2023 Corporation Tax Rates: A Comprehensive Guide by MHA

Corporation Tax

During 2022, the tail end of the pandemic ran straight into the war in Ukraine which in turn contributed to the current cost of living crisis, making the year a very turbulent one.

Corporation tax was no exception to chaos as demonstrated by the yo-yo-ing of the main corporation tax rate. The appointment of Jeremy Hunt as Chancellor of the Exchequer has created much needed stability and allowed the corporation tax landscape to become more settled.

However, a number of changes are coming in April 2023 which it is important to plan ahead for, as well as the usual tax planning considerations companies need to consider at the year end.

Change in tax rates – 25% small company rate

On 1 April 2023, the main rate of corporation tax will increase from 19% to 25%. For businesses with accounting periods which straddle 1 April, profits will be time apportioned.

Businesses with profits of less than £50,000 will continue to be taxed at 19%, and for businesses, with profits of between £50,000 and £250,000 a tapered rate will apply.

These thresholds will be reduced for companies in a corporate group or with other associated companies.

Depending on the company’s year end, it may be advantageous to accelerate taxable profits so they fall before the period ends and are potentially taxed at a lower rate. For companies with a March year end, this would mean they are taxed at 19% rather than 25%.

Companies may want to consider cash flow, as tax will typically be due 12 months earlier on profits arising before the company year end rather than after.

Losses

Losses are always a key planning point for companies which make them, as there is often a decision to be made about how to utilise losses.

In certain circumstances, losses can be carried back – normally for 12 months but the extended loss carry back rules between April 2020 and March 2022 allowed a loss carry back for up to 3 years or they can be carried forward to offset against future periods.

If a company is in a group with other companies that are tax-paying, a sideways loss relief claim can be made via group relief.

When corporation tax rates are static, decisions are more likely to revolve around cash flow, as there are no particular tax benefit differences between the various options.

The increase in the main rate of corporation tax to 25%, this opens up differences in the amount of tax payable depending on the decisions made.

For periods before April 2023, loss carry backs and group relief claims will result in 19% tax savings, whereas carrying a loss forward post-April 2023 will result in a 25% tax saving from those losses.

The tax benefits from carrying forward losses will have to be weighed up alongside the cash flow impact to determine the best course of action.

Where companies have previously surrendered losses for tax credits, through the R&D scheme perhaps, or loss carry back claims have been made, an amendment can be made within two years of the period end to reverse the claim.

Companies should consider this in light of the corporation tax rate increase, to enable those losses to save tax at 25% rather than 19%. In such situations, however, any repayment previously received would need to be repaid, and interest on underpayment of tax will need to be factored in.

Income and Expenditure

Normal year end tax planning advice typically involves deferring income where possible to take full advantage of all available allowances and deductions. In light of the increase in tax rates consideration should be given also to the reverse where cash flow is not an issue, to accelerate income and profits to take advantage of the lower rate.

The following points explain this in more detail:

Income

Income is brought into the charge to tax in accordance with generally accepted accounting principles (GAAP). The general principle is that income arises as and when the work is done or goods are supplied, and not when a business is paid.

It may be possible to accelerate income into an earlier accounting period or defer into a later one, however, accounting policies must be applied on a consistent basis and be in accordance with GAAP.

Expenditure

There are several ways a company can affect which accounting period expenses arise in, for instance, expenditure on planned repairs can be timed to fall into either an earlier or later period.

Provisions can be made in the accounts for future costs to accelerate a tax deduction, or a company could review existing provisions to see whether they could be reduced or reversed.

Generally, if a provision is in line with GAAP then it is allowable for tax purposes unless there are specific rules prohibiting deduction for the particular expenditure being provided for.

The following specific areas of expenditure are particularly worth reviewing:

Bad debts

Debtors should be reviewed in detail so that any impairments or provisions can be made for bad debtors. It is important that evidence is kept showing that the circumstances giving rise to the provision or write-off were in existence at the balance sheet date.

Stock

Care needs to be taken in this area, however, a company may be able to make specific provisions against damaged, slow-moving or obsolete stock.

Bonuses

If a company intends to make bonuses, the timing is important to determine which year tax relief falls into. To accelerate tax relief into a period before the year end, a provision for bonuses can be made, but it must be able to demonstrate that the liability to make the payment existed at the balance sheet date, and the bonuses are paid within 9 months of the year end.

If the liability didn’t exist at the balance sheet date or if payment is deferred until more than 9 months after the year end, the tax relief will arise in the later period.

