How will the Corporation Tax change impact your business and what you can do to mitigate it
Corporation tax rates are changing for corporation tax years starting on 1 April 2023. From 1 April 2023 the rate of corporation tax is set to increase to 25% from 19%.
The 25% corporation tax rate only affects companies with profits of £250,000 and over.
Nevertheless, we still recommend that all companies and other organisations which are subject to corporation tax should make sure they understand how the changes will affect them and consider if there are legitimate and practical steps which can be taken to mitigate the increase.
The current corporation tax rate of 19% generally applies to all companies whatever their size and no matter the amount of profits. From 1 April 2023, there will no longer be a single corporation tax rate for most company profits.
From 1 April 2023, the 19% rate will cease to apply and will be replaced by variable rates ranging from 19% to 25%.
Basically, from 1 April 2023:
- A small profits rate of 19% will apply to companies whose profits are equal to or less than £50,000.
- The main corporation tax rate is increasing to 25% and will apply to companies with profits in excess of £250,000.
- Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25% reduced by marginal relief. The marginal relief acts to adjust the rate of tax paid gradually increasing liability from 19% to 25%.
Is there anything which businesses can do to mitigate the increase?
Whilst it’s safe to say that for many companies and organisations, tax will be increasing from 1 April 2023, there are measures which companies can take to reduce the amount of corporation tax they have to pay. These measures might include:
- Crystallising gains, for example by appropriating property from stock to fixed assets or appropriating property from stock to stock in another group company to crystallise a tax charge;
- Changing or shortening your accounting period;
- Advancing revenue;
- Delaying payments such as bonuses, remuneration or other large, planned expenditure.
These steps can be complex and what might be appropriate for one business will not be suitable for another so it’s important to take professional advice. Here are some things which it is worth considering over the next few weeks to help you and your company be best prepared:
Where a company disposes of a capital asset at a gain, for example land and property, certain shares and other assets, that gain is subject to corporation tax.
Where it is possible to crystallise gains before 31 March 2023 this could have the advantage of the gain being subject to tax at the current 19% rate rather than 25%.
This might be achieved for example by appropriating property from stock to fixed assets or appropriating property from stock to stock in another group company to crystallise a tax charge.
Change your year end
If your business has cyclical profits and/or is going to realise a large gain in an accounting period that will straddle 1 April 2023, it might be worth changing the company’s year-end.
If the company changed its year end to 31 March 2023 it would pay tax at 19%.
Shorten your accounting period
If the company is forecasting a large gain prior to 31 March 2023, it might we worth shortening the accounting period.
Companies can shorten their accounting period ends more frequently than extending their year-end date. This will bring forward the filing date of the accounts and tax computation/return and the tax payment date though, so needs to be considered carefully.
Bring revenue forward
The ability to advance revenue and profits prior to 1 April 2023 to take advantage of the current 19% tax rate is of course governed by accounting standards and it goes without saying that the company’s accounts should reflect a true and fair view of a company’s profitability and match/accrue for future obligations in relation to delivering those revenues.
However, you could consider if any contracts are able to be concluded, completions brought forward, or the economic risks or rewards of goods sold being transferred before 31 March 2023 which might achieve the effect of advancing the related profits.
Delaying bonuses, remuneration or other large, planned expenditure
Depending on when the company pays expenses such as bonuses, remuneration or pension payments, it might be prudent for these to be delayed.
As these items are deductible from taxable profits as a trade expense, by delaying these payments to after 1 April 2023 the company could save 6% of tax relief against the increased rate.
Companies who have upcoming projects or planned expenditure could consider delaying commencement and pushing related costs into the next accounting period to save tax at the higher rate, although this of course should be considered alongside the commercial pros and cons of any delays.
Get in touch
If you would like to discuss how the corporation tax change will affect your company and what steps you might legitimately take to mitigate your tax bill, please contact a member of our team.
The information was correct at time of publishing but may now be out of date.