Corporation Tax 2023 - The Changes
Updated: May 16
After much back and forth, the government has confirmed that it will go ahead with its plan to raise the corporate tax rate to 25% from April 1, 2023. But as always with taxes, it's not quite as simple as that.
The main rate of corporation tax will increase from 19% to 25% from 1 April 2023. The temporary 130% capital allowances super-deduction regime will end on 31 March 2023. A 100% first-year capital allowance for plant and machinery expenditure, known as 'full expensing', and 50% first-year allowances for special rate assets will apply to qualifying expenditures incurred by companies from 1 April 2023 to 31 March 2026.
Background to the April 2023 Changes
The April 2023 corporate tax hike was first announced in March 2021 by then-Chancellor Rishi Sunak. However, in the “Mini-Budget” of September 23, 2022, Kwasi Kwarteng announced that the measure should be scrapped entirely. After the strong negative market reaction to the mini-budget, the government was forced to make another about-face. On October 14, 2022, PM Truss confirmed that the corporate tax hike would go ahead as originally planned. In this guide, we look at what the new corporate tax (CT) regime will look like and how much more tax small limited companies will pay from April 2023.
What are the New Corporate Tax Rates?
There is currently a flat corporate tax rate of 19%. From April 2023:
● The main rate of corporation tax is 25% for companies with profits of £250,000 or more - this applies to all profits
● For companies with a profit of £50,000 or less, a small profit rate of 19% applies
● The main rate will taper between £50,000 and £250,000
However, there are some important twists in these rules, and the details deserve attention. Of course, the corporate tax does not exist in isolation, so in this article, we will look at the implications of the change in the broader context of the total tax liability for a small business.
One Caveat - We don't know the detailed rules yet, only the government's budget announcement for 2021. However, there was a similar rule until 2014/15, so we can assume that the rules for 2023 will be essentially the same; Although thresholds have historically been much higher, many companies have never addressed these complexities.
Understanding the Taper – Marginal and Effective Interest Rates
The taper requires a little understanding. The official expression of the prices is:
● If profit is over £250,000, the main rate of 25% applies to all winnings – including those under £250,000
● If the profit is £50,000 or less the 19% small business rate will apply to all wins
● If profits are between these thresholds, the 25% main rate applies and the company is eligible for Marginal Small Companies Relief (MSCR).
Marginal Small Companies Relief
MSCR reduces the effect of the increased rate.
The MSCR calculation is:
(Upper limit - Profits) x Base Profits/Profits x MSCR Percentage
○ Upper Limit is £250,000
○ Basic profits are the companies trading profits/gains
○ Profits are Basic Profits plus Franked Investment Income (FII is generally Dividends from other companies)
○ MSCR Fraction is 3/200ths
There is however a simpler expression on a slab basis, where there is no FII: Profit Band Marginal Rate £0 to £50,000 19% £50,000 to £249,000 26.5% £250,000 plus 25% These bands give the same result as the full formula and are easier to use, but perhaps not as politically friendly as far as the Treasury is concerned. The Effective Corporation Tax rate at various profit levels will be:
Profits Effective CT %
Quarterly Instalments Payments Regime (QIPS)
QIPS will also be affected by new subsidiaries' regulations from April 1, 2023. The QIPS rule requires “large” companies to pay corporate income tax in four equal installments from the 14th to the 7th. The tenth, thirteenth, and sixteenth months after the beginning of the accounting year.
A company is "large" for these purposes if its taxable profits exceed £1.5m. If other group companies account for 51%, this limit will be divided by the total number of group companies. For growing companies, QIP only applies to the second year in a row that the company is large.
Substantial Commercial Interdependence
However, if there is no significant economic interdependence between the companies concerned, the attribution of rights to others is ignored. In particular, the degree of financial, economic, and organizational interdependence of the companies must be taken into account. Two companies are economically dependent on each other in particular when one financially supports the other (directly or indirectly) or both (directly or indirectly) have a financial interest in the activities of the other. Two companies are economically dependent on each other, especially if:
● They pursue the same economic goal;
● The activities of one benefit the other; or
● Your activities concern mutual customers.
