Don’t miss planning opportunities before corporation tax hike

The issue

From 1 April 2023 the headline rate of corporation tax will increase from 19% to 25%. The precise rules are that profits up to £50,000 will continue to be taxed at 19%; profits between £50,000 and £250,000 will be taxed at 26.5% (due to the way ‘marginal relief’ works) and profits over £250,000 will be taxed at 25%.

Although these rates do not kick in until 1 April they will have an impact in respect of many accounting periods starting over the coming months. For example, a company with its accounting year starting on 1 October 2022 will have six months of its profits taxed at the higher rates.

Accelerating profits

Telling a company to accelerate profits so that it can pay tax sooner is often not popular advice – but we are in exceptional circumstances here. At higher rates, £100,000 of additional profit will suffer £25,000 of tax after 1 April 2023 and £19,000 of tax before that date. This is a tax hike of nearly 32%. For profits that are in the marginal band then the tax bill increases from £19,000 to £26,500, which is a rise of nearly 40%. As few companies will have a cost of capital of over 30%, it will make good commercial sense to pay tax early, so as to secure a ‘return’ of over 30%.

Whether profits can be accelerated will depend on a combination of accounting treatment and the commercial position. In some industries it may make sense to offer trade discounts to accelerate the recording of profit.

Property development companies

Where property development companies are concerned, it should be possible to accelerate profit by transferring to another company in the group.

Example

A property development company (Propco) has a stock of finished property with a market value of £10m and an inherent profit of £2m. During the year ended 31 March 2023 it transfers this property at book value of £8m to a new subsidiary company. Prima facie this triggers a tax liability of £380,000 (19% of £2m) for that tax year because the tax is by reference to the market value. The subsidiary then sells the property for £10m in the year ended 31 March 2024 and pays no tax because it has made no profit (by reference to the deemed £10m acquisition value). Had Propco waited until the year ended 31 March 2024 to sell the property itself, then it would have had a tax liability of £500,000 (£120,000 more).

If the subsidiary company had problems selling the property, then it would be possible to restore the original position by making an election to deem the property to have been transferred at £8m for tax purposes, thus meaning that the subsidiary holds the property at £8m for tax purposes.

If a return of over 30% on capital is attractive, then this is something that property development companies should at least be considering.

Forbes Dawson view

It is many years since we last had a hike in corporation tax rates. All tax paying companies should at least be thinking about whether it makes commercial sense to accelerate the tax charge and whether this would be viable. Conversely, there will also be an incentive to delay expenditure to later periods where relief can be enjoyed at 25%, such as rolling up interest payable on director’s loans, for example. In some cases the position can be improved by amending accounting periods to ensure that the two rates are clearly segregated and there is no requirement for a blend of pre-1 April and post-1 April rates.

 

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