From 1 April 2023 the headline rate of corporation tax is scheduled to increase from 19% to 25%. Profits up to £50,000 will continue to be taxed at 19%; profits between £50,000 and £250,000 will be taxed at 26.5% (due to the way ‘marginal relief’ works) and profits over £250,000 will be taxed at 25%.
Although these rates do not kick in until 1 April 2023 they will have an impact in respect of many accounting periods starting over the coming months. An accounting period straddling the 1st April 2023 will be time apportioned with the company paying tax on the profits for the apportioned period post 1st April 2023 at the new rate.
Accelerating profits to pay tax sooner does not always feel logical, but with the tax rate increasing to 25%, £100,000 of additional profit will suffer £25,000 of tax after 1 April 2023 compared to £19,000 of tax before that date. This is a tax rise of over 30%. For profits that are in the marginal band then the tax bill increases from £19,000 to £26,500, which is a rise of nearly 40%. It may therefore make commercial sense to accelerate profits where possible to take advantage of the lower rate of corporation tax currently in operation.
Whether profits can be accelerated will depend on a combination of accounting treatment and the commercial position so will not be possible in all circumstances.
There are certain transactions which involve transferring assets (particularly property) from trading stock to fixed assets where the timing of the transfer could have a significant tax impact. If you have assets that potentially fall into this category further advice should be sought from your usual contact.
Whilst accelerating profits will attract tax at the lower rate of 19% the flip side is deferring expenditure in order to obtain tax relief at 25% post 1 April 2023. Capital expenditure is unlikely to fall into this category because of the availability of the super deduction capital allowance which uplifts capital expenditure to 130% of the cost price (this broadly equalises the tax saving between the 19% and the 25% rates). The super deduction will cease to be available from 1st April 2023 so delaying capital expenditure is unlikely to achieve any significant tax saving.
There are though other types of discretionary expenditure such as repairs and bonuses which it may be feasible to defer beyond 1 April 2023.
In some cases it may be worth amending accounting periods to ensure that the two rates are clearly segregated and there is no requirement for a blend of pre and post 1 April 2023 rates. This may be particularly relevant if your business is seasonal and profits fall naturally in the pre 1 April 2023 period.
Written by Nick Donohue, Head of Tax at RPG Chartered Accountants
For further information about how this may impact your business, please speak to your usual RPG contact on 0161 608 0000 or email info@rpg.co.uk .
Published July 2022– please do not rely on this document alone and seek advice to take into account your own circumstances.
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