The Finance Bill corporation tax rate provisions take companies back to 2015, but with a difference.
As expected, the Finance Bill includes provision for the main rate of corporation tax to increase to 25 percent with effect from 1 April 2023. The current rate of 19 percent lives on as the ‘standard small profits rate’, so called to distinguish it from the small ring fence profits rate which, however, also remains at 19 percent. The legislation dealing with the small profits rate and marginal relief, which was repealed with effect from 1 April 2015, is to be reenacted almost word for word, but with the key difference that the lower and upper limits, previously £250,000 and £1,250,000, are now set at £50,000 and £250,000 respectively. This difference is likely to mean that significantly more companies than in the past will be paying corporation tax at the higher rate, although the Government has estimated that around 70 percent of active companies will benefit from the small profits rate.
For those who need a reminder, the small profits rate applies only to companies with ‘augmented profits’ at or below the lower limit. Other companies will calculate tax at the main rate but, if their augmented profits are below the upper limit, will deduct marginal relief calculated by applying the ‘standard marginal relief fraction’ of 3/200 to the difference between the augmented profits and the upper limit. The ‘augmented profits’ are chargeable profits plus exempt distributions from non-group companies, and these exempt amounts are also excluded from the marginal relief calculation. Setting these complications aside, the calculation is equivalent to applying a marginal rate of 26.5 percent to profits between the lower and upper limits. As before, small profits relief is not available for close investment-holding companies. The new upper and lower limits, and the exclusion for close investment-holding companies, will now also apply to ring-fence profits.
The limits are reduced for accounting periods of less than a year and also where a company has one or more associated companies. For this purpose, from 1 April 2023, the previously repealed definition of ‘associated companies’ is also to be reenacted and, furthermore, is to be used in place of ‘related 51 percent group companies’ in the various other contexts in which that definition has applied since 2015. The definition of ‘related 51 percent group company’ will therefore be repealed.
A consequential point to note for larger groups is that for quarterly instalment payment purposes, groups of companies must currently divide the £1.5 million taxable profit limit for determining if a company is large (or the £20 million limit to determine if very large) between the number of ‘related 51 percent group companies’. For accounting periods beginning on or after 1 April 2023 the ‘associated companies’ rules will apply instead. Although the rules are similar, the ‘associated companies’ rules consider a broader definition of control than simply 51 percent share ownership and in some cases, this could push some group companies and borderline large/very large groups into making their tax payments earlier than they have done previously.
Also as expected, the Finance Bill provides for an increase in the rate of diverted profits tax to 31 percent from 1 April 2023.
As the rate increases will be substantively enacted once the Bill has passed all its stages in the House of Commons, deferred tax assets and liabilities on balance sheets prepared to a later date will need to be re-measured accordingly.
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