Organizationally, two companies are dependent on each other, especially when they have a common management, employees, premises or facilities.
What About Short Accounting Periods And Associated Companies?
According to the CT hike's original press release; In the case of short billing periods and affiliated companies, the lower and upper limits are reduced proportionately. So if you operate more than one limited company where one company is controlled by another – under the control of the same owners – the £50,000 and £250,000 thresholds will be reduced.
On April 1, 2023, 3 major changes to the R&D Tax Act will come into force:
Eligible R&D expenditure now includes data and cloud computing
Possible limitations on including costs incurred outside the UK for UK R&D requests
Expansion of targeted avoidance measures against exploitation of the R&D tax credit system.
Multiple companies face some issues with the new corporate tax rates. In short, the £50,000 and £250,000 thresholds are split where there are related companies. This means that the main rate starts at a lower level. The split is done on a strictly arithmetic basis so in situations where total profits are below £250,000 care is needed to ensure that each company is as close as possible to its competitors in terms of profit levels.
Associated Company Definition
Associated companies are companies under common control. The rules on this are complex, but generally, they look at different groupings of people who control a company and commonalities within those groupings. Specifically, companies are connected where: They are controlled by the same person, e.g.
● Ms Chris owns 100% of A Limited and 100% of B Limited - the companies becoming associated
● Mr Smith owns 100% of A Limited and 80% of B Limited - the companies becoming associated
● Mr Jordan owns 100% of A Limited and 20% of B Limited - the companies will not be affiliated
They are controlled by the same group of people, albeit with different stakes, e.g.
● Company A is 80% owned by Mr. X and 20% by Mrs. Y; Company B with Mr. X and Mrs. Y each holding 45% and Mrs. Z with 10%. A and B are joined by virtue of Mr. X and Mrs. Y despite different holdings
The rights of family members (spouse and blood relatives) may be included where there is an economic link between the two companies. e.g:
● Mr S owns 100% of A Limited, Ms F owns 100% of B Limited – if A Limited and B Limited have no commercial interdependence the companies will not be linked – if there is commercial interdependence they will be linked.
HMRC considers commercial interdependence on the following basis:
● Financially, for example, one company supports the other
● Economically, for example, the companies serve the same market, have common customers or benefit from one another
● Organizational, e.g. joint management, premises or equipment
Associated Company Apportionment
For Affiliates, the thresholds of £50,000 and £250,000 are strictly split e.g. if two affiliates, then each has a £25,000 small win rate threshold. The strict apportionment can lead to an anomaly in the case of unequal profit.
How Does this Effective Interest Rate Affect Dividends?
Corporate dividends are paid out of post-tax profits - so more corporate tax means less profit to be distributed, but the personal dividend tax (a form of income tax) on dividends will decrease.
Points to Be Considered:
● Be aware of the number of companies under common control. As a law firm, we have noticed a trend in recent years for clients to set up multiple companies - this could create difficulties with corporate tax rates.
● If there are companies under common control, try to balance profits as evenly as possible.
● If multiple companies are needed, consider an LLP instead
● Be aware of family members' business activities where there is interdependence or serving the same markets.
Fortunately, there is better news on trade prices. While the planned revaluation process continues (from 1 April 2023, estimated values for commercial properties in England will be updated to reflect the property market on 1 April 2021), the Government will limit the impact of new valuations on taxpayers. Dealing with significant increases in bills. A number of exemptions will apply in the 2025-2026 period, including a freeze on commercial price multiples and a percentage cap on annual commercial price increases.
Tax relief for businesses in the retail, hospitality, and leisure sectors introduced during the pandemic will be extended by 25%. But hopes that the government would offer a more radical alternative to merchant fees have now been dashed as it has finally decided not to introduce a tax on online sales in the UK. Perhaps this is an acknowledgment that the increasing integration and use of traditional and online sales for businesses will create greater complexity in identifying and accounting for online sales.