Following on from the announcements in the Budget concerning the taxation of companies going forward, we have been looking at the practical impact of this and the options available.
With effect from 1 April 2023, for trading companies with taxable profits of less than £50,000, the rate will remain at 19%. For those with profits over £250,000 the rate will be 25%.
The problem area will be the marginal position for profits between £50,000 and £250,000. These will become subject to a marginal rate which will be more expensive. The effect of the marginal rate in this area will be as follows. The tax paid by a company with £50,000 profits at 19% will be £9,500. At £250,000 profits at 25% it will be £62,500. So in the marginal band in between those profits, tax will increase gradually through the band by £53,000 over the span of £200,000 profits. This gives an effective rate in that band of 26.5%. So a company with taxable profits of £100,000 will be paying corporation tax at a rate of 19% on £50,000 and 26.5% on the other £50,000.
So keeping profits below £50,000 will be greatly beneficial where appropriate and we will be available to discuss options to achieve this.
The marginal rate band also brings the return of the ‘associated company’ issue. In general terms it means that for corporation tax purposes, companies considered to be under common control are treated as one for corporation tax purposes. So, if you have five associated companies, that lower limit of £50,000 becomes £10,000 for each company. This means the higher tax rates will be reached much sooner. Those with a number of companies under control may wish to reconsider the current structures they have.
‘Super’ Deduction for Plant and Equipment
The Budget included a new ‘super’ deduction for expenditure on plant and equipment from 1 April 2021 to 31 March 2023. It gives a 130% allowance on expenditure on new equipment purchases (not second-hand items) which previously would attract a 100% Annual Investment Allowance.
The indication is that there is an incentive to companies to invest in new equipment but there is something that needs to be taken into account by those with profits which will be above £50,000 from 1 April 2023. For a company below £50,000 a purchase of equipment of say £10,000 would give a ‘super deduction’ of £13,000 which at 19% gives tax relief of £2,470. If that purchase is delayed until after 1 April 2023 and the company is a 25% taxpayer, assuming the Annual Investment Allowance is still available, the deduction would be £10,000 which at 25% gives a higher tax relief of £2,500. That may not be much of a difference but if the company was to fall in the marginal rate of 26.5% then the tax relief would be £2,650. So that may not be as much of an incentive to bring forward capital expenditure earlier than necessary as it may first appear.
For the period between 1 April 2020 and 31 March 2022, companies will be allowed to carry back tax losses for three years rather than the previous one year. The losses must be offset against the latest year first. The practical position on this again relates to the upcoming change in tax rates.
A company with a £50,000 loss in the year to 31 March 2021 would be able to offset all of that as long as there had been sufficient taxable profits in the previous three years. The tax relief would be at 19% giving £9,500. However, if there were profits of £100,000 in the year to 31 March 2024 and losses had been carried forward instead of carried back, they would remove the profits of £50,000 taxable at the marginal rate of 26.5% giving tax relief of £13,250. If profits had moved into the 25% area it would be £12,500. So care must be taken in weighing up the benefit of an early cash benefit with that of receiving a higher rate by carrying forward losses for a period. Other matters to take into account would be profits between 1 April 2021 and 31 March 2022 which would use up some of those carried forward losses, and also accurately predicting future profits, but there are options there to use the losses in the most beneficial manner.
If you have any questions on planning your company tax in the coming year, please contact us.
March 15th, 2021