What are the new rates and when do they take effect?
From the beginning of April 2023 the headline rate of corporation tax will rise from 19% to 25%. Where taxable profits are below £50,000 these will continue to be taxed at 19%. Profit which fall in the £50,000 to £250,000 band will be taxed at 26.5%, because of how marginal relief works. Profits over £250,000 will be taxed at 25%. Where an accounting period straddles 1st April 2023, profits will be time apportioned meaning the company will pay tax at the new rate for the portion or profits after 1 April 2023. Therefore accounting periods commencing over the coming months will be impacted by the change.
What is the cost?
The most logical approach to tax planning is generally to defer income or accelerate expenditure to secure earlier tax relief. However, with the tax rate set to increase, tax planning becomes more pertinent. For example, After 1 April 2023, for companies paying the headline rate of corporation tax, each £10,000 of additional profits will incur £2,500 of tax, rather than the current charge of £1,900, which represents a tax rise in excess of 31%. Where profits fall in the £50,000 to £250,000 band, the tax will go from £1,900 to £2,650 per £10,000 of profits. This is even more punitive, with an increase of almost 40% compared to current rates.
Can tax planning help?
Although it may seem illogical initially, it might make financial sense to accelerate profits where possible to benefit from the lower rate of corporation tax which currently applies. A combination of factors will determine whether profits can be accelerated. As well as the company’s commercial position and its ability to accelerate income, the accounting treatment of transactions will need to be considered. Therefore, it is not always possible to accelerate income.
Another option is to defer expenditure in order to obtain tax relief at the higher rates. Where your accounting period straddles the year end, more thought needs to be given as to the timing of expenditure. Deferring capital expenditure may not be helpful because of the availability of the super deduction allowance (which is due to end in March) which uplifts tax relief on qualifying capital expenditure (please refer to the separate article giving more detail). The super deduction gives approximately the same tax relief as deferring the expenditure until after 1 April 2023. With the tax relief coming sooner, the super deduction is probably going to be more appealing.
Some other types of discretionary expenditure may be able to be deferred beyond 1 April 2023. Costs such as repairs, training costs or bonuses could potentially be delayed.
If your business is seasonal with much of you profit earned before the rate changes in April, it might be worth considering changing your accounting date. This would separate the two periods and thus avoid the higher tax charge resulting from the mixture of pre and post 1 April 2023 rates.
If you would like to discuss how this change is likely to impact your business, please speak to our managing director, Adam Dutton. Please telephone him on 01756 799823 or email him at email@example.com.