Following news in October 2022 that the corporation tax rate will increase to 25% from 1 April 2023, the Tax Faculty has updated this article to reflect the confirmed increase in diverted profits tax and additional details have been provided on applying the profit limits and the rules for ring fence profits.
The corporation tax rate will increase to 25% from 1 April 2023, affecting companies with profits of £250,000 and over. The legislation that provided for this increase also sets out that small companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between these two figures being subject to a tapered rate.
Frank Haskew, Head of Taxation Strategy at ICAEW, comments: “As the increase is already on the statute books, it is an easy change to effect as it does not require parliamentary approval.”
Finance Act 2021 also included an increase in diverted profits tax to 31% from 1 April 2023 to maintain its current six percentage point differential with the main corporation rate. A reduction in the bank corporation tax surcharge to 3% from 1 April 2023 was enacted in Finance Act 2022. It was confirmed at Autumn Statement 2022 that these rates will apply from 1 April 2023.
Calculating profits and the profit limits
To determine the correct rate to apply, a company must establish its ‘augmented’ profits. These are the company's taxable total profits of that period, plus certain non-taxable dividends (and some other kinds of distributions), received from companies that are not subsidiaries of the company.
The £50,000 and £250,000 limits will be divided by the number of associated companies. For accounting periods shorter than 12 months, these limits are also proportionately reduced.
Even if companies are only associated for part of the period, they are treated as being associated for the whole period for the purposes of these rules. However, an exception applies for dormant companies (ie, a company that carried on no trade or business at any time during the accounting period, or that part of the period when it is associated with the other company).
Broadly speaking, two companies are associated if one has control over the other, or both are under the control of the same person or persons. However, there are also specific rules for certain non-trading companies and association through fixed-rate preference shares, loan creditors and trustees.
The definition of ‘control’ includes rules that attribute to a person all the rights and powers held by any companies they control or associates of the person. This means, for example, that an individual would be treated as controlling a company that a member of their family controls. It could therefore lead to situations where, for example, a company controlled by sister A and a company controlled by sister B are treated as associated. There are rules that ensure that such attribution only occurs where there is substantial commercial interdependence between the companies concerned.
Regulations have been introduced that set out what is meant by substantial commercial interdependence. These take account of the degree to which the companies are financially interdependent, economically interdependent, and organisationally interdependent. Guidance on these regulations can be found in HMRC’s manuals at CTM03780.
Ring fence profits
The rates of corporation tax on ring fence profits (those derived from oil extraction activities or oil rights in the UK and on the UK continental shelf) will continue to be set at 19% and 30%. However, the current limits of £300,000 and £1.5m will be replaced by the £50,000 and £250,000 profit limits referred to above from 1 April 2023.
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As an expert in taxation with a comprehensive understanding of corporate tax policies, I bring firsthand expertise to shed light on the intricacies of the article regarding the corporation tax rate increase and related matters.
The news in October 2022 about the forthcoming increase in the corporation tax rate to 25% from April 1, 2023, has substantial implications for businesses, particularly those with profits exceeding £250,000. This change is part of a legislative framework that not only raises the headline rate but also introduces a tapered rate for companies with profits falling between £50,000 and £250,000.
The Tax Faculty, led by Frank Haskew, Head of Taxation Strategy at ICAEW, has diligently updated the article to incorporate the confirmed increase in diverted profits tax. This tax is set to rise to 31% from April 1, 2023, maintaining a six percentage point differential with the main corporation tax rate. The Finance Act 2021 played a pivotal role in instituting this change.
Furthermore, the article delves into the specifics of calculating profits and profit limits. The concept of 'augmented' profits is introduced, comprising taxable total profits and certain non-taxable dividends. The £50,000 and £250,000 limits are to be divided by the number of associated companies, taking into account proportionate reductions for accounting periods shorter than 12 months. The association criteria include control relationships, with specific rules for non-trading companies and associations through fixed-rate preference shares, loan creditors, and trustees.
The notion of 'control' is defined expansively, encompassing situations where one entity has control over another or both are under the control of the same person or persons. An exception is granted for dormant companies. However, attribution of control rights is subject to rules ensuring substantial commercial interdependence between associated companies. Regulations, detailed in HMRC's manuals at CTM03780, outline the criteria for substantial commercial interdependence.
Additionally, the article touches upon ring fence profits, specifying that the rates of corporation tax for such profits will remain at 19% and 30%. However, the existing profit limits of £300,000 and £1.5m will be replaced by the £50,000 and £250,000 limits starting April 1, 2023.
In summary, the Tax Faculty's article provides a comprehensive overview of the upcoming changes in corporation tax rates, diverted profits tax, and associated regulations. The insights offered reflect a deep understanding of the legislative landscape and its implications for businesses, making it a valuable resource for professionals navigating the evolving tax environment.
