One of the biggest announcements in the Budget on 3 March 2021 was the news that the main rate of Corporation Tax will increase to 25% from 1 April 2023. Alongside this announcement was the introduction of a small profits rate of 19% to “provide protection to the smallest businesses”.

For those of us in tax who have been around long enough (like myself!), this allows us to hark back to the good old days of pre 2015 where we had two rates of Corporation Tax, Marginal Relief and Associated Companies, to worry about. The draft Finance Bill published on 11 March provides us with some key detail on what is proposed.

When do the rates apply?

When the rates apply will depend on the “augmented profits” of a company for the relevant accounting period. Broadly speaking, augmented profits are taxable profits plus any exempt distributions received (excluding dividends received from 51% subsidiaries).

The small profits rate of 19% will apply where augmented profits for the accounting period do not exceed the lower limit of £50,000.

The main rate of 25% will apply where augmented profits for the accounting period exceed the upper limit of £250,000.

For companies with profits in between these thresholds, tax is calculated at the main rate then Marginal Relief applies to reduce the liability.

Worked example

Let’s take a small standalone trading company (Company A) with augmented profits of £100,000. This is in between the £50,000 and £250,000 rates, so Marginal Relief applies.

The marginal relief is calculated as F x (U-A) x N/A, where:

F is the standard marginal relief fraction (3/200)
U is the upper limit
A is the augmented profits
N is the total taxable profits

In this example the tax liability would be as follows:

100,000 x 25% =                                                                                                        25,000
Less Marginal Relief 3/200 x (250,000-100,000) x 100,000/100,000               (2,250)
Corporation tax liability                                                                                           22,750

This means that the effective rate of tax on profits between £50,000 and £250,000 will be 26.5%.

Associated companies

The reintroduction of a two-rate system brings with it the reintroduction of the concept of associated companies.

Where a company has one or more associated companies, the upper limit of £250,000 and lower limit of £50,000 are divided by the number of companies.

The detailed definitions of associated companies are beyond the scope of this blog, however, broadly, two companies are associated where one has control of the other or where both are under the control of the same person or persons.

Taking the example above, let’s say that Company A has one associated company, Company B. The upper and lower limits would be reduced to £125,000 and £25,000 respectively.  On the same profits of £100,000 the corporation tax liability would be £24,625.

For small business owners with multiple ventures the news may therefore not be as good as initially thought.

Impact on deferred tax calculations

Companies preparing UK GAAP and IFRS balance sheets up to a date after which the Finance Bill has been enacted by law or “substantively enacted” will need to consider the increased rates when calculating their deferred tax provisions. Substantively enacted in the UK generally means when the Bill has passed the third reading in the House of Commons.

Get in touch

If you would like to discuss the impact of any of the points in this blog on your business, please feel free to get in touch with me or your usual Johnston Carmichael contact.