In this section of our hub, we delve into the world of corporate taxation, looking in detail at corporation tax, quarterly instalment payments and capital allowances. We also include information regarding the changes coming into force on 1 April 2024 for the Research & Development tax regime.
Corporation Tax
During 2023, the cost-of-living crisis has continued, impacting on the UK’s economic position. The Chancellor has been battling inflation whilst nursing the economy and seeking to incentivise the electorate ahead of a UK General Election in 2024.
However, in terms of corporation tax, the landscape has settled. The biggest news was the introduction of Full Expensing for capital expenditure, giving a 100% tax deduction for qualifying purchases of capital assets and this being made permanent.
For 2024 then, there are less changes to the main corporation tax rates to be concerned with from April 2024, but it is still important to plan ahead for the usual tax planning considerations companies need to consider at the year end.
Tax rates – 25% small company rate
On 1 April 2023, the main rate of corporation tax increased from 19% to 25%. For businesses with accounting periods which straddle 1 April, profits are time apportioned.
Businesses with profits of less than £50,000 continue to be taxed at 19%, and for businesses, with profits of between £50,000 and £250,000 a tapered rate applies.
These thresholds are reduced for companies in a corporate group or with other associated companies.
Companies with a March 2024 year end onwards will face exposure to a full 25% tax rate, subject to the above thresholds.
Companies will want to consider cash flow and to expect a higher tax liability even if profits have only remained level.
Quarterly Instalment Payments (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 was calculated according to the number of ‘51% group companies’. For the first accounting period starting after 1 April 2023 this has been widened to all ‘associated companies’ which would include companies that weren’t in a group together but under common control. Although this change happened last year, because it affected accounting periods beginning on or after 1 April 2023, it didn’t immediately impact many companies, but where these changes brought companies into the quarterly payments regime those accelerated payments are starting to become due. If they haven’t already, it is therefore important for companies to consider if these changes will affect them and plan accordingly.
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. 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% 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. This will remain relevant and a consideration until periods ending March 2025 onwards and so still warrants note.
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. Forecasts of future profits / losses should also be taken into account.
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.
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. This will remain relevant and a consideration until periods ending March 2025 onwards and so still warrants note.
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. Forecasts of future profits / losses should also be taken into account.
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 was given also to the reverse, where cash flow is not an issue, to accelerate income and profits to take advantage of the lower rate.
As we move on to future years taxed at a full 25% (periods ending March 2024 onwards) one should revert to deferring income and accelerating expenditure where appropriate.
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 nine months of the year end.
If the liability didn’t exist at the balance sheet date or if payment is deferred until more than nine 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.
Income Tax in 2024: How to make the most out of opportunities
Read more about Income Tax in 2024: How to make the most out of opportunitiesRead moreIncome 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.
Capital Allowances
There is no change in capital allowance rates or allowances on 1 April 2024. The Annual Investment Allowance (AIA) remains at its permanent rate of £1 million, and the full expensing regime which provides unlimited 100% relief on new & unused main rate plant & machinery expenditure continues. The good news is that in the recent Autumn Statement the Chancellor made full expensing permanent, allowing companies to plan further ahead for capital allowances in the knowledge that they’ll be able to get full relief on qualifying expenditure.
It is often still worth planning to bring capital expenditure forward to before the company’s year end, as it will accelerate relief. Also, if the company or group has significant expenditure on used assets or special rate expenditure (such as building integral features or solar panels) it can be worth considering the timing of expenditure carefully to ensure it makes full use of the Annual Investment Allowance.
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.
Research & Development (R&D) scheme changes
On 1 April 2024 the old SME and RDEC schemes will be merged into a new RDEC-style scheme. This new scheme will apply for accounting periods starting on or after 1 April 2024, meaning that the first annual period to be affected will be those ending March 2025 onwards.
Costs related to subcontractors and Externally Provided Workers will only be allowable if the work is undertaken in the UK, subject to specific exemptions, for accounting periods starting on or after 1 April 2024.
On the positive side, the eligible expenditure categories have now been extended to include the cost of datasets and cloud computing.
Digital Submission
It is now compulsory for companies to claim R&D relief in a digital submission, which requires a breakdown of costs and a summary of the R&D activities performed. The claim requires 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.
Corporate Tax
Read more about Corporate TaxRead moreIt is often still worth planning to bring capital expenditure forward to before the company’s year end, as it will accelerate relief.
Also, if the company or group has significant expenditure on used assets or special rate expenditure (such as building integral features or solar panels) it can be worth considering the timing of expenditure carefully to ensure it makes full use of the Annual Investment Allowance.
HMRC Notification
Finally, any company seeking to submit its first R&D claim, or first one for a while, for an accounting period beginning on or after 1 April 2023, is now 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.
Subcontracted R&D
A recent concern has been the treatment by HMRC of subcontracted and subsidised R&D. Draft legislation suggested that no company would be able to claim if they were contracted to undertake work – even if the R&D did not form part of the contract. This would have obliterated claims in Construction and many areas of Software and Engineering where work is driven by client demand and engagement.
HMRC has clarified that the ‘decision-maker’ or the company bearing the risk is eligible for relief. In practice, this means that claims can be made as long as the R&D does not form part of the contract. If contracted specifically to undertake R&D, it is the customer who may be able to claim. Of course, grey areas will still exist and need to be looked at on a case-by-case basis, however, this seems to be a far more pragmatic approach in ensuring the correct company is making a claim.
It is hoped that HMRC will begin to accept arguments in line with the new clarification to be implemented.
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 two-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.
Research & Development
Read more about Research & DevelopmentRead moreA recent concern has been the treatment by HMRC of subcontracted and subsidised R&D. Draft legislation suggested that no company would be able to claim if they were contracted to undertake work – even if the R&D did not form part of the contract.
This would have obliterated claims in Construction and many areas of Software and Engineering where work is driven by client demand and engagement.
For further guidance
For further guidance on any of the measures discussed in this article, please contact your usual MHA advisor or contact us here.
Find more informative articles like this in our dedicated hub - with resources, advice and practical guidance on all year end tax planning issues including forthcoming changes to tax rates and allowances.
