Preparing for the new rates of Corporation Tax – 19%, 25% and 26.5%

Greg Sutherland

Greg Sutherland

Tax Director

Whist there was (briefly) some doubt in the Autumn of 2022, the main rate of Corporation Tax will, from 1 April 2023, increase to 25%, although the effective 19% rate will continue to apply to the smallest UK companies.

Typically, the rate payable by a company will depend on either;

  • the number of “associated companies” it has (together with its level of profits), or;
  • if the company is a Close Investment Holding Company (CIHC). 

CIHCs are taxed at 25% irrespective of their size.

This article picks out some aspects relating to associated companies, the timing of Corporation Tax payments and the concept of Close Investment Holding Companies. 

The general rules from 1 April 2023

Broadly, where taxable profits are earned post 1 April 2023, the small profits rate of 19% will be chargeable should the company’s taxable profits fall below £50,000 per annum. 

The Corporation Tax main rate of 25% will typically apply if taxable profits are over £250,000 per annum, with “marginal relief” available where the profits are between these amounts.

In effect, the Corporation Tax rate between the two thresholds of £50,000 and £250,000 is 26.5%.

The thresholds are prorated depending on the length of the accounting period and/or the number of associated companies. There are always exceptions to general rules which include CIHCs and where the receipt of dividend income can alter the application of the £50,000 and £250,000 thresholds. Our Budget 2021: Corporation Tax Changes article shows how “marginal relief” works explains the difference between taxable profits and “augmented” profits.

Associated companies

If a company has one or more “associated companies”, then the thresholds are divided by the total number of associated companies.

The general rule is that a company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons. This includes non-UK resident companies but excludes dormant and some "passive" entities.

The rules adopt a wide definition of control, such that companies not in the same corporate group may still be “associated” for these purposes. 

There are other ways in which companies may be “associated” with each other. For example, the rights of certain related individuals (say, spouses) may also be amalgamated to determine if there is common control of two (or more) companies. This can apply where the companies are “substantially commercial interdependent”. A common example could be where a spouse’s trading company rents a property owned by the other spouse’s company. 

Acceleration of tax payments

“Large” and “Very Large” companies are required to accelerate their payment of corporation tax through the Quarterly Instalment Payment (QiP) regime – the Very Large making their companies’ payments even earlier than the Large companies.

Under the new rules, the thresholds for determining whether a company is Large or Very Large are also divided by the number of associated companies, in a similar way to the reduction of the thresholds set out above in relation to the rate of Corporation Tax.

The “associated companies” definition replaces the narrower “51% related companies” definition. This means more companies will fall within the QiPs regime and some companies may now be regarded as “Very Large” when previously they were only “Large”.

Reintroduction of Close Investment Holding Companies (CIHC)

When the Corporation Tax main rate increases from 1 April 2023, the small profits rate and marginal relief discussed above will not be available for CIHCs. Instead, CIHCs will be subject to the main 25% rate of Corporation Tax, regardless of their levels of augmented profits.

A close company includes any company which is under the control of five or fewer shareholders or a company with any number of shareholders, if any shareholders are also directors. HMRC’s guidance outlines that all close companies are CIHCs, unless they exist for the purposes of:

  • Carrying on a trade or trades commercially, or;
  • Investing in land, estates or interests in land for commercial letting to unconnected parties, or;
  • Certain other group administrative coordination/investment activities, where, broadly, the activities of the other companies fall within the above.

Letting to connected parties

As outlined above, the small profits rate and marginal relief will only be available for property businesses where this consists of commercial lettings to unconnected parties.

A parent company (owning a property) with a trading subsidiary is a common corporate group structure. There are often good reasons why land and buildings are held separately from the trading business. This could be to protect the property if the trading business were to fail, or it could be a requirement of lenders to protect their security.

If the parent company rents the property to the trading subsidiary, then the parent company will likely be regarded as a CIHC and will therefore be taxed at 25%, irrespective of its level of profits. 

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The consequences of increasing the headline Corporation Tax rate are normally straight forward – an increased level of tax will become payable.

However, whilst the maintenance of the small companies’ rate of 19% is beneficial to smaller companies, it does create an additional compliance burden and some “not so obvious” knock-on consequences:

  • The wide definition of “associated” companies.
  • The potential acceleration of corporation payments.
  • Inability to benefit from the small companies’ rate of 19% (or marginal relief) if the company is a Close Investment Holding Company.

This is not an exhaustive list of the application of the rules which will come into effect on 1 April 2023. 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.

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