Pension contributions

Employer pension contributions (including schemes such as SIPP or SASS for directors and their families) are allowable on a paid basis. Relief can be accelerated by ensuring payments are made early just before year end, or held back to get relief in the later period.

Capital Allowances

1 April 2023 marks a significant change in the capital allowance regime. While the Annual Investment Allowance (AIA) remains at its new permanent rate of £1 million, 31 March 2023 marks the end of the extremely generous ‘Super Deduction’ scheme which allowed an immediate 130% tax deduction for qualifying plant & machinery.

For companies with March year ends, qualifying expenditure before 1 April 2023 will qualify for 130% relief, but post 1 April will only be able to get 100% relief via AIA (subject to £1 million limit shared between connected companies).

For companies that don’t have a March year end, 31 March 2023 will also be the last date they can claim the 'Super Deduction', but as the relief is being phased out they will be entitled to a reduced rate depending on their year end.

If a company wishes to accelerate the purchase for capital allowances purposes it will need to consider carefully the timing of capital expenditure, and where equipment is bought on HP, it must be brought into use by the year end.

R&D changes

On 1 April 2023 the rates at which relief on Research and Development is given will change. Any company whose accounting period straddles this date will receive relief at a hybrid rate, and it may be beneficial to identify spending up to 31 March 2023 and from 1 April 2023. 

For companies within the large company Research and Development Expenditure Credit scheme, the effective rate at which a credit is given increases from 10.53% to 15%.  It would therefore be beneficial to defer any planned eligible expenditure to on or after 1 April 2023 in order to gain relief at the higher rate.

For companies within the small and medium-sized Research and Development scheme, the rate at which the R&D uplift is calculated decreases from 130% to 86%, and the rate at which tax credits are paid will decrease from 14.5% to 10%. Where possible it would be beneficial to bring forward any planned eligible expenditure to before 1 April 2023 in order to claim relief at the higher rates.

A further set of new rules on Research and Development relief will take effect for accounting periods starting on or after 1 April 2023.  Costs related to subcontractors and Externally Provided Workers will only be allowable if the work is undertaken in the UK, subject to specific exemptions. 

On the positive side, the eligible expenditure categories will be extended to include the cost of datasets and cloud computing. It would therefore be beneficial to defer R&D expenditure on these costs until the start of the accounting period which begins on or after 1 April 2023.

For accounting periods beginning on or after 1 April 2023, it will be compulsory for companies to claim R&D relief in a digital submission, which will require a breakdown of costs and a summary of the R&D activities performed. The claim will require the endorsement of a named senior officer of the company and should identify any agent advising on the claim. Where a company has historically provided only total R&D costs it should ensure it is recording data on its R&D activities to ensure it can provide sufficient information in the new digital format.

Finally, any company seeking to submit its first R&D claim for an accounting period beginning on or after 1 April 2023 will be required to notify HMRC of their intention to file a claim within six months of the end of the accounting period to which the claim relates. 

This is a significant reduction on the existing two-year time limit and should be considered as soon as a potential project is started.  Existing claimants are not required to notify HMRC if they have claimed relief in one of the preceding three accounting periods.

Filing deadlines

The filing deadline for the normal CT600 Corporation Tax Return remains unchanged at 12 months after a company’s accounting period. There are various other filing deadlines at that same time including:

• Corporate Interest Restriction return – where interest is over £2m
• Reviewing and publishing tax strategy – for large groups
• Country by Country Reporting – countries that are members of large international groups.
• Senior Accounting Officer filing – for companies or groups with over £200m turnover

There is also the 2-year deadline for amending a company’s tax return to consider, as this will be the deadline for amending returns to submit claims including for R&D tax relief, group and consortium relief and capital allowances claims.

QIPS – change from “related 51% group companies” to “associated companies”

Companies are required to make payments in quarterly instalments where taxable profits are above £1.5 million (or £10 million if this is the first period in which it is defined as large).

There is also a more accelerated quarterly payment regime for “very large” companies with taxable profits over £20 million. These thresholds are reduced according to the number of related companies it has.

Prior to 1 April 2023, this is calculated according to the number of ‘51% group companies’. For the first accounting period starting after 1 April 2023 this will be widened to all ‘associated companies’ which would include companies that weren’t in a group together but under common control.

It is important for companies to consider whether the changes will propel them into the quarterly instalment regime or the instalment regime for very large companies, and plan accordingly.