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Corporation Tax Changes in the UK in 2023

August 20, 2022

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In March 2021, the state Budget was released. The government declared a significant increase in corporate tax, which should come into force in April 2023.

In the article, we will tell how exactly the corporate tax changes, who it affects, and discuss some ways to prepare for these changes.

Corporate Tax Rate And Related Changes in the Company's Rules

It is planned that the corporate tax rate will increase from April 1, 2023.

  • The rate increases to 25% for companies whose taxable profit is more than £250,000. 
  • The current rate of 19% will still apply to companies with a profit of less than £50,000.
  • Companies with a taxable profit from £50,000 to £250,000 pay tax at a rate of 25%, reduced due to the marginal relief so that in general they pay on a sliding scale from 19% to 25%.

If companies want to get rid of taxable assets over the next few years, they should consider moving the disposal date before April 1, 2023, to take advantage of the lower rate. 

The lower and upper limits for taxable profit are reduced depending on the number of "associated companies", while the limits of taxable profit are divided between all associated companies equally.

Regardless of where the associated companies are located, the general rule applies to them if they meet the criterion of ‘51% of the group's companies. Inactive companies are exempt from this rule, and holding companies may also be exempt depending on the circumstances. 

The date of the regulations coming into force coincides with the accounting periods starting from April 1, 2023, and later. The new rules for associated companies provide for a more complex ‘mutual control' test.

What are Associated Companies and Groups?

The updated lower and upper limits will be reduced depending on the number of companies that are associated with tax purposes. Also included are companies that are not based in the UK.

Companies are associated:

  • when one controls the other.
  • when both are under common control.

In a group of two companies, the upper and lower limits will be divided into two, which means that the profit level, at which the marginal rate is applied, can be more easily breached.

There are some crucial exceptions for companies that are not engaged in trade or business, as well as for passive holding companies.

If the companies are under common control, but there is no relationship of "significant commercial interdependence", they will not be considered associated.

We can provide an example to illustrate this:

Husbands and wives are related parties when paying taxes. At first glance, a company run by Mr Smith would be associated with a company run by Mrs Smith. Let’s imagine that Mr Smith is the director and sole shareholder of company X, which runs a restaurant, and his wife owns company Z and runs a store. The nature of these two businesses is commercially different. If there are no financial or economic ties between the companies, they are organisationally independent. Such companies are not considered associated.

Considerations on Claims Related to the Loss Carry Back

The Finance Act of 2021 introduced legislation providing for a temporary extension of the loss carry-back rules. This applies to trading losses incurred in the reporting periods ended between April 1, 2020, and March 31, 2022. 

These losses can be carried back three years and must first be compared with the profits for recent years before being carried back to earlier years. However, if losses are carried forward instead, the benefit can potentially be obtained at a maximum of 26.5% (when the profit falls within the range of marginal rates), and not at the level of 19%. Cash flow considerations related to carrying forward a loss should be taken into account when making decisions on the use of losses.

Impact on Business 

Here we look at the possible impact of the new rules on businesses, including civil society organisations. It is expected that this measure will have a significant administrative impact on about two million businesses that will need to be aware of the changes, even if they currently have no corporate tax obligations.

The introduction of a small profit rate means that approximately 1.4 million enterprises will still have either no corporate tax or a corporate tax of 19%. This will be the only time when businesses will get acquainted with the changes in rates and determine what corporate tax rate they should pay. Some enterprises will have to update their internal software systems. One-time implementation costs for the entire business are estimated at about £50 million.

In addition, there will be a slight administrative burden for companies that will make claims for marginal relief, especially in case of changes in the number of associated companies. 

The changes are expected to affect agents acting on behalf of enterprises and software vendors. HMRC (HM Revenue & Customs) does not have enough information to say whether agents or software vendors will increase fees, which will increase running costs as a consequence of this change. 

This measure will not have any impact on civil society organisations.

It is expected that the quality of customer service, in general, will remain the same, since this measure does not influence how businesses interact with HMRC.

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