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Understanding the Corporation Tax Increases for 2023

Corporation Tax is being reformed and companies with profits of more than £50,000 will pay corporation tax at a higher rate than they do now.

While the changes do not come into effect to the financial year which starts on 1 April 2023, their impact will be felt sooner where accounting periods span 1 April 2023. Consequently, they will be relevant to accounting periods of 12 months starting after 1 April 2022.

So, what are the changes?

From 1 April 2023, the rate of corporation tax that you pay will depend on the level of your profits and the number of associated companies that you have, if any.

The lower limit will sit at £50,000 and the upper limit at £250,000 for a company with no associated companies. Where a company has one or more associated companies, the limits are divided by the number of associated companies plus 1, so that, for example, the lower limit for a company with one associated company will be £25,000 and the upper limit will be £125,000.

If your profits are below the lower limit, from 1 April 2023, you will pay corporation tax at the small profits rate. At 19%, this is the same as the current rate of corporation tax.

If your profits are above the lower limit, you will pay corporation tax at the main rate. This has been set at 25% for the financial year 2023.

If your profits fall between the lower limit and the upper limit, you will pay corporation tax at the main rate, but you will receive marginal relief which will reduce the amount that you pay.

Where a company benefits from marginal relief, the effective rate of corporation tax will be between 19% and 25%. A company with profits nearer the lower limit will receive more marginal relief than a company with profits nearer the upper limit and pay tax at a lower rate.

How is marginal relief calculated?

Marginal relief is calculated in accordance with the following formula:

F x (U-A) x N/A

Where:

  • F is the marginal relief fraction (set at 3/200 for the financial year 2023);
  • U is the upper limit;
  • A is the amount of augmented profits (profits plus dividends from non-group companies); and
  • N is the amount of total taxable profits.

It pays to plan ahead!

Where the accounting period spans 1 April 2023 the profits for the period are apportioned and those relating to the period prior to 1 April 2023 are taxed at the financial year 2022 corporation tax rate of 19%, while those relating to the period from 1 April 2023 to the end of the accounting period are taxed at the relevant rate for the financial year 2023 depending on the company’s profits.

Where the company will, from April 2023 pay corporation tax at a rate above 19%, now is the time to plan ahead and, where possible, accelerate profits so that they fall in the current accounting period rather than one spanning 1 April 2023. On the other side of the coin, delaying costs so that they fall in a period spanning 1 April 2023 rather than the current period will also reduce the tax that is payable at a rate above 19%.

Here's an example:

Sample Company Ltd prepares accounts to 30 September each year.

It has annual profits of £300,000.

It’s profits for the year to 30 September 2022 will be taxed at 19%.

However, it’s profits for the year to 30 September 2023 will be time apportioned and six months’ worth will be taxed at 19% and the remaining six months’ worth at 25% -- an effective rate of 22%.

The company accelerates a profitable contract so that it is completed before 30 September so that the profit is taxed at 19%.

If you would like to find out more and discuss how you can plan ahead, get in touch.

If you own a furnished holiday letting, there are a number of advantages available to you in terms of tax which are not available to standard residential lettings.

One of the key advantages is in reference to the treatment of interest and finance costs, let me explain more…

Relief restriction for owners of standard residential lettings

Did you know that residential landlords can now only obtain relief for interest and finance costs, such as mortgage interest, as a basic rate tax reduction, regardless of the rate at which the residential landlord pays tax?

The interest and finance costs incurred are not deducted when working out the taxable profit, so the tax is initially worked out on the profit without taking account of the interest and finance costs.

The tax liability is then reduced by 20% of the interest and finance costs, capped at the lower of 20% of the taxable profit or the amount that reduces the tax liability to nil.

Any unrelieved interest and finance costs can be carried forward for relief as an income tax deduction in calculating the tax liability of the same property business in a later tax year, with the costs being relieved at the first available opportunity.

This approach has a number of downsides – relief is only given at 20% even if the landlord is a higher or additional rate taxpayer and relief may not be given in full in the tax year in which the costs are incurred.

Deduction in full for furnished holidays letting owners

The changes to interest rate relief do not apply to furnished holiday lettings, and where a let qualifies as furnished holiday let, interest and finance costs can be deducted in full when working out the taxable profit.

Unlike standard residential lettings, the deduction is not capped, and can give rise to a loss which may be carried forward and set against future profits from the same furnished holiday business.

Also, as relief is by deduction, relief is given at the landlord’s marginal rate of tax not at 20% where the landlord is a higher or additional rate taxpayer.

Here’s an example to illustrate this:

Helen is a residential landlord.

For 2021/22 her taxable profit before taking account of interest costs on the associated mortgage is £30,000.

Mortgage interest paid in the year is £8,000.

Helen has other income from her photography business and pays tax at the higher rate of 40%.

Before applying the basic rate tax reduction, the tax on the property income is £12,000 (£30,000 @ 40%). The basic rate tax reduction in respect of the mortgage interest reduces this by £1,600 (£8,000 @ 20%) to £10,400.

