Corporation tax rates are changing and so are the rules for determining when companies are ‘associated’. The one-size-fits-all approach will no longer apply and plans should be put in place now to mitigate the impact of these changes.
From 1 April 2023, the rate at which a company pays tax will be determined by comparing a company’s profits against the corporation tax thresholds of £50,000 (the lower limit) and £250,000 (the upper limit). The rate of corporation tax for companies with profits that do not exceed the lower limit will be 19% and the rate for companies with profits exceeding the upper limit will be 25%. Where profits fall between the lower and upper limits, the company will pay tax at an effective rate of 26.5%.
In many cases, determining the number of associated companies will be very difficult as the definition of what an associated company can stretch a lot further than initially expected. Companies are associated with each other if one company controls the other or both companies are controlled by the same person or persons. The definition of ‘person’ includes a company, an individual or individuals, trustees of a trust, or partners in a partnership and a person is defined as having control of a company if they can exercise direct or indirect control over the company’s affairs or can acquire this power in future. Care will need to be taken by clients and advisers to ensure they can identify how far and wide power is exerted by business owners, leaders and their connections.
In addition to the above, the thresholds for paying tax through quarterly instalments (‘QIPs’) will also need to be apportioned by the same number of associated companies from 1 April 2023. This may mean that companies not within QIPs previously are brought into the regime after 1 April 2023 such that their tax payments schedule is accelerated. Setting out what this looks like in advance is likely to aid cash flow and help avoid potential late paid corporation tax interest charges.
As we build up to the change on 1 April 2023, businesses are encouraged to consider the impact of these rules in advance. If you would like assistance with associated companies determinations, marginal rate calculations, or forecasting for QIPS, please contact your usual Kilsby Williams adviser, call 01633 810081 or email firstname.lastname@example.org.