As of 01 April 2023, there has been a change in the amount of UK corporation tax businesses must pay. This affects UK limited companies; UK clubs, co-operatives or other unincorporated associations, such as community groups or sports clubs; and foreign companies with a UK branch or office.
Corporation tax is due on profits resulting from doing business (trading profits), investments, and profits made from the sale of assets (chargeable gains). You won’t receive a bill for your corporation tax; it is up to you to keep accounting records, prepare and file a tax return, and pay the correct amount due.
Corporation Tax Rates from 01 April 2023
Businesses affected fall into one of three rate categories*, as follows:
- Small profits rate (companies with profits under £50,000) = 19%
- Main rate (companies with profits over £250,000) = 25%
- Marginal Relief rate (companies with profits between £50,000 and £250,000) = variable.
*This ignores entities such as ring-fence companies and unit trusts. If this applies to you, we recommend you take professional tax advice.
What is Marginal Relief?
The Marginal Relief rate is the most complex as it involves a variable rate rather than a fixed rate. Marginal Relief provides a gradual increase in corporation tax rates for those companies whose profits fall between the small profits rate and the main rate. It allows for the rate to increase gradually between the 19% small profits rate and the 25% main rate, depending on the amount of taxable profit earned.
Who Can Claim Marginal Relief?
If your profits fall between the lower limit of £50,000 and the upper limit of £250,000, you can claim Marginal Relief.
Considerations for Marginal Relief
If your accounting period is shorter than twelve months, the upper and lower limits are reduced proportionately.
For example, if your accounting period is nine months, then the lower limit is reckoned to be £37,500 (75% of £50,000) and the upper limit £187,500 (75% of £250,000).
The number of associated companies your company has also has an impact on limits. As with accounting periods, the effects are proportional.
For example, if your company has three other associated companies; the impact is that limits are divided by four, meaning the lower limit becomes £12,500 and the upper limit becomes £62,500.
You can read more about what constitutes an associated company later in this blog.
Calculating Marginal Relief
Online Calculator for Marginal Relief
The calculation can be complex, so HMRC have provided an online calculator. Companies and their agents can use this service to:
- Check availability for Marginal Relief.
- Calculate how much Marginal Relief a company might be entitled to.
- Get an indication of Corporation tax and effective tax rates before and after Marginal Relief.
HMRC provide the service for assistance only; none of the calculations produced are retained or used by them. To use the service, you will need to know:
- The accounting period start and end date.
- The total taxable profit.
- Any distributions from non-group, associated companies.
- Any associated company details.
Manual Calculation of Marginal Relief
To calculate Marginal Relief manually, you can use this formula:
Taking each of those component figures:
- The upper limit is £250,000.
- Basic profits are trading profits/gains.
- Profits are basic profits plus Franked Investment Income (FII); which is generally dividends from other companies on which corporation tax has already been paid.
- The MSCR (marginal small companies’ relief) fraction is 3/200.
A simpler method of calculating corporation tax ignores FII, as arguably the majority of small companies won’t be impacted by that. We know the small profits rate (profits under £50,000) is 19% and the main rate (profits over £250,000) is 25%. This type of calculation gives an effective marginal rate of 26.5% for those companies that fall into the middle area.
So, while Marginal Relief will reduce the Corporation tax payable, any profits that fall between £50,000 and £250,000 will effectively be taxed at 26.5% – although the overall tax rate will be lower than that.
For example:
- A company makes £100,000 of taxable profit
- £50,000 is taxed at 19% (lower rate) = £9,500
- £50,000 is taxed at 26.5% (Marginal Relief rate) = £13,250
- Total tax due: £22,750
- Overall tax rate: 22.75%
What Constitutes an Associated Company?
Companies under common control are considered to be associated companies. That might mean they are all owned by one person or by the same group of individuals.
Where different companies are owned by members of the same family (spouses and blood relations) then they are considered to be associated if there is a commercial interdependence.
If one company gives financial support to another, or both have a financial interest in a different company, then they are associated through financial interdependence.
If two companies share an economic objective, or the activities of one benefit the other, or the companies have common customers, then they are associated through economic interdependence.
