Prepare now for a tough corporate tax hike

In an effort to reduce the current budget deficit, the government is introducing widespread changes to a range of taxes which will unfortunately lead to a reduction in after-tax profits and take-home pay for businesses and individuals in general.

From 1 April 2023, the UK’s main corporate tax rate will drop from 19% to 25%, marking the end of the current single approach.

A small profit rate of 19% will apply to increased profits below the lower limit of £50,000.

Profits over the upper limit of £250,000 will be charged at 25%.

Marginal relief will be available for benefits falling between the lower and upper limits.

HM Treasury estimates that around 70% of UK businesses will continue to pay 19% tax, with 10% of businesses paying the new 25% rate.

An important point is the passage of the test of the company linked to the rules of the associated company.

This change may affect a company’s payment dates and classification for quarterly payment purposes.

Fortunately, there is still time to plan ahead and possibly mitigate the predicted negative impact.

If a company has tax losses, it should be considered whether it would be more beneficial to delay use for use in future accounting periods.

It may be worth potentially accelerating any recognizable benefit to before April 2023 and, conversely, delaying spending to achieve favorable tax rates.

Deferring capital expenditure until after April 2023 appears at first glance attractive, with relief on purchases at the higher rate of 25%.

However, businesses will not derive any real benefit from deferring essential capital expenditure due to the availability of the 130% “super-deduction” introduced by the government and available until March 31, 2023.

The super-deduction ensures that the relief companies get (130% of 19% equals 24.7%) is almost the same as the new headline rate of 25%, which will put them overall in a position of tax neutrality .

Now may also be a good time to review the number of companies under common control, taking into account how a restructuring exercise might lead to a more tax-efficient group structure.

Based on our recent experience, many business groups have already initiated projects to consolidate activities, rationalize inter-company balances and eliminate dormant entities with a view to increased efficiency.

Time is running out in what will undoubtedly be a difficult time for taxpayers, but some simple steps in preparation can help limit tax exposure.

Companies benefiting from effective tax planning will be in the best position to face the significant changes to come.

For further information or advice, Adam Lecky can be contacted at adam.lecky@ie.gt.com. Grant Thornton (NI) LLP specializes in audit, tax and advisory services.