Mark has a furnished holiday letting on which profit before deduction of interest costs is also £30,000.

He too pays mortgage interest of £8,000 and, like Helen, has other income and is a higher rate taxpayer.

However, unlike Helen, he can deduct the full amount of the mortgage interest, reducing the taxable profit to £22,000, on which tax of £8,800 (£22,000 @ 40%) is payable.

Despite identical profit and interest, Mark pays £1,600 less in tax than Helen as he is able to obtain relief for his interest costs at his marginal rate of 40%.

If you own a furnished holiday let and would like to find out more, get in touch. We can talk through this advantage and look at what other advantages may be applicable to you.

The capital allowance system provides tax relief for the net capital expenditure (cost less sale proceeds) over the life of an asset. Consequently, when an asset is sold, is it necessary to take account of the disposal proceeds. Read on to find out more about what a capital allowance is and an example of what can happen when sold.

Capital Allowances

Capital allowances are the tax equivalent of depreciation, and the mechanism of providing tax relief for certain items of capital expenditure. However, with the exception of cars, capital allowances are not available where accounts are prepared under the cash basis; instead relief may be available as a deduction in computing profits under the cash basis capital expenditure rules.

Plant and Machinery Capital Allowances

Plant and machinery capital allowances are available for items such as machinery, fixture and fittings, tools, computer equipment, plant and vehicles. Capital allowances may be given at different rates.

100% Allowances

The annual investment allowance (AIA) is given at the rate of 100% on qualifying expenditure up to the AIA limit. This is set at £1 million until 31 December 2021, reverting to £200,000 from 1 January 2022. Special rules apply where the accounting period spans 31 December 2021.

100% first-year allowances are also available in limited cases, such as for expenditure on new zero emission cars and goods vehicles

18% Writing Down Allowances

Writing down allowances on main rate expenditure is given at the rate of 18% on a reducing balance basis. Main rate capital allowances are available for most plant and machinery.

6% Writing Down Allowances

Some items, such as high emission cars and long life assets are allocated to the special pool and attract writing down allowances at the lower rate of 6%.

Enhanced Capital Allowances

For a limited period companies are able to claim enhanced capital allowances in respect of qualifying expenditure that is incurred between 1 April 2021 and 31 March 2023. A super deduction of 130% is available where the expenditure would otherwise qualify for main rate capital allowances at 18%, and a 50% first-year allowance is available where the expenditure would otherwise qualify for special rate capital allowances of 6%.

Balancing Charges and Allowances

The capital allowance system provides tax relief for the net capital expenditure (cost less sale proceeds) over the life of the asset. Consequently, when an asset is sold, is it necessary to take account of the disposal proceeds. If the capital allowances that have been claimed over the life of the asset exceed the cost less disposal proceeds, it may be necessary to claw back some of the allowances. This is done by means of a balancing charge.

Let’s assume a car is purchased for £10,000 and the AIA allowance is claimed, providing immediate tax relief for the full £10,000 of expenditure. If the car is sold three years later for £5,000, the net cost to the business is £5,000 (cost of £10,000 less proceeds of £5,000).

However, without adjustment, the company would have received tax relief of £10,000. The position is corrected by means of a balancing charge of £5,000. The balancing charge effectively increases the profits that are charged to tax. Where the AIA or a 100% first year allowance has been claimed, the balancing charge will be equal to the sale proceeds.

There will not always be a balancing charge on disposal – it depends on whether the tax written down value is more or less than the sale proceeds. If it is more, there will be a balancing charge and if it is less, there will be a balancing allowance.

Example

A van is purchased for £15,000 on which main rate capital allowances are claimed at the rate of 18%.

In year 1, the writing down allowance is £2,700, in year 2, it is £2,214 and in year 3 it is £1815.

At the end of year 3, the written down value is £8,271.

If the van is sold for £8,000, balancing allowances of £271 will be available; however, if the van is sold for £10,000, a balancing charge of £1,729 will arise.

The net allowances equal the cost less the disposal proceeds.

The balancing allowance increases taxable profits in the year of sale, while a balancing allowance will reduce the taxable profits.

Add Proceeds to the Pool

Unless the item is in a single asset pool, balancing charges and allowances are calculated globally for the ‘pool’ rather than on an individual asset-by-asset basis. Therefore, when an asset is sold, it is not necessary to calculate the balancing charge individually for that asset – instead, the sale proceeds are simply added to the pool.

Super-Deduction and Balancing Charges

Special rules apply where an asset has benefited from the super deduction of 130% and depending when the asset is disposed of, it may be necessary to inflate the sale proceeds when working out the balancing charge.

If you’d like to find out more, get in touch.

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Xena Limited 
115 George Lane 
South Woodford
London 
E18 1AB
Xena Limited
63 – 66 Hatton Garden
London
EC1N 8LE

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