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New Corporation Tax & Associated Company Rules: A 2023 Update for UK Businesses

15 July 2021

As announced in the Budget earlier this year there will be two rates of Corporation Tax from 1 April 2023. When the new rules take effect, taxable profits up £50,000 will continue to be taxed at 19% under the new Small Business Profits Rate.

With the latest Budget announcement, the landscape of Corporation Tax in the UK is poised for significant changes from 1 April 2023. These updates not only introduce new tax rates but also highlight the importance of understanding associated company rules for businesses. Grasping these changes is crucial for effective financial planning and compliance.

Key Changes to Corporation Tax Rates:

Starting 1 April 2023, Corporation Tax will see a dual-rate system based on your company’s taxable profits. Here’s a straightforward breakdown:

  • For Small Businesses: Profits up to £50,000 will continue to enjoy a lower tax rate of 19%, under the new Small Business Profits Rate.
  • For Larger Profits: Any profits exceeding £250,000 will be subject to a higher rate of 25%.

These changes aim to support small businesses while ensuring larger enterprises contribute a fair share to the national budget.

What Does This Mean for Your Business?

Associated Company Rules Come into Play

The introduction of these tax rates makes understanding the rules around associated companies more important than ever. An associated company is essentially one that is either controlled by another company or both are under the control of the same person or persons. This definition is vital as it affects your tax calculations.

Impact on Taxable Profits

For profits falling between £50,000 and £250,000, a marginal tapering relief applies. However, this relief is adjusted based on the number of associated companies you have and is also influenced by your accounting period’s length.

Division of Thresholds

The £250,000 threshold for the higher tax rate is divided by the total number of associated companies. For instance, if you have one associated company, both your business and the associated entity would face the main 25% Corporation Tax rate at £125,000 of profits each—half the usual threshold.

Illustrating the Impact

Consider two scenarios to understand the practical implications:

  • Scenario 1: A single company with no associated entities makes £260,000 in profits. It pays 19% tax on the first £50,000 and 25% on the remaining £210,000.
  • Scenario 2: Two associated companies each making £130,000 in profits would both hit the 25% tax rate much sooner, at £125,000, due to the division of the threshold.

Navigating the Changes

It’s important to note that the definition of an associated company is broad, encompassing companies globally, as long as they meet the control criteria. Planning and consultation with a tax adviser can ensure that your business not only complies with these new Corporation Tax rates and associated company rules but also optimises its tax position.

By familiarising yourself with these changes and considering their implications for your business, you can navigate the evolving tax landscape confidently. Whether it’s adjusting your business structure or re-evaluating profit distributions, staying informed will help you make strategic decisions in this new tax era. Learn about Corporate Tax and Advisory Services with ECOVIS, contact us today.

HMRC’s manuals make it clear that a company may be an associated company no matter where it is resident for tax purposes.

Source: HM Revenue & Customs Mon, 12 Jul 2021 00:00:00 +0100

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