In the Spring Statement, the Chancellor confirmed that Corporation Tax will increase to 25% from 1 April 2023. This will raise around £18 billion a year and is seen as a down payment on the Government’s medium-term fiscal plan.
In this article, Amy Crosby, Director of Corporate Tax at HW Fisher outlines what these changes will mean for companies and what businesses should do to prepare ahead of 1 April 2023.
Who will be impacted?
Corporation Tax will increase to 25% from 1 April 2023, affecting companies with profits of £250,000 and over. Companies with profits up to £50,000 will continue to pay Corporation Tax at 19%, with profits between these two figures being subject to a tapered rate.
When will businesses be required to pay?
There will also be changes to Quarterly Instalments Payments ‘QIPs’ as the definition of an associated company has been updated. The new definition will come into force on 1 April 2023. As a result, more companies are likely to have associates for the purposes of Corporation Tax and therefore additional companies will fall within the QIPs regime. ‘Large’ companies should pay Corporation Tax in four equal instalments, on the fourteenth day of the seventh, tenth, thirteenth and sixteenth months following the start of the accounting period. A company exceeding £1.5m of taxable profits is deemed large.
Financial year straddle
For accounting periods which straddle the 1 April 2023, they will be split and deemed to have two separate parts –
This means profits for the year will need to be apportioned on a time basis. For example, a company with a 31 December 2023 year-end, 3 months’ profits will be allocated to the first period and 9 months to the second period.
The lower (£50,000) and upper (£250,000) limits –
Control means they can exercise direct or indirect control over the company’s affairs or can acquire the power in future. It is, but not limited to, being entitled to or entitled to acquire in future –
The legislation further provides that there may be attributed to any person all the rights and powers of any associates unless the exclusion provisions apply.
The associates of a person include any relative or partner of the person – this means spouse/civil partner, parent or remoter forebear, child or remoter issue, or brother or sister. It appears that husband and wife remain associates even though they may be living apart. The definition does not include an uncle, aunt, nephew or niece but does include a grandparent or grandchild.
However, when determining whether a person (P) has control of two companies (A and B), HMRC do not take into account the rights and powers of P’s associates (including spouses and business partners) unless there is ‘substantial commercial interdependence’ between the companies (A and B) in question.
Worldwide companies are included; therefore, an overseas company can be an associated company. The only exclusion would be if the company was dormant (overseas and UK).
Companies that join or leave during an accounting period will be counted as associated, because they have been associated at some point during the accounting period.
This is a significant change from the current rules whereby only companies which are in the same accounting group are associated.
Are capital gains subject to Corporation Tax?
Yes, capital gains are subject to Corporation Tax and a disposal of property would give rise to a significant capital gain. For tax purposes, the date of disposal for the property is generally the date that contracts are exchanged.
Capital gains are apportioned evenly over the accounting year-end. Therefore, where an accounting period straddles 1 April 2023, the gain will need to be time apportioned, as illustrated below –
|Accounting year end||Date of disposal||Treatment|
|31 December 2022||Any time in the AP||Gain is taxed at CT rate of 19%|
|31 March 2023||Any time in the AP||Gain is taxed at CT rate of 19%|
|31 December 2023||Any time in the AP||Gain is time apportioned –
3/12 of the gain is taxed at 19%
9/12 of the gain is taxed at 25% or their marginal rate
Amy explains: “If your company is considering a disposal that will give rise to a capital gain and the accounting period ends on 31 March 2023 or before, we would advise you to sell in this accounting period, to avoid their gain being charged at the higher CT rates (25% or marginal rate). However – if a company’s accounting period straddles 1 April 2023, it should consider disposing of the capital asset (e.g., property) before 1 April 2023 and shortening the accounting period to 31 March 2023. Please note that shortening a company’s year-end can have other impacts on its affairs and the decision should be considered carefully before proceeding.”
“Other irregular items of income would work in a similar way – so if a large item of income is receivable prior to 1 April 2023, it may be preferable to shorten the company’s period of account to 31 March 2023 to tax this at 19% rather than a hybrid rate.”
To discuss your individual circumstances, please get in touch directly.