Introduction
After multiple policy U-turns and much uncertainty, the main rate of corporation tax rose from 19% to 25% from 1 April 2023, payable by companies with annual profits of £250,000 and over. Companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between the two limits being subject to a tapered rate.
All UK companies must pay corporation tax on the profits they generate, while the profits of non-incorporated businesses, such as sole traders and partnerships, are taxed via self-assessment.
Context around the measure
The April 2023 corporation tax rise was first announced by the then-Chancellor of the Exchequer, Rishi Sunak, in March 2021 during his Spring Budget. At the time, the Government’s fiscal policy had been to reduce the annual deficit and deliver “sustainable public finances” after Sunak signed off on £400 billion more spending than planned in 2020, owing to the Covid-19 pandemic.
The Treasury originally estimated the changes to corporation tax would increase tax revenues by an additional £17.2 billion per year by 2025/26, which, in documents accompanying the 2022 Autumn Statement confirmed the measure, has subsequently been upgraded to £17.9 billion per year by 2026/27. Despite the increase, the UK will remain the country with the lowest effective corporation tax rate in the G7.
How the taper will work
The mechanism for the taper is referred to as “marginal relief”, claimable by companies with annual profits between £50,000 (the “lower limit”) and £250,000 (the “upper limit”). These limits are proportionately reduced if the company’s accounting period is shorter than 12 months. The lower and upper limits are also proportionally reduced by the number of “associated companies” that the company has, arriving at “adjusted limits”.
Marginal relief is not available to a company that is non-UK resident or a close investment holding company.
Where a company qualifies for marginal relief, its corporation tax liability is calculated at 25% on its tax-adjusted profits, then the marginal relief available is subtracted. The calculation for marginal relief is as follows:
(UL – AP) × (TTP ÷ AP) × MRF
where:
- UL is the adjusted upper limit
- AP is the company’s “augmented profits” for the period. These are the company’s taxable total profits, plus any exempt distributions received from companies that are not 51% subsidiaries.
- TTP is the company’s taxable total profits for the period
- MRF is the standard marginal relief fraction, currently (3÷200)
A marginal relief calculator is available on the GOV.UK website, here: https://www.tax.service.gov.uk/marginal-relief-calculator
To explain some of the concepts introduced above:
- A company is an “associated company” of another company if one of the two has control of the other, or both are under the control of the same person or persons. This is wider than the concept of “51% group companies” that has applied in recent years, but represents a return to the approach that has historically applied. A company may be an associated company no matter where it is resident for tax purposes.
If, for example, a company has three other associated companies, the lower and upper limits are divided by four, reducing to £12,500 and £62,500, respectively.
- A “close company” is, broadly, a company which is controlled by its directors or by five or fewer participators. A close company will be a close investment holding company in an accounting period unless it exists throughout that period wholly or mainly for one or more ‘permitted reasons’, such as carrying on a trade, holding investments in subsidiaries, or lending money to or co-ordinating the administration of other group companies.
Typically, only close companies that are mainly pure investment companies, perhaps holding a portfolio of shares and securities or properties let out to connected parties, should be treated as CICs.
- The marginal relief fraction is calculated such the marginal relief provides a straight-line tapering of the company’s effective tax rate with profits between £50,000 and £250,000. A total 6% (i.e., 25% – 19%) tax rate increase must be achieved on the original £50,000 of profits, as profits increase over a £200,000 range, i.e., an increase of (£50,000 ÷ £200,000) × 6% per £1, i.e., (3/200).
Payment of corporation tax
The standard due date for a company to pay its corporation tax liability remains unchanged, at nine months and one day after the end of the accounting period. However, the return of the (wider) “associated companies” concept instead of “51% group companies” also applies when considering whether earlier payment is required, by quarterly instalments.
For instalment purposes, a company is treated as “large” where its tax-adjusted profits exceed a threshold of £1,500,000. However, as for the tax rate thresholds, this threshold is proportionately reduced by the number of associated companies.
Once this threshold is exceeded, the company’s corporation tax liability becomes payable by quarterly instalments. The first instalment is due for payment six months and 13 days after the start of the accounting period, then further instalments are due at three-month intervals. Assuming a 12-month accounting period, each payment should be for one-quarter of the expected total liability for the year. A one-year ‘grace’ period applies in most cases, such that the company becomes liable to pay by instalments once the profit threshold is exceeded for two or more consecutive years.
HMRC does not expect that the payment amounts will be exactly correct relative to the eventual final liability when the company’s tax computation is finalised, but calculations of appropriate payments should be based on the company’s best estimates at each payment date. Adjustments can be made to take account of the amounts of earlier payments such that, for example, the total of the first two payments is for one-half of the total expected liability.
Interest applies on any amounts either under- or over-paid, though typically with a rate differential of 1.25% in HMRC’s favour.
For “very large” companies, with tax-adjusted profits exceeding £20 million, earlier instalment due dates may apply.