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Although it is anticipated that not many companies will need to pay tax at the new headline corporation tax rate, it is important to be aware of the proposed changes, if they go ahead when the new Prime Minister takes office.

How is corporation tax changing?

UK trading companies currently pay corporation tax at the rate of 19% on their taxable profits. However, for the financial year commencing 1st April 2023, the main corporation tax rate is set to increase to 25% where profits exceed £250,000. This rate will also apply to many investment companies.

A new ‘small profits rate’ of corporation tax of 19% will apply where profits are £50,000 or less.

For companies whose profits range between £50,000 and £250,000, they will pay tax at the main rate of 25%. This will be reduced by a marginal relief providing a gradual increase in the effective corporation tax rate. The practical impact of this is that profits in the margin (falling between the upper and lower limits), will pay an effective rate of tax of 26.5%.

What are associated companies and groups?

The new upper and lower limits will be reduced in proportion to the number of companies which are associated for tax purposes, and this includes companies not based in the UK.

Companies are associated when:

  • one has control of the other; or
  • both are under common control

A group with two companies will see the upper and lower limits divided by two, meaning the profit level at which a marginal rate will apply could be more easily breached.

However, there are some important exclusions for companies that do not carry on a trade or a business, and for passive holding companies.

Where companies are under common control but the relationship between one or more companies is not one of ‘substantial commercial interdependence’, they will not be treated as associated for the purpose of the new rules.

For example, husbands and wives are connected parties for tax. On the face of it, a company run by Mr A will be associated with a company run by Mrs A.  However, if Mr A is the director and sole shareholder of Company A which operates a shoe shop and his wife runs a restaurant through Company B, the nature of the two businesses is completely different commercially. Provided there are also no financial or economic links between the companies, and they are organisationally independent, they are not associated for these purposes.

When do I need to prepare for the corporation tax changes?

For companies who have group structures – or where the common control issue is relevant – the associated company issue should be considered as soon as possible in case any planning is required to mitigate any future tax increases.

For tips about what you can take to prepare your business for these challenging times, please click here.

Need advice about corporation tax?

TaxAssist Accountants can help with the preparation of company accounts, company tax returns and corporation tax calculations as well as providing advice on tax planning that may benefit you and your company. To find out more about our services and to book a free consultation, call 0800 0523 555 or fill in our online enquiry form.

Date published 7 Jul 2022 | Last updated 22 Jul 2022

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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