Corporation tax rates and payment
It is fair to say that the UK’s corporation tax rate has been on something of a policy rollercoaster of late. As far back as 2016, when the rate was 20%, George Osbourne announced that he would reduce corporation tax to 17% with effect from 2020 (and even expressed his fervent desire to get the rate as low as 15% thereafter). As a matter of fact, the rate reduced from 20% to 19% in 2017, but there it remained (the further planned reductions being interrupted by COVID).
Fast-forward through COVID, to the point where Boris Johnson and Rishi Sunak decided that the that the rate of corporation tax should increase from 19% to 25% with effect from 1 April 2023, a policy which was then reversed (albeit very briefly) by Liz Truss and Kwasi Kwarteng who preferred to retain the 19% rate, before that reversal itself was reversed by Rishi Sunak (again) and Jeremy Hunt, who reintroduced the rate of 25% with effect from 1 April 2023. Confused?
Of course, the headlines have mainly focused on the increase in corporation tax to 25%, but that does not tell the whole story (and, to be honest, one can forgive the main-stream media for that, because the rules that have been introduced are somewhat complicated and can hardly count as breakfast reading). However, both companies and advisors will need to be aware of the potential complexities and issues arising as a result of the changes which came into effect on 1 April 2023.
New corporation tax rates
So exactly where are we now? Well, the changes to the main rates of corporation tax can be summarised as follows:
- UK resident companies with augmented profits not exceeding £50,000 will continue to pay corporation tax at the existing rate of 19%;
- UK resident companies with augmented profits exceeding £50,000 but not exceeding £250,000 will pay corporation tax at the main rate of 25% as reduced by marginal relief; and
- all other companies will pay corporation tax at the main rate of 25%.
Non-UK resident companies and close investment holding companies cannot benefit from the 19% rate or marginal relief.
Additionally, there are a number of exceptions to the above rates as a result of various different tax regimes introduced over the years so specific advice should always be sought as to the applicable rate.
Determining the right rate of corporation tax
The thresholds used to determine the correct rate of corporation tax (i.e. the £50,000 and the £250,000 thresholds described above) need to be adjusted where the company has one or more associated companies. The adjustment requires the amount of the threshold to be divided by the number of companies associated with the company in question plus the company itself. So, for example, in the case of a company with 3 wholly owned subsidiaries, the small profits threshold would be £12,500 (i.e. £50,000 / (1+3)). The thresholds also need to be apportioned where a company’s accounting period is less than 12 months.
The ‘associated companies test’ relies on establishing who has control of a company, as opposed to being determined by reference to a particular level of shareholding in the company (which is often a more straightforward test to apply). It is not always possible to tell which companies are associated with each other simply by looking at a group structure chart, because two companies could be associated with one another for these purposes whilst not being in the same corporate group.
Broadly, a company is associated with another company if one controls the other or both are controlled by the same person or persons. A person is defined as having control for these purposes if he or she exercises, is able to exercise or is entitled to acquire direct or indirect control over the company’s affairs.
A person will be treated as having control over a company, if he or she possesses or is entitled to acquire a majority of shares, voting power, profits or capital, but these thresholds are not of themselves determinative of control (they are only examples where control will be treated as being present, control could exist without these thresholds being met).
The actual control provisions are complex and more detailed than the above summary can do justice and, in practice, it may be difficult to work out whether the control test is met in certain cases, without a detailed legal analysis of the articles of association, shareholders’ agreement or other agreements relating to the administration of the company’s business.
Corporation tax payments in instalments
Working out whether a company has any associates is also key in determining when a company has to pay its corporation tax.
Companies which are not ‘large’ or ‘very large’ pay corporation tax after the end of the relevant accounting period to which the tax relates (9 months and 1 day to be precise) whereas ‘large’ and ‘very large’ companies are required to pay some or all of their corporation tax during the accounting period to which it relates.
The system of payment for ‘large’ and ‘very large’ companies is known as ‘quarterly instalment payments’ or ‘QIPS’ and means that HMRC gets its hands on the corporation tax owed by these companies sooner than it otherwise would (it also represents something of a headache for the companies themselves as they have to pay the instalments based on a best estimate of the total taxable profits they will make in the year and may as a result end up underpaying or overpaying corporation tax if actual profits are more or less than expected profits).
A ‘large’ company for these purposes is one whose augmented profits exceed £1.5M and a ‘very large’ company is one whose augmented profits exceed £20M. Again, these thresholds need to be adjusted where the company has one or more associated companies. So, for example, in the case of a company with 3 wholly owned subsidiaries, it would be a “large” company when its augmented profits exceeded £375,000 (i.e. £1,500,000/ (1+3)). The limits will also need to be apportioned where a company’s accounting period is less than 12 months.
The actual application of the QIPS regime is a little bit more complicated than set out above, and just because a company has taxable profits in excess of the relevant thresholds does not mean it immediately falls immediately into the QIPS regime. Therefore, it will be important to take specific advice.
Companies and advisors will need to be aware of change to the corporation tax rules and make sure that they understand the which companies are associated with one another for tax purposes, to ensure that they are able to determine how much corporation tax is payable and when.
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