If two companies have or use common management, common employees, common premises, or common equipment, then they are associated through organisational interdependence.
Please note that the 51% group company test outlined in the Corporation Tax Act 2010 will be abolished and replaced by these associated company rules. Modifications will also be made to the small ring fence profits rate.
As mentioned earlier, the lower and upper profit limits will be proportionately reduced for short accounting periods and cases involving associated companies.
Managing Your Corporation Tax Obligations
The amount of corporation tax due has always been based on total taxable profits. However, given the very close correlation between your profitability and the new tax rates, it is arguably more important than ever to seek guidance and make sure you take advantage of all available reliefs and allowances.
Capital allowances permit businesses to write off the cost of some capital spending against taxable profits, so reducing their overall tax bill.
The current tax year offers an exceptional opportunity to effectively manage your tax obligations, especially if you anticipate a higher tax rate being applied in future. By capitalising on the current lower rate and the various reliefs available, you can take advantage of this opportunity while it lasts – when your new tax year starts, the chance will be lost (although many allowances will still be available).
Available Reliefs and Allowances
A range of reliefs and allowances are available:
- The super-deduction and the first-year allowance (FYA)
- Full expensing (FE) capital allowance
- Annual Investment Allowance (AIA)
- Enhanced Capital Allowances (ECAs)
- Carrying forward losses
- Disposal of chargeable assets
- R&D tax relief
- Research and Development Expenditure Credit (RDEC)
Let’s take a closer look…
The Super-Deduction and the First-Year Allowance (FYA)
If a company purchased qualifying plant and machinery between 01 April 2021 and 31 March 2023, it might benefit from the super-deduction capital allowance, or the first-year allowance scheme. The super-deduction scheme ended on 31 Match 2023, but the first-year allowance scheme has been extended to
31 March 2026.
Under super-deduction, companies can claim 130% capital allowances, and under the first-year allowance, 50%.
To be eligible for the relief, the assets purchased must be new, not second-hand and/or refurbished. If those assets are then leased or rented out to customers super-deduction cannot be claimed.
What is ‘Plant and Machinery’?
‘Plant and machinery’ covers various tangible assets that businesses utilise in their day-to-day operations. Things like stock and premises aren’t included, and neither are company cars.
For the purposes of claiming capital allowances, which are expenditure a company can claim against taxable profit, the majority of tangible capital assets used in the course of a business are classed as plant and machinery. These include:
Example
Say a company spent £500,000 net of VAT (the VAT is recoverable) on qualifying assets within the qualifying period.
When the 130% super-deduction capital allowance is applied, £650,000 can be deducted from taxable profits.
Calculate corporation tax at 19% and that means a reduction of £123,500.
Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) enables businesses to deduct 100% of qualifying plant and machinery expenses from their profits.
Most tangible capital assets acquired or leased by a business are classified as plant and machinery, making them eligible for capital allowances.
This allowance also covers eco-friendly investments, such as the purchase of solar panels and other energy-saving devices.
Unlike certain other capital allowance schemes, the AIA permits claims for both new and second-hand equipment, including refurbished items.
A permanent AIA limit of £1 million is now in effect.
To maximise the benefits of this allowance and reduce your tax liability, it is advisable to capitalise on the higher limit by bringing forward expenditure whenever feasible.
Enhanced Capital Allowances (ECAs)
Enhanced Capital Allowances (ECAs) provide a tax relief option similar to the Annual Investment Allowance (AIA). When an asset qualifies for this allowance, you can deduct its entire cost from your profits before calculating the taxable amount.
To be eligible for this relief, the equipment must be brand new and unused. Additionally, you cannot typically claim items that your business purchases for leasing purposes or for use within a property you rent out.
You have the option to claim the first-year allowance alongside the AIA for different assets. However, in the year of claim, you must decide which allowance to use for each asset, as you can’t claim the same expenditure under both allowances.
If you don’t claim the full entitlement of the first-year allowance, you can claim a portion of the cost in the following accounting period using writing down allowances.
Writing down allowances are typically used when you have already claimed the AIA on items totalling more than the AIA limit, or if the items do not meet the eligibility criteria for the AIA.
