Corporation tax rates change from April 2023 for those farming businesses that operate as limited companies, as opposed to sole traders and partnerships.
“Changes to corporation tax are coming in just over 12 months, when the current single rate of 19% will be replaced by a tiered system. Those reporting taxable profits of up to £50,000 will continue to pay at the rate of 19%, but those with profits above £250,000 will see a rate increase to 25%. Those whose taxable profits fall within the £50,000 to £250,000 bracket could be subject to ‘marginal relief’ from the full 25% rate, with tapering available.”
Because of the way the marginal relief formula works, whilst the overall average tax rate will be lower, the element of profits that fall within the ‘marginal relief’ band from April 2023 can end up being taxed at a higher marginal rate of 26.5%.
What can be done to plan for the changes?
Martyn adds: “Clearly, businesses will want to minimise their tax bill, and pay at the lower rate of 19% where possible. Planning to minimise the corporation tax bill will take some careful thought.
“Whilst it may seem possible to split off diversified activities into a separate company, with the separate companies each having lower taxable profits, where there are ‘associated companies’ for corporation tax, the £50,000 and £250,000 thresholds are divided by the number of associated companies. So, where there are two associated companies, the thresholds are halved. Associated companies are those where one is under the control of the other, or those that are under common control, and at any time in an accounting period. The associated companies’ rule can therefore counteract such restructuring.
“Other possible planning might be to bring forward profits such that they are taxed before 1 April 2023, or to defer expenses until after 1 April 2023, so that they obtain tax relief at a higher rate of corporation tax. Similarly, if a business makes corporation tax losses, carrying those forward to offset against future profits taxed at higher rates of tax may be preferable to carrying back to offset against profits subject to lower tax rates, albeit the tax relief and cash flow advantage will be delayed.”
31 March 2023 will also see the end of the super deduction for companies, as well as the end of the £1 million raised Annual Investment Allowance (AIA). The super deduction, introduced from April 2021, provides a tax deduction of 130% for companies investing in new qualifying plant and machinery. The AIA, which isn’t restricted to companies, provides for a 100% tax deduction on qualifying plant and machinery expenditure. After that date, the AIA will reduce back to £200,000. The timing of qualifying capital expenditure should therefore also be carefully considered to maximise the tax relief afforded.