In the world of business, tax rates can have a significant impact on financial decisions and planning. The profits of a company decide its rate for corporation tax. These rates can change from year to year. Understanding these changes is crucial for companies to make informed decisions about tax planning and optimize their financial positions. This blog article will explore recent changes to Corporation Tax rates and how companies can plan for the future.
Rates for Corporation Tax Years Starting 1 April
The rates for Corporation Tax vary depending on the profits a company makes. The government maintained the main rate at 19% for several years for non-ring fence profits. This is until they announced an increase to 25% for profits above £250,000 in the Spring Budget of 2021. On the other hand, for companies with profits of £50,000 or less, there is a small profit rate of 19%. In comparison, for companies with profits between £50,000 and £250,000, a tapered rate will apply, with the marginal relief gradually increasing the effective Corporation Tax rate. You can use the Marginal Relief calculator to determine the amount of relief that a company can claim on its Corporation Tax.
Changes in Tax Rates – 25% Small Company Rate
On 1 April 2023, the main rate of Corporation Tax will increase from 19% to 25%. This change in tax rates will affect businesses with accounting periods that straddle 1 April. This is because profits will be time apportioned. Businesses with profits of less than £50,000 will continue to be taxed at 19%, and for businesses with profits between £50,000 and £250,000, a tapered rate will apply.
Companies must plan for this change in tax rates, particularly for companies with a March year-end. In such cases, accelerating taxable profits before the period ends can result in lower tax rates. This happens because companies must pay tax 12 months earlier for profits generated before the company year-end than for those generated after. Therefore, companies should also take into account the cash flow implications of such difference in tax payment timing.
Losses are an essential consideration for companies. One can carry them forward to offset against future periods or carry them back for up to 12 months in certain circumstances. Thus, the extended loss carryback rules between April 2020 and March 2022 allowed a loss carryback for up to three years.
If a company is in a group with other tax-paying companies, a sideways loss relief claim can be made via group relief. When Corporation Tax rates are static, decisions regarding losses tend to revolve around cash flow. The reason is there are no significant tax benefit differences between the various options.
However, as the main rate of Corporation Tax has increased to 25%. The amount of tax payable varies depending on the decision made. Loss carrybacks and group relief claims for periods before April 2023 will result in 19% tax savings. On the other hand, carrying a loss forward after April 2023 will result in a 25% tax saving from those losses.
The decision of carrying forward losses will weight up against the cash flow impact to determine the best course of action. Companies that previously surrendered losses for tax credits, such as through the R&D scheme, should consider amending their claims within two years of the period end to save tax at 25% rather than 19%. However, this would require repayment of any previously received tax credits and factor in interest on underpayment of tax.
Impact of Recent Events on Corporation Tax
The year 2022 was a turbulent year for Corporation Tax. The tail end of the pandemic ran straight into the war in Ukraine. This contributed to the current uncertainty in the business world. In fact, The impact of these events on Corporation Tax is yet to be fully understood. However, tax rates and rules may likely continue to change in response to economic developments.
Companies should keep an eye on any further changes in Corporation Tax rates and plan accordingly. In particular, businesses with a March year-end should consider accelerating taxable profits before the period ends to take advantage of the current lower tax rates. Companies should also evaluate their loss carry back and carry forward options, as the increase in the main rate of Corporation Tax to 25% has significant implications for tax savings.
In conclusion, understanding changes in Corporation Tax rates is crucial for businesses to plan their financial decisions effectively. Companies can optimize their tax planning and maximize their profits by keeping up to date with the latest tax rate changes and evaluating the impact on their financial position. To know more about this changes, you can check the official guidance. In addition, if you like learning about similar topics, consider joining London School of Business’s BA (Hons) Accounting and Finance programme.