ECAs can be claimed for a wide range of environmentally friendly improvements to your business. This includes:
- Eco-friendly technologies
- Energy-saving equipment
- Zero emissions cars and goods vehicles
- Electric cars
- Gear for electric vehicle charging points
Full Expensing (FE) Capital Allowance
Full expensing (FE) is a new scheme that was introduced on 01 April 2023 and is scheduled to run to 31 March 2026.
It applies to spending on main rate assets, such as forklift trucks, drills, bulldozers, computers, tractors, vans, office furniture, and fire alarm systems.
FE means that companies can deduct the full cost of the asset from their profits straight away – rather than doing so incrementally over the life of the asset.
Special rate assets, including long life assets, can also benefit from a 50% first year allowance. However, first-year capital allowances do not apply to plant or machinery purchased for leasing purposes.
Carrying Forward Losses
When a company experiences a trading loss during an accounting period, it has the option to claim corporation tax relief. It’s not always possible to accurately predict a trading loss, but a loss in the current year can be offset against the following year’s profit.
However, for this relief to be applicable, the company must have a reasonable expectation of generating a profit in the following year because to benefit from this relief the company must continue trading activities.
If you plan to carry forward a trading loss from an accounting period concluding prior to 01 April 2017, you can only utilise the relief against profits from the same trade.
Additionally, businesses should be aware that certain types of carried-forward losses are subject to a restriction on the total amount that can be offset against profits. If your company is part of a group and has carried forward trading losses incurred on or after 01 April 2017, other companies within the group may be eligible to exploit those losses through group relief.
Disposal of Chargeable Assets
A company makes a chargeable gain if it disposes of an asset for more than it paid for it. Chargeable assets include land and buildings, plant and machinery, and fixtures and fittings.
The gain is usually the difference between what was paid for the asset and what it was sold for. Chargeable gains are included in your corporation tax return and taxed alongside other profits.
If you dispose of assets prior to the new tax rates applying to your business, you might benefit from a lower rate of tax on the gain.
Research and Development (R&D) Tax Relief
The government introduced the R&D tax relief scheme with the aim of supporting, rewarding, and encouraging companies engaged in research and development (R&D) activities. This scheme provides tax relief that can significantly reduce a company’s corporation tax bill or, in certain cases, result in a payable tax credit.
While not every business will be eligible for this relief, many have the potential to qualify.
Small and medium-sized enterprises (SMEs) can benefit from R&D tax credits through the SME scheme, which is open to solvent registered companies with fewer than 500 employees, a turnover under 100 million euros, or a balance sheet total under 86 million euros.
Pre 01 April 2023 SME R&D tax relief allows companies to deduct an additional 130% of qualifying R&D costs from their yearly profit, on top of the regular 100% deduction, allowing for a total deduction of 230%. (Post 01 April 2023, the figures are 86% and 186%).
If the company has claimed relief and made a loss, pre 01 April 2023 it can claim a payable tax credit worth up to 14.5% of the surrenderable loss. (Post 01 April 2023, the figure is 10%).
To claim this relief, a company needs to meet the SME criteria and demonstrate that its project aligns with the standard definition of R&D.
Research and Development Expenditure Credit (RDEC)
Large companies with more than 500 employees, a turnover exceeding 100 million euros, and a balance sheet total surpassing 86 million euros, are eligible to claim Research and Development Expenditure Credit (RDEC).
The RDEC amount is calculated at 13% of qualifying R&D expenditure (post 01 April 2023, the figure is 20%) and is subject to taxation.
Depending on whether a company is generating profits or experiencing losses, the credit can be used to offset corporation tax liabilities or result in a one-time cash payment.
GreenStones are Here to Support You
It is important you consider how the changes to corporation tax and the new rules that have been imposed will affect things like how you invest in your business in future, and how you reward shareholders and team members.
There is limited time available to benefit from the lower across-the-board rate of corporation tax and the historic reliefs and allowances, so prompt action is needed to investigate options and implement strategies.
To discuss your options, contact the GreenStones Team on 01733 371180 today.