Which corporate tax rates will change in 2025?

In this article, we delve into the world of corporate taxation, looking in detail at corporation tax, quarterly instalment payments, capital allowances and R&D.

Corporation Tax

Stability and continuity were the key messages coming from the Chancellor in the Autumn Budget, with the introduction of the much-anticipated Corporate Tax Roadmap.

The roadmap sets out the government’s commitments for the coming parliament, including capping the top rate of Corporation Tax at 25%, and making full expensing a permanent feature of the capital allowances regime. In addition, the government affirmed its intention to retain R&D and Patent Box reliefs as well as the Substantial Shareholding’s Exemption, features of the tax regime which make the UK an attractive location for multinationals to headquarter.

Whilst welcome, the roadmap did not provide any significant incentives to boost the corporate sector. Nonetheless, in conjunction with the forthcoming Industrial Strategy and a review aimed at simplifying the transfer pricing regime scheduled for early in 2025, it is hoped that the roadmap will give an assurance of stability, encouraging investment and business confidence

Tax rates – 25% mainstream 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 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. It is recommend that companies undertake an annual review to ensure they are aware of any changes to the structure or ownership which may change the associated companies count.

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 carrybacks 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 (or potentially higher if marginal rates apply) 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 considered.

Where companies have previously surrendered losses for tax credits, through the R&D scheme perhaps, or loss carryback 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 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% (or potentially higher if marginal rates apply for 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.

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.

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 an additional requirement and significant reduction on the existing two-year time statutory limit, and should be considered as soon as a potential project is started. Existing claimants are typically not required to notify HMRC if they have claimed relief in one of the preceding three accounting periods, but some exemptions apply.

Subcontracted R&D

A recent concern has been the treatment by HMRC of subcontracted and subsidised R&D with several First-Tier Tribunal cases being heard in recent years. Updated guidance 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.

Under the merged scheme, 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 if 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 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.