From 1 April 2023 the headline rate of corporation tax is going up from 19% to 25%. Contrary to some commentary, this does not mean that any profits made before 1 April are taxable at 19% and any profits made from 1 April are taxed at 25%. The correct answer is more subtle. What actually happens for a 12 month period of account is that taxable profits (including chargeable gains) are time apportioned across the year and then the time apportioned profit is taxed at a blended rate.
Gerald owns a manufacturing company with a 31 January year end. He hurries the sale of a factory through by 31 March 2023 in order to benefit from a tax rate of 19% rather than 25%, and the disposal crystallises a chargeable gain of £2m. Gerald feels smug about having saved £120,000 (6% of £2m) of corporation tax but is later dismayed to be told that the tax position would have been no different even if the sale had taken place on 31 January 2024. In fact, only £323,288 (£2m x 59/365) of the £2m gain ends up being taxed at 19% with the remaining £1,676,712 being taxed at 25%. This gives an overall tax liability of £480,603, which is only a £19,397 ‘saving’ from the full 25% rate. Therefore, it is not true that all profits which arise before 1 April 2023 are taxed at 19%. Or, can it be true?
Changing accounting periods
All may not be lost for Gerald in the above example. If he were to shorten the company’s accounting period to the two months ended 31 March 2023 then the chargeable gain would all fall within this accounting period and so would be taxable at 19%, giving a £380,000 tax liability. This gives rise to a tax saving of over £100,000 compared to doing nothing.
Forbes Dawson view
Although changing accounting periods will also change tax payment dates, often significant tax savings will be available with this simple planning. Some commentators have suggested that anti-avoidance rules may apply if accounting periods are changed solely for tax reasons, but we think that this falls within the category of vanilla and unoffensive tax planning.
There may also be opportunities to make savings by extending accounting periods, using similar principles. Take for example a company with a December year end which makes a £2m gain on 20 April 2023. The tax position can be significantly improved by extending the accounting period to 20 April 2023. This is because there would then only be 20 days of apportionment for the 25% rate. Alternatively, the previous period could be shortened to April 2022 followed by a 12 month period to April 2023.
All companies with significant profits (and particularly those with significant chargeable gains) should at least consider whether there will be a benefit in changing their accounting periods.
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