Plan ahead for upcoming corporation tax changes in 2023

January 3, 2023

For accounting professionals with duties in corporation tax, preparations have been a start-stop operation since March 2021. With U-turns in policy and decision-making from the UK Cabinet Office during 2022 contributing to a confused outlook on the future, it’s likely that preparations for the April 2023 changes are only just starting to get underway. 

Read on to find out more about the changes, and how to plan ahead for the clients that this change will affect.

What are the April 2023 corporation tax changes?

As of the new tax year starting April 2023, the main rate of Corporation Tax will be subject to a 6% rise for companies reporting profits of £50,000 or more. While companies will still be taxed at the current rate of 19% for the first £50,000 in profits, any additional profits will be subject to Corporation Tax of 25%.

All sole traders or partnerships registered as non-incorporated businesses are still subject to Self-Assessment processes, rather than subject to Corporation Tax laws. While a rate of marginal relief will apply for companies profiting between £50,000 and £250,000, any company with annual profits of over £250,000 will be subject to the full rate of 25%.

The reason for a companies, or accountants potential unpreparedness can be traced back to the initial announcement of the changes in March 2021, by Prime Minister (then Chancellor) Rishi Sunak. Since then, Corporation Tax has been both scrapped by announcement via Kwasi Kwarteng in the mini Budget of September 2022, and reaffirmed as actionable by Prime Minister Liz Truss, on 14th October 2022.  

Confusion aside, it’s critical that both in-house accountants and firms alike are planning adequately for Corporation Tax and subsequently reviewing their existing practices, and there are some considerations you might want to make during this process.

Calculating marginal relief

Marginal relief will decrease the amount of payable tax for UK resident companies whose profits lie between £50,000 and £250,000. Set by the HMRC, companies who qualify are subject to a proportionally lower rate, depending on how much their taxable profits are (from April 2023).

HMRC provides an online calculator that will predict your Corporation Tax for the coming year, providing a head start on company finances.

Associated company rules 2023

From April 2023, all companies or groups where associated company rules apply, more commonly known as the 51% rule, will be subject to stricter guidelines to avoid unethical splitting of tax limitations. 

When the changes are implemented, a company (whether overseas or local to the UK) can only be classed as associated if within the past 12 month one company has control of the other, or if both companies are in control by the same person or group of people. 

While there are a number of exclusions, preparing for this change means reviewing associated company accounts, analysing profits of each controlled company, and making required changes in line with new tax rates.

R&D tax relief and credit changes

Taking effect from 1st April 2023,changes in taxation for R&D will change, primarily affecting large companies that claim R&D Expenditure Credit (RDEC), and small-to-medium businesses that claim R&D tax relief.

While companies eligible for RDEC will see an increase from 13% to 20%, smaller companies that qualify for tax relief will see the deduction rate reduced from 130% to 86%. Preparing for this means taking into consideration three key changes in the legislation to ensure compliance under new Corporation Tax, and to effectively maximise any claims by correctly implementing R&D activities: 

  1. Qualifying expenditure will now cover data and cloud computing
  2. Potential restrictions on costs incurred overseas for UK R&D claims
  3. Strengthening of anti-avoidance measures for the exploitation of R&D tax relief.

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