The great corporation tax hike and losses

The issue

Currently all companies pay corporation tax at 19%, irrespective of their profits. From 1 April 2023 this will increase to 25% for many companies. In actual fact, some small companies will still be subject to a 19% rate and then there will be a marginal rate to get the overall rate to 25% for profits from £250,000. This will work as follows:

• 19% for profits up to £50,000.
• 26.5% for profits from £50,000 to £250,000.
• 25% for profits over £250,000.

These limits will be divided, depending on the number of ‘associated companies’, which will broadly be comprised of companies under the same control.

Therefore, we are looking at quite a jump in tax rates. Does this mean that we now need to be more sophisticated when it comes to losses?

Losses

Who thinks that brought forward trading losses have to be set against profits? Well you would be wrong! Although the default position is that trading losses will be offset against profits of the same trade, a claim can be made to restrict these. The position is slightly different when trading losses are to be carried forward against total profits. Here the losses will only be relieved if a claim is made.

Example

Manchester Pub Company Ltd has a very profitable year ending 31 March 2023 and makes £1m profit. However it has trading losses of £600,000 brought forward from various lock-downs which hit its business hard. If it claims the losses then these would effectively be worth £114,000 (£600,000 @ 19%) on 1 January 2024 (nine months after the year-end). If the company ‘disclaims’ the losses and then relieves them for the 31 March 2024 year end then those losses will be worth £150,000 (£600,000 @ 25%). Commercially, this represents a return of 31.6%!

Forbes Dawson view

This kind of thinking will be especially relevant for cash-rich companies which will not mind a short-term dent in their cash flow. However, with an absolute ‘return’ of over 31% (above), we should no longer be robotically relieving brought forward losses against profits. This point should be discussed with stakeholders who should be able to make an informed decision. Helpfully, such a decision can be made up to two years after the accounting period in question, which means that there will usually be some level of certainty about the level of post 31 March 2023 profits. In summary, this is a new corporation tax planning point which should be considered for any company with brought forward losses.

 

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