax is paid on the taxable profits of public limited companies. In just over 12 months, its current single rate of 19% will be replaced by a tiered system.

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This means those reporting taxable profits of up to £50,000 will continue to pay at the 19% rate, but those with profits over £250,000 will see the rate increase to 25%.

Anyone with taxable profits in the £50,000 to £250,000 bracket could qualify for “marginal relief” from the full rate of 25%, with reduction available, Mr Dobinson explained.

Due to the operation of the marginal relief formula, while the overall average tax rate will be lower, the element of profits that falls under the “marginal relief” bracket from April 2023 could end up being taxed at a higher marginal rate of 26.5%.

“Obviously businesses will want to minimize their tax bill and pay at the lower rate of 19% wherever possible,” Dobinson said. “Planning this will take careful thought.”

It may seem possible to split up diversified businesses into a separate company, with individual companies all having lower taxable profits.

However, where there are “associated companies” – where one is under the control of another or more than one company is under common control at any time during an accounting period – the thresholds of £50,000 and £250,000 is divided by the number of associated companies.

For example, if there are two associated companies, the thresholds are halved, which can thwart such restructuring, Dobinson said.

“Another possible planning could be to advance profits so that they are taxed before April 1, 2023 or to defer expenses until after April 1, 2023 so that they obtain tax relief at a tax rate on societies higher,” he said.

“Similarly, if a business realizes corporate tax losses, it may be better to carry them forward to offset them against future profits taxed at higher tax rates than to carry them back to offset them against profits. subject to lower tax rates, although tax relief and cash flow benefit will be delayed.”

End of tax breaks

The £1m Super Deduction and AIA will also end on March 31, 2023.

Introduced in April 2021, the super-deduction offers a 130% tax deduction to companies investing in new qualifying plants and machinery.

In addition, the AIA – which is not limited to businesses alone – grants a 100% tax deduction on eligible plant and machinery expenditure, and is expected to revert to £200,000.

The timing of qualifying capital expenditure must therefore also be carefully considered to maximize the tax relief provided, Mr Dobinson said.

Luisa D. Fuller