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Important Changes to Corporation Tax and the Impact of Associated Companies

Significant changes to the UK's corporation tax rates came into effect from 1 April 2023, and it's essential for businesses to understand the implications, especially if they are associated with other companies.

27 Oct 2023

Significant changes to the UK’s corporation tax rates have come into effect from 1 April 2023, and it’s essential for businesses to understand the implications, especially if they are associated with other companies. These changes could affect not only the tax rates on profits but also the timing and frequency of tax payments.

Let’s break down what’s happening.

Old vs. New: Understanding the Tax Rate Changes

Until 31 March 2023, the corporation tax rate in the UK was a uniform 19%. However, from 1 April 2023, the tax rate for businesses is now profit-dependent, and it’s crucial to grasp how this affects your bottom line:

  • Small Profits Rate: For profits up to £50,000 (the lower limit), businesses will be taxed at 19%. This rate is referred to as the ‘small profits rate.’
  • Blended Rate: Profits falling between £50,000 and £250,000 will be subject to a blended rate, ranging from 19% to 25%.
  • Main Rate: When profits exceed £250,000 (the upper limit), the company faces a tax rate of 25%, known as the ‘main rate.’

The Associated Company Factor

One significant change to keep in mind is the impact of associated companies. If your business is associated with others, the profit thresholds are adjusted, potentially affecting your tax rates. The thresholds are reduced based on the number of associated companies. The lower and upper limits are divided by the number of associated companies plus one.

To illustrate:

If your company earns £50,000 in profits and has 5 associated companies, your tax rate would increase from 19% to 25%.

This is because the upper profit threshold is lowered to £41,667, calculated as £250,000 divided by six (five associated companies plus one).

It’s vital to determine if your company has associated companies and how many there are.

Defining Associated Companies

An associated company is one that shares control with another or is controlled by the same person or group of people. Control is broadly defined and can include share ownership, voting power, or asset entitlements. In some cases, the concept of ‘substantial commercial interdependence’ might lead to companies being associated, especially when their commercial activities are interconnected.

Real-Life Implications

Consider a family-owned property business with three separate companies, each making approximately £100,000 in profits annually. Before April 2023, they paid tax at 19%. However, with the new rules, all three companies would pay 25% on their profits because they are considered associated. This reduces the upper profit threshold from £250,000 to £83,333.

Quarterly Instalment Payments

These changes may lead to associated companies falling into the quarterly instalment payments regime, meaning they’ll have to pay taxes in quarterly instalments instead of once a year. This places more strain on cash flow management and necessitates more accurate profitability projections to avoid interest charges and penalties for underpayments.

Adjusting to the Changes

In a nutshell, under the new rules, more companies, especially those associated with others, will face higher tax rates and earlier tax payments. This makes cash flow management and accurate financial projections vital to avoid penalties and interest charges.

Here to help

It’s important to understand the implications of these changes for your business and to remain compliant. We are working with clients to help them through the complexities of these evolving tax changes.

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