The return of two Corporation Tax rates

In March 2021 it was announced that from 1 April 2023 the rate of corporation tax would increase to 25%, however companies with profits below £50,000 would continue to be taxed at 19%. A tapered rate would operate on profits above £50,000 such that only businesses with profits of £250,000 or more will be taxed at the full 25% rate.

The £50,000 lower limit, and £250,000 upper limit will be apportioned according to the number of companies that are associated for corporation tax purposes. They will also be apportioned for short accounting periods of less than 12 months.

HMRC are yet to publish guidance on the new rules, their guidance remains in place in respect of the old rules that were in place before 1 April 2015 in respect of both associated companies and marginal relief.

The previous legislation on companies with small profits was contained in the Corporation Tax Act 2010 (“CTA10”) Part 3, this has now been re-written into Part 3A.

Associated Companies

In the press release announcing the 25% rate the following statement was made:

Broadly, a company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:

• one company has control of the other
• both companies are under the control of the same person or group of persons

There is one key difference between the old rules and this statement, under the old rules companies were associated if there we under common control at any point within an accounting period, the preceding 12 months did not come into it.

Of course, this could just have been a hastily drafted press release meant to suggest you look back over the 12 months from the end point of an accounting period, but if this statement holds true in the yet to be published guidance then a companies ownership/control from 1 April 2022 may impact a companies corporation tax rate from 1 April 2023.

The updated legislation defining associated companies is at CTA10 s18E, this does not mention the preceding 12 months, it sates:

18E Associated companies

(1)     For the purposes of section 18D, a company is another company’s associated company in an accounting period if it is an associated company (see subsection (4)) for any part of the accounting period.

(2)     The rule in subsection (1) applies to each of two or more associated companies even if they are associated companies for different parts of the accounting period.

Hopefully this anomaly is cleared up when HMRC updates its guidance for the new rules.

The commercial interdependence rules previously found in s27 are now in s18G. These broadly enabled us to ignore companies under the control of an associate (such as spouses) if there was no commercial interdependence, the new section title refers to “partners” rather than “associates”, other than that its wording is identical, at this point this relaxation appears to remain in place.   

Marginal Relief

The marginal relief calculation is set out in CTA10 s18B as follows:

The corporation tax charged on the company’s taxable total profits of the accounting period is reduced by an amount equal to—

(F x (U – A)) x (N/A)

where—

F is the standard marginal relief fraction,

U is the upper limit,

A is the amount of the augmented profits, and

N is the amount of the taxable total profits.

The marginal relief fraction for financial year 2023 has been published as 3/200. Augmented profits are the company’s taxable total profits plus any exempt distributions received from companies that are not 51% subsidiaries or a quasi-subsidiary (ie held through a consortium).

If you require any assistance in relation to this or any other matter please get in touch.

Jim Calverley ATT – 10th March 2022