Plan ahead for upcoming corporation tax changes in 2023

Jeremy Hunt has announced that the UK corporation tax rate will still rise in 2023 in line with what Rishi Sunak had previously announced in his Autumn budget. Nearly all of Kwasi Kwarteng’s mini budget proposals have been scrapped, in the hope that these U-turns will stabilise the UK economy.

Along with the headline increase in corporation tax, there were also numerous measures announced which were designed to help the country recover following the COVID-19 pandemic.

Corporation tax rate and associated company rule changes

The rate at which corporation tax is charged is scheduled to increase from 1 April 2023. The rate will increase to 25% for companies whose taxable profits exceed £250,000. For companies with profits of less than £50,000, the current 19% rate will still apply.

Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate reduced by a marginal relief such that overall, they will pay on a sliding scale between 19% and 25%.

If companies are looking to dispose of chargeable assets within the next few years, they should consider bringing forward the date of the disposals to before 1 April 2023 in order to benefit from the lower rate.

Companies whose accounting periods end soon after April 2023 will pay a pro-rated corporation tax rate on a just and reasonable basis.

The upper and lower limits for taxable profits are reduced depending on the number of ‘associated companies’, the taxable profit limits being divided equally among all the associated companies.

Associated companies can be located anywhere provided they meet the ‘51% group company’ test.  Please note that dormant companies are exempt from this rule and holding companies may become exempt depending on the circumstances.

For accounting periods beginning on or after 1 April 2023, new associated company rules will be introduced which provide for a more complicated ‘mutual control’ test.

A review of the associated company position, post 1 April 2023 is recommended.

Quarterly instalments payments regime (QIPS)

The ‘QIPS’ regime will also be affected by the new associated company rules coming into force on 1 April 2023. The QIPS regime provides that ‘large’ companies should pay corporation tax in four equal instalments, on the fourteenth day of the seventh, tenth, thirteenth and sixteenth months following the start of the accounting period.

A company is ‘large’ for this purpose if taxable profits are over £1.5m. Where there are other 51% group companies this limit is divided by the total number of group companies. For growing companies, QIPs apply only in the second consecutive year that the company is large.

For large groups and growing entities, the above rule changes will be of notable consideration going forward.

By way of illustration:

Mr X owns Company A which has four 51% related group companies. He also owns Company B, a separate stand-alone company. Company A’s profits for the 12-month accounting period to 31 March 2023 are £275,000.

Under the current rules, the QIPs threshold will be reduced to £300,000 (£1.5m / 5) and Company A would not be deemed ‘large’.

Assuming similar profits in the period to 31 March 2024, Company B would be treated as an associated company (because there is mutual control) and reduce the threshold accordingly. The QIPS threshold will be reduced to £250,000 (£1.5m / 6) and Company A would be deemed ‘large’ for QIPs purposes.

Loss carry back claim considerations

Legislation was introduced in the Finance Act 2021 to provide a temporary extension to the loss carry back rules for trading losses. This applied to losses incurred in accounting periods ended between 1 April 2020 and 31 March 2022. These losses can be carried back three years and should be set against profits of the most recent years first before carry back to earlier years.

However, if losses are instead carried forward, relief could potentially be obtained at a maximum of 26.5% (where profits fall into the marginal rate band) as opposed to 19%. The cashflow considerations of carrying forward the loss should be factored into loss utilisation decisions.

Super deduction and Annual Investment Allowance

Within the Spring Budget of 2021, a super deduction capital allowance scheme was introduced. For additions acquired between 1 April 2021 and 31 March 2023, companies can claim 130% first year relief on main pool qualifying assets and 50% first year relief on special rate pool qualifying assets. This represents a huge increase on the 18% and 6% respectively, that would normally be available.

For companies with a year-end straddling April 2023, the super deduction will be pro-rated.

It has recently been announced by Jeremy Hunt that the proposed changes to keep the Annual Investment Allowance ‘AIA’ at £1 million from 1 April 2023 will remain intact.

Companies planning to undertake significant capital expenditure in the coming years should consider bringing these projects forward to maximise the benefits of the super deduction schemes.

We would be happy to assist you in evaluating the best course of action.

R&D tax relief expansion

There are 3 major changes to the R&D tax relief legislation which will take effect from 1 April 2023:

1. The R&D qualifying expenditure will now include data and cloud computing
2. A potential restriction on the inclusion of costs incurred outside the UK for UK R&D claims
3. An expansion of targeted anti-avoidance measures to counter exploitation of the R&D tax relief regime.

The probable restriction of overseas costs will mainly affect entities which have their main development centres located outside the UK as the overseas costs may no longer qualify.

However, the inclusion of cloud computing and data development costs as qualifying expenditure in R&D claims would be welcome news to many data related entities.

Further details about the R&D legislation and the additional anti-avoidance measures will be issued by the government in the coming year.

Businesses will need to consider the potential impact of these changes on their R&D claims to ensure compliance and to maximise any claim, for example, relocating certain R&D activities to the UK.

Please do not hesitate us if you need any further advice in this respect.

Contact us for further guidance

If you would like more advice on how these tax changes could affect you, or would like to discuss any further tax matters, please get in touch with Alison Conley or Nicholas Hayward. Alternatively, you can get in touch with us here or contact your usual MHA advisor.