Initially announced by PM Rishi Sunak back when he was Chancellor, subsequently reversed by his predecessor Liz Truss and re-instated by current Chancellor Jeremy Hunt, the political instability around whether the rate of Corporation Tax is going to increase has been immense. Alas, we now know the rate rise is indeed going to take effect from 1st April 2023 onwards.

Whilst the existing rate of 19% (to be termed the small profits rate [SPR]) will be retained for businesses earning taxable profits of £50,000 or less, the main rate will be 25% and apply to businesses with taxable profits above £250,000. For businesses with taxable profits between £50,000 and £250,000, the main rate will be applicable, but they will be eligible for a marginal relief such that the effective rate of Corporation Tax is 26.5% on profits between these limits.

The marginal relief can be computed as:

(3/200) x (Upper Limit-Taxable Profits) x (Taxable Profits/Augmented Profits) whereby the upper limit is £250,000 and the Augmented Profits include any Exempt ABGH distributions (dividends) from companies in which the business holds shares which aren’t classified as related 51% group companies.

The upper and lower limits are also time-apportioned for companies with accounting periods shorter than 12 months. The fact that chargeable accounting periods cannot exceed 12 months renders application to accounting periods over 12 months as N/A. Instead, the company is likely to have to view its single accounting period as being divided into 2 separate ones. One consisting of 12 months and another being the remaining period.

It is also important to note that the limits will also be apportioned for associated companies which encompasses a new set of rules coming into place by HMRC. Put simply, 2 companies are said to be associated if either:

-] they are controlled by the same person or group of persons; or

-] one company controls the other

Let’s look at an example of how the Corporation Tax (CT) liability will be computed for a business with taxable profits of £100,000 with no exempt ABGH distributions. Assuming a standard 12-month accounting period beginning on or after 1 Apr 2023, the initial CT due is £25,000 [25%*£100,000]. However, the company will be able to claim Marginal Relief which is calculated as follows:

(3/200) x (£250,000-£100,000) x (£100,000/£100,000) = £2,250

Hence, the final CT liability is £22,750 [£25,000-£2,750] which amounts to an effective rate of 22.75% [£22,750/£100,000] which can be cross-checked too. The first £50,000 should’ve been taxed at 19% yielding £9,500 whilst the second tranche of £50,000 should’ve been taxed at 26.5% yielding £13,250. The sum being £22,750.

Lastly, Marginal Relief cannot be claimed by non-UK resident companies, close investment holding companies or where augmented profits, including distribution from unrelated and non-associated companies, exceed £250,000.

To identify ways in which your business can plan its tax affairs in the optimal manner to minimize its Corporation Tax liability, contact Cheylesmore Chartered Accountants today. We can have a look at your existing tax planning procedures, if any, and advise on the effectiveness of these. Where no steps have been taken, we can encourage the uptake of reliefs and allowances which are on offer that will reduce the company’s total taxable profits.