Group companies – Considerations ahead of the Corporation Tax rise

Corporation Tax (CT) rates are set to rise in the UK from 1 April 2023. From this date, the main rate of CT will increase to 25 per cent for all companies with taxable profits over £50,000.

Although the future of the CT rise is currently up in the air due to pledges made during the Conservative Party leadership contest, it is worth considering what impact this change could have on group companies.

Where a company’s profits for a year are above £50,000, but below £250,000, the company will be taxed at 25% but will benefit from Marginal Relief, which provides an additional deduction to reduce their overall tax rate to between 19% and 25%, based on their specific profitability.

These thresholds are reduced proportionally by the number of companies that are ‘associated’. So, where two companies are associated with each other, the thresholds for each company would be reduced to £25,000 and £125,000.

Companies are associated where one company controls the other, or both are under the control of the same person or groups of people. These rules apply to a company’s worldwide associations, regardless of their tax residency. However, the ‘associated company’ rules don’t apply where a company is:

  • Dormant
  • A passive holding company

The rules for tax payments will also be changing for periods commencing on or 1 April 2023.

Companies pay corporation tax nine months and one day after the end of their accounting period, unless they are considered to be ‘large’ or ‘very large’, at which point they must pay by instalment. The threshold for ‘large’ is £1.5 million, and the threshold for ‘very large’ is £20 million.

The instalments for ‘large companies are due payments in the 7th, 10th 13th and 16th month after the start of the accounting period (or 3rd, 6th, 9th and 12th month for ‘very large’ companies).

Under the current rules, these thresholds are reduced proportionally by the number of ‘51% related companies’ – basically companies that are in the same corporate group (and that are not dormant or passive holding companies). For periods commencing on or after 1 April 2023, the ‘51% related companies’ rule will be replaced by the much broader ‘associated company’ rule. So, where there are two companies controlled by the same person, the profit thresholds for corporation tax instalment payments will be reduced to £750k and £10m.

As the associated company rule looks beyond the corporate group to what companies are controlled by individuals (regardless of whether they are grouped), it is likely that a company will have more ‘associated companies’ than it had ‘51% related companies’, so more companies will be pushed into paying corporation tax by instalment.

The overall impact of this is that the first tax instalment payment for the next accounting period will be due before the tax has been paid in respect of the previous year, creating an unexpected charge.

With this being the case, careful advanced planning is required to make sure cash flow is not adversely affected by this complex change.

If you are struggling to get to grips with the changes to Corporation Tax next year, we can help. To find out more about our wide range of corporate tax services, please speak to us.

Posted in News, Newswire.