Things to think about before April 2023

Midnight on 31 March 2023 will be a key second in tax planning for UK corporate businesses.  A couple of key tax reliefs end on 31 March 2023 and the main rate of corporation tax jumps up to 25% the very next day.

There are a lot of things to consider and plan for ahead of that second.

Currently, there is a single rate of corporation tax, being 19%. This rate applies regardless of the company’s level of profits or the number of associated companies. From 1 April 2023, companies with profits of £50,000 or less will continue to be taxed at 19%, with the 25% rate applying to profits above £250,000.

Therefore, a marginal tax rate will be introduced between £50,000 and £250,000, to get the average rate up to 25% by £250,000 of profits.  To prevent avoidance, the lower and upper thresholds are divided by the number of associated companies (see below for the definition) and adjusted for short periods.

Here are 5 areas you should consider ahead of 1 April 2023:

1) Maximising the use of the super deduction

The super deduction was designed to stimulate business investment in plant and machinery and will be available for qualifying expenditure incurred from 1 April 2021 up to and including 31 March 2023. The super deduction provides for 130% capital allowances on most new plant and machinery acquired by companies. The aspect that makes the relief ‘super’ is that the relief obtained is more that the expenditure originally incurred.

Where the accounting period spans 1 April 2023, the 130% rate will be apportioned based on the days prior to this date over the number of days in the period. If we use a 31 December 2023 year end as an example, the super deduction will be 107.4%.

Ensure you maximise this relief by accelerating any capital spend before the end of your next accounting period.

2) Planning to sell your business or make large profits/gains in the next 12 months?

If you are forecasting an exceptional profit or gain in the near future, consider completing before the increase in tax rate on 1 April 2023? Or even better in the year end before 1 April 2023?

Where your accounting period spans 1 April 2023, the profits are time apportioned to those falling within the tax financial year 2022, which are taxed at 19%, and those falling within the tax financial year 2023 potentially taxed at 25%. The tax rate will depend on the level of profits falling into that period, with the upper and lower profits limits being proportionately reduced for the short period.

You could consider shortening the accounting period to before the 31 March 2023.  This would ensure that all profits are taxed at 19%, albeit this may accelerate the tax payment.

3) Rationalise your group structure

The tax thresholds for the increased tax rate are proportionately reduced by the number of associated companies. If you have 5 associated companies, the 25% tax rate will apply where a company’s taxable profits exceed £50,000 (being £250,000 divided by 5).

The number of associated companies is also key when considering whether a company is large (or very large) for quarterly installment payment purposes.

A company is associated with another company if at any time within the preceding 12 months:

• one company has control of the other
• both companies are under the control of the same person or group of persons

The limits apply to companies worldwide and regardless of where they are resident for tax purposes.

You could consider minimising the number of associated companies by reviewing your corporate structure. This could be by reducing the number of active companies by consolidating companies or ceasing those small and negligible trades.

4) Loss planning

You should consider whether it is more cost-effective to carry forward losses to potentially save tax at 25% in the future, as opposed to utilising them now at the 19% tax rate.

Currently, there is an extended loss carryback available until 31 March 2022, which allows for losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022 to be carried back 3 years. This relief is invaluable to those businesses who have needed the cashflow but the losses surrendered will receive a tax repayment at 19%. In the future these losses will be worth 25%.

The same consideration can be applied for group relief claims, carried forward loss claims and whether to surrender losses from R&D claims to HMRC for the repayable tax credit.

We would recommend you consider any loss relief claims in the next year or two to ensure the losses are maximised at the best rates whilst balancing this with cashflow needs of the business.

5) Annual Investment Allowance (AIA)

The AIA was temporarily increased from £200,000 to £1,000,000 for qualifying expenditure on plant and machinery incurred during the period from 1 January 2022 to 31 March 2023. From 1 April 2023, this is due to drop back down to £200,000.  When there is a change in the AIA limit the timing of the expenditure is key, as there will be 2 notional periods for capital allowances purposes where your year end spans 1 April 2023.

There are several areas in which we can advise you to maximise the current reliefs available and perhaps minimise your future tax exposure. Please do not hesitate to get in contact with your Kreston Reeves advisor so we can explore your specific circumstances, or contact us here.