Many companies will have encountered significant hardship during the pandemic. When added to the current high levels of inflation, cashflow management has become a key objective for many business owners.
In this environment, businesses will want to ensure that they minimise cashflow disadvantages from the corporation tax changes coming into effect from 1 April 2023.
Corporation tax changes from 1 April 2023
Corporation tax rates will increase on 1 April 2023 from the current flat rate of 19%:
- The rate will increase to 25% for companies with taxable profits exceeding £250,000.
- The rate will remain at 19% for companies with taxable profits less than £50,000.
- A tapered rate (at an effective rate of 26.5%) will apply for companies with taxable profits between £50,000 and £250,000.
This works as follows, using an example where a company has taxable profits of £300,000 for the year ending 31 March 2024:
- The company’s first £50,000 of taxable profits would be taxed at 19% = £9,500.
- Its next £200,000 of taxable profits would be taxed at 26.5% = £53,000.
- Its next £50,000 of taxable profits would be taxed at 25% = £12,500.
The total corporation tax liability will therefore be £75,000. This equates to 25% of £300,000.
Close investment-holding companies (broadly, those that don’t trade and don’t let property to third parties) will attract a flat rate of corporation tax of 25% from April 2023 irrespective of the level of its taxable profits.
Corporation tax payment dates will remain the same, as follows:
- Liabilities for groups with total taxable profits below £1.5 million would generally be payable nine months and one day from the end of the accounting period.
- Liabilities for groups with total taxable profits over £1.5 million would generally be payable earlier (mostly in-period) under the quarterly instalment payment (QIP) regimes.
- However, where there are associated companies (see below), groups with total taxable profits of less than £1.5 million can fall within QIPs where individual group companies have more than an equal share of the group’s total profits.
The rate thresholds of £50,000 and £250,000 will be proportionately reduced for short accounting periods and divided by the number of worldwide ‘associated companies’ (dormant companies are excluded).
Currently, associated companies only include 51% subsidiary companies. But, from 1 April 2023, the definition of associated companies will be widened to companies under the control of the same person or group of persons. When determining the number of associated companies under these new rules, care is needed in interpreting the complex rules around the attribution of rights held by connected parties.
The impact of the 1 April 2023 changes to the associated companies rules
- The potential for the number of associated companies to increase, which would result in reduced rate thresholds. The impact of this is twofold with the risk of increased corporation tax liabilities and acceleration of these increased corporation tax liabilities by bringing companies into the QIP regime earlier.
- Additional administration costs in determining and monitoring the numbers of associated companies under the more complex new rules.
Potential ways of mitigating the cashflow risk from the corporation tax changes
- If a company anticipates large capital gains or larger than normal trading profits in the period leading up to 1 April 2023, changing the accounting period end to 31 March 2023 could lock in the current 19% rate.
- Within commercial and accounting boundaries, accelerating taxable profits and chargeable gains, and deferring allowable expenditure could minimise taxable profits charged at the higher 25% rate.
- As referred to above, the change in the definition of associated companies can result in increased corporation tax liabilities and bring more companies into the QIP regime with the resulting acceleration of these increased corporation tax liabilities. Company owners could look to rationalise their group structures by consolidating activities within a smaller number of group companies or removing companies with little activity and commercial importance to mitigate this risk.
Accelerate capital allowances
- The super deduction can be used to accelerate capital allowances by providing a temporary 130% first year capital allowance for expenditure incurred on new and unused main pool plant and machinery at an effective corporation tax rate of 24.7% (current rate of 19% x 130%). But the super deduction will end on 31 March 2023.
- From 1 April 2023, the corporation tax rate will increase to 25% but the super deduction will end. Provided the 100% annual allowance is available (capped up to £1 million of qualifying spend per annum), the effective corporation tax rate would be 25%, which is slightly higher than the current effective rate of 24.7% under the super deduction.
- However, a key benefit of the super deduction over the annual investment allowances is that the super deduction does not have a cap. Accordingly, there could be substantial cashflow benefits by claiming the super deduction before 31 March 2023 if the company is looking to spend in excess of the annual investment allowance cap of £1 million in the near future. In attempting to claim the super deduction ahead of 31 March 2023, careful consideration will need to be given to the date that the expenditure is incurred for capital allowance purposes.
- In addition, where cashflow requirements are not immediate, companies with large pools of brought forward capital allowances could defer capital allowance claims until after the corporation tax rate changes have come into force in order to obtain relief at a higher rate.
Maximise the value of tax losses
- The increase in corporation tax rates provides companies with the opportunity to increase the value of their tax losses.
- Where cashflow requirements are not immediate and future profits are anticipated, carry forward of tax losses for offset at higher rates of corporation tax is an option (eg 25% for future offset versus 19% for current or past offset). This tax saving differential can be higher if the losses are R&D tax losses as the rate of tax relief for carried forward R&D tax losses is greater than the rate for surrendering R&D tax losses for immediate payment.
- Commercial management charges between group companies, or the allocation group relief tax losses from group companies with lower effective corporate tax rates to those group companies with higher effective tax rates, would result in tax savings.
- Employee share schemes do not require the immediate cash outlay of salary or cash bonuses and so can aid cash retention, as well as providing commercial benefits for incentivising and retaining key employees.
This article provides a general summary of managing the cashflow of tax liabilities for companies, and professional tax advice should always be sought.
For more information on any of the points discussed, please speak to your usual Saffery Champness contact, or get in touch with Sean Watts.