New Corporation Tax Changes for Associated Companies: Understanding the Impact and Mitigation Strategies
Published 10th April 2023
This article discusses the increase in the primary rate of corporation tax to 25% from April 2023, as well as the implications for associated companies and strategies to mitigate the impact.
Corporation Tax Changes from April 2023
On 1 April 2023, the primary rate of corporation tax rates in the UK increased to 25% for companies with taxable profits exceeding £250,000. This change signifies a substantial rise from the current rate of 19%. It will significantly impact the financial planning of businesses across the country.
However, the increase will not affect all companies equally. For those with profits between £50,000 and £250,000, a sliding scale of tax rates will be applied, ranging from 19% to 25%. Companies operating within this profit range will pay a proportionately lower tax rate.
One critical aspect of these changes is the division of taxable profit limits among associated companies. If a company has one or more associates, the £50,000 and £250,000 thresholds will be divided equally between them. Thus, the more associates a company has, the lower its thresholds become, potentially pushing it into a higher tax bracket.
For companies with accounting periods straddling 1 April 2023, the profits will need to be apportioned on a pro-rata basis. This division will enable a fair calculation of the tax due under pre- and post-April 2023 rates.
Understanding Company Associations and Control
In the context of corporation tax, 'associated companies' are those under the control of the same person or persons. Control, as defined by the legislation, refers to the power to exercise, or the ability to exercise, direct or indirect control over a company's affairs. This control can be based on ownership of share capital or voting power.
Notably, in determining control, the rights and powers of specific other individuals may be attributed to a person. For example, the rights of a child under 18, a spouse or civil partner, or the rights of a company controlled by a person can be attributed to that person.
Despite the rigid definition of control, the Finance Act 2021 Schedule 1 provides certain exemptions for company associations. This provision allows more flexibility in specific scenarios and helps avoid unnecessary tax complications.
Impact of Corporation Tax Changes on Associated Companies
Being associated with another company can significantly impact a firm's tax liability. For businesses making profits below the upper thresholds, the tax burden seems more substantial due to the division of thresholds among associates. This results in these companies potentially paying more tax than if they were not associated.
Furthermore, these changes can affect potential investors, who might see less benefit in acquiring majority ownership of associated companies due to the increased tax liability. The related company rule may also deter large businesses from splitting up to take advantage of lower tax rates.
The increased tax rate can significantly affect companies at lower profit levels if they are associated with each other, as their profits may push them into the higher corporation tax bracket.
Mitigation Strategies for Associated Companies
To mitigate the impact of these tax changes, associated companies could consider merging to reduce the number of associates required to share the CT thresholds. However, this strategy should be carefully evaluated as it could have other tax and business implications.
If unsure about associated companies or control of a company, businesses should seek professional advice. Enhanced relief could also be considered to ensure associated businesses do not pay more tax than un-associated businesses.
Moreover, making the correct tax calculations and disclosures for associated companies on the CT return is crucial to avoid penalties.
Conclusion: Navigating Corporation Tax Changes
Understanding the changes in Corporation Tax and the impact on associated companies is crucial for businesses to plan their financial strategies effectively. Given the complexity of these changes, seeking professional advice is highly recommended.
At Hammond Barr, we offer expert accountancy services to ensure your business navigates these changes efficiently. Our team of Stevenage based AAT-qualified technicians provides comprehensive support to help you manage your tax obligations proactively.
Let us guide you through these changes to optimise your business's financial health.
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