Corporation tax – what has changed?

Blog Corporation Tax

With one U-turn after another there have been several announcements about tax and, given the current political position, there may be more to come!

It has been difficult to keep up with the changing landscape and hard for businesses to plan, particularly in relation to Corporation Tax, so we let’s take stock and summarise the current position.

Companies making taxable profits below £50,000

Nothing changes. Corporation Tax rates remain at 19%.

But remember, taxable profits are not the same as accounting profits. Depreciation and other disallowable expenses (eg client entertainment) are added back to accounting profits, and capital allowances on fixed assets are deducted, to arrive at taxable profits.

Companies making taxable profits above £250,000

The situation for these companies is simple, profits will be taxed at 25%. A 6% increase on the previous rate.

Companies with profits between £50,000 and £250,000

These companies will pay a tapered rate of tax between 19% and 25%, supposedly to prevent there being a cliff edge between the 2 tax rates. What this means in reality is that profits under £50,000 are taxed at 19% and profits above that at a whopping 26.5%. Therefore, making profits in this margin is the worst case scenario.

Things to watch out for
  • The £50,000 and £250,000 limits are applied to associated companies. This is to stop businesses gaining a tax advantage by carving their trade into multiple entities. If companies are under common control (ie 51% or more of the shares are controlled by the same entity) they are deemed as associated.
  • If your financial year end isn’t the 31 March, then your profits will be split on a pro-rata basis and taxed at the old and new rates accordingly. Capital allowance claims will, however, be based on the date of purchase.
Planning points
  • If you are considering asset disposals, it would be sensible to do so before the new rates become effective on the 1st April 2023.
  • Make sure your profits lie in the correct period, understated work in progress or debtors could cost you an extra 7.5% in tax.
  • Time the purchase of assets carefully. You’ll have to consider what rate of tax you will be paying, and when, and juggle whether Super Deductions (If you don’t know what these are then give us a call) can be claimed prior to 31 March 2023.

As ever, the team are here if you want a bit of help with your tax planning.

Posted in Blog, Tax.