With effect from 1 April 2023, UK companies will be back in a corporation tax regime that includes 'tiered' rates - the exact rate of corporation tax on profits arising after that date will be governed by:
- the amount of profit arising; and
- the number of 'associated companies'
Single standalone companies will pay:
- 19% on profits below £50,000
- 25% on profits above £250,000
- an effective rate of 26.5% on profits falling between these thresholds*
Accounting periods which straddle the 1 April 2023 date will be split into two periods and the profits apportioned; profits attributed to the period up to 31 March 23 will be taxed at 19%; those apportioned to the period from that date will be taxed at the new rates.
The new 'small profits rate' of 19% means that the associated company rules are once more important in calculating the corporation tax due. Where the company in question has one or more associated companies, then the thresholds above are reduced by dividing by the number of associated companies. Where the accounting period straddles 1 April 2023, we are concerned with the number of companies associated at any time from 1 April 2023 through to the end of the accounting period.
A company is associated with another if one controls the other or if both companies are under common control. To determine 'control' of a company, it is necessary to look at shares held by a person and their associates - associates would include the individual's spouse, legal partner, ancestors, lineal descendants and siblings. Companies owned by associates of an individual will not however be treated as associated provided the relationship between the companies is not one of 'substantial commercial interdependence'.
Companies which are not UK resident may be counted as associated, irrespective of their tax residence.
Some group companies do not need to be treated as associated, including dormant companies and passive holding companies.
As well as determining the rate of corporation tax, associated companies also need to be considered for the purposes of the quarterly instalment payment regime, because the £1.5m, £10m and £20m thresholds are also to be divided by the number of associated companies. An accounting period straddling 1 April 2023 again has to be split into two notional periods.
Companies going into the large companies instalment regime from 1 April 2023 will be required to make their first instalment payment by 14 October 2023; those subject to the very large companies instalment regime would be due to make their first instalment payment by 14 June 2023.
Companies who may be impacted by the new regime could consider rationalising the number of entities in a group, perhaps to dissolve entities with negligible amounts of activity and/ or to consolidate activities within a small number of companies.
Contact us to discuss any matters discussed in this article.
*(25% on the entire profit, less marginal relief yields an effective rate of 26.5% on profits between £50k and £250k)