The Corporate Prodigal Son Bites

For accounting periods straddling 31st March 2023 and those thereafter, companies will see the return of the corporate prodigal son, last seen back in 2015, which could result in old favourites such as varied corporation tax (CT) rates, thresholds and the infamous complexed associated company rules returning to inflict heightened CT pain.

For the past 6 years the majority of companies have paid CT at a fixed 19% on their taxable profits (TP). From 1st April 2023, it will depend upon the size of your total taxable profits to see what CT rate will apply as CT threshold limits have been set.

► If TP are no more than the £50K threshold it will all be taxed at 19%.

► If TP exceed the £250K threshold it will all be taxed at 25%.

► If TP fall between £50K and £250K it will be taxed again at 25% but would also attract what is called marginal relief which would reduce the liability.

For example:

► Vale Park Ltd TP for the year ending 31st March 2024 is £150,000 thereby falling between the £50K and £250K thresholds.

► After taking account of marginal relief the CT liability is £36,000.

► Pre-1st April 2023 it would have been £28,500.

However, if a company is caught by the associated company rules, the CT liability could be worse. In basic terms, if you, or you in conjunction with others, are deemed to be in control of more than one company then each of those businesses could be affected.

Depending on the number of associated companies there are, one has to divide the £50K and £250K lower and upper threshold limits by that number before working out that particular company’s CT liability.

For example:

► Mr and Mrs Pope own 100% of Pope Ltd which in turn owns 100% of Massey Ltd which also own 90% of Wozza Ltd.

► There are 3 associated companies as they are all under the control of Mr & Mrs Pope.

► The lower CT threshold will therefore be £50,000/3 = £16,667

► The upper CT threshold would be £250,000/3 = £83,333

► Pope Ltd profits for the year ending 31st March 2024 are £40,000.

► Pope Ltd CT liability is £9,350. If it had no associated companies it would have been £7,600.

Many factors can influence whether or not companies are going to be drawn into the associated companies net for CT purposes such as the substantial commercial interdependence rules, the minimum controlling combination test or it being a non-trading or dormant company.

Planning could possibly be looked at to mitigate the CT position such as the feasibility of shortening or lengthening the accounting date or even merging companies if it is commercially acceptable to do so.

All of that will, of course, be dependent upon such things as:

► The size of the TP and the flow of those profits.

► When did the respective companies become or cease to be associated.

If you own a company and are worried about how the changes in the corporation tax system might impact upon your business from 1st April 2023, please contact us and we can carry out a review for you.