Prepare for the April 2023 corporate tax rate increases

Although it is expected that few businesses will have to pay tax at the new corporate tax rate, it is important to be aware of the proposed changes.

How is corporate tax changing?

UK trading companies currently pay corporation tax at the rate of 19% on their chargeable profits. However, for the financial year beginning April 1, 2023, the main corporate tax rate is expected to increase to 25% when profits exceed £250,000. This rate will also apply to many investment companies.

A new ‘small profits rate’ of corporation tax of 19% will apply where profits are £50,000 or less.

For companies with profits between £50,000 and £250,000, they will pay tax at the main rate of 25%. This will be reduced by a marginal reduction providing for a gradual increase in the effective corporate tax rate. The practical impact of this is that profits within the margin (between the upper and lower limits) will pay an effective tax rate of 26.5%.

What are associated companies and groups?

The new upper and lower limits will be reduced in proportion to the number of companies that are associated for tax purposes, and this includes non-UK based companies.

Companies are associated when:

  • one controls the other; Where
  • both are under common control

A group made up of two companies will see the upper and lower limits halved, which means that the level of profit at which a marginal rate will apply can be exceeded more easily.

However, there are important exclusions for companies that do not carry on a trade or business and for passive holding companies.

Where companies are under common control but the relationship between one or more companies is not a “substantial business interdependence”, they will not be treated as associated for the purposes of the new rules.

For example, husbands and wives are related parties for tax purposes. A priori, a company managed by Mr. A will be associated with a company managed by Mrs. A. However, if Mr. A is the director and the sole shareholder of company A which operates a shoe store and his wife manages a restaurant through Company B, the nature of the two businesses is completely different commercially. Provided that there are also no financial or economic links between the companies and that they are organizationally independent, they are not associated for these purposes.

When should I prepare for corporate tax changes?

For companies that have group structures – or where the issue of common control is relevant – the question of the associated company should be considered as soon as possible in case planning is required to mitigate any future tax increases.

For advice on what you can do to prepare your business for these difficult times, please click here.

Need advice on corporation tax?

TaxAssist Accountants can assist with the preparation of business accounts, business tax returns, and corporation tax calculations, as well as provide advice on tax planning that can benefit you and your family. company. To find out more about our services and book a free consultation, call 0800 0523 555 or complete our online inquiry form.

Release Date Jul 7, 2022

This article is intended to inform rather than advise and is based on the law and practice of the time. Taxpayer circumstances vary and if you find the information provided useful, it is important that you contact us prior to implementation. If you take or do not take action as a result of reading this article, before receiving our written approval, we will not accept any liability for any financial loss suffered.

Luisa D. Fuller