Corporation Tax’s journey back in time
Whilst borrowing might be at £355bn this year, the Chancellor chose to forego any drastic changes that could put an increased strain on taxpayers’ wallets in this year’s Budget in favour of focusing on protecting livelihoods and jobs.
Of course, there was one quite large exception to that rule which drew the eyes of businesses across the UK; the increased rate of Corporation Tax to 25% from April 2023.
Many took a sharp intake of breath at that announcement, even with recent leaks, with a view that large businesses were effectively footing the bill for the pandemic.
At the same time, many could argue that it’s a logical move in that this is a tax on business profits and if you’re making a profit then you’re likely doing reasonably okay given the circumstances.
The UK also still has the lowest Corporation Tax rate in the G7, so is still competitive in terms of being an ideal place to conduct business.
So how will this all work in practice?
The unified rate of 19 percent won’t actually change until 1 April 2023, when it will be increased to 25 percent for companies with profits in excess of £250k. Smaller businesses are protected in that their rate stays the same as long as they earn less than £50K.
The issue is the gradual increase on those in-between those two figures, as at some point 19% inevitably has to become 25% so there’s a penal rate. This means those long-forgotten marginal relief calculations are likely making a comeback.
So, we’re back to the old days of thinking where do you allocate your group relief to, how do you work with your management to reduce the incidence of tax, and making sure the effective rate of Corporation Tax across your group is as good as possible.
It’s not the only turning back of the clocks either, the limits are divided by the number of associated companies, and by definition, these are also back to the old rules.
They now cover any company that is controlled by a person, the same person or controlled by the number of the same persons, so be prepared to go back to debating between associates and shareholders on exactly who owns what.
The largest throwback has to be the enhanced ability to carry back trading losses. What was previously allowed was a carry back for one year without limit, which can now be extended a further two years up to £2m – with a similar extension for unincorporated businesses.
It only applies to profits against the same trade, but either way, it could mean that if you’re in a difficult position you can enhance your carry back claims to a level from almost ten years ago, and hopefully achieve additional cash flow benefits.
The one thing that maybe isn’t quite so much a blast from the past is the potential impact on how colleagues are compensated for their work.
Historically, over the last ten years or so the idea has always been that a salary is best topped up by a dividend, but with increased Corporation Tax on said dividends, it might be wise to revisit some of